Analysis of Financial Statements. Financial statements and reports Ratio analysis. The Annual Report Provides. A verbal description of the firms operating results during the past year Discussion of new developments Financial statements. Key Financial Statements. Balance sheet
Short-term inv. 48,600
Acct Receivable 351,200
Total Current Asset 1,124,000
Gross Fixed Asset 491,000
Net Fixed Asset 344,800
Total assets 1,468,800
Total Current Liability
Total liability and equity
Tot. operating. costs
To measure cash earnings without accrual accounting, cancelling tax jurisdiction effects, and cancelling the effects of different capital structures.
Uses of Cash
Decrease in a liabilities or equity account
- Paying off a loan or buying back stock uses cash
Increase in an asset account
- Buying fixed assets or buying more
inventory uses cash.
Sources of Cash
Increase in a liabilities or equity account
- Borrowing funds or selling stock provides the firm with cash
Decrease in an asset account
- Selling inventory or collecting receivables
Cash flow from operating activities:
Net income $ 44,220
Additions (sources of cash):
Incr. in accruals 4,000
Incr. in accounts payable 29,600
Subtractions (uses of cash):
Incr. in receivables (50,800)
Incr. in inventories ( 120,800)
NCF from operations ($ 73,780)
Investment in fixed assets ($ 36,000)
Increase in notes payable $ 25,000
Increase in L-T debt 101,180
Common dividends ( 22,000)
NCF from financing $104,180
Net increase (decr.) in cash ($ 5,600)
Cash at beginning of year 57,600
Cash at end of year $ 52,000
Cash flow from financing activities:
Aging Schedule for Hanover Country Club
Current ratio = .
To indicate the extent to which the claims of S-T creditors are covered by assets that will soon be converted to cash
To measure how quick the firm can pay off S-T debt without liquidating inventories
Quick ratio = .
Current ratio = .
CA - Inv.
Quick ratio = .
A little weaker than average.
Inventory turnover = .
(To indicate whether a firm carries too many inventories and whether it manages inventories effectively.)
Low inventory turnover--excess
inventory for current level of sales.
Days Sales Outstanding (DSO) is the average number of days the firm must wait after making a sale before it receives cash.
2011 DSO =
= 37.59 days.
High DSO--firm is collecting too slowly or has overly liberal credit terms.
Fixed assets turnover = .
[ To show how effective the firms utilizes its fixed assets to generate sales.]
Total assets turnover = .
[To indicate the extent to which a firm uses its total resources to generate sales.]
Fixed assets turnover OK, but total
assets turnover is low--indicates
problem with current assets (inventory and receivables).
Debt ratio = = .
D + E
[It measures the proportion of a firm’s total assets that is financed with creditors’ funds.]
Debt/equity = .
[It is similar to debt ratio and relates the amount of a firm’s debt financing to the amount of equity financing.]
= 1/(1 - D/A).
Times interest earned (TIE)
[It tells the extent to which the firm’s current earnings are able to meet current interest payments.]
Debt ratio high, TIE low and falling.
Debt is risky; would have high kd.
PM = .
[ It gives the profit per dollar of sales.]
Indicates: Sales prices are low and/or
costs are high.
BEP = .
[It shows the raw earning power of the firm’s assets, before influence of taxes and leverage. ]
Indicates: Firm is doing a poor job of
generating earnings from its assets.
ROA = .
ROE = .
[It measures a firm’s net income in relation to the total asset investment.]
[It measures the rate of return that the firm earns on stockholders’ equity.]
All profitability measures are low and falling.
High inventory, A/R levels lead to low profits.
P/E = .
[The price the market places on $1 of a firm’s earnings.]
Book value/Share = .
Market/Book = .
[The higher the rate of return a firm is earning on its common equity relative to the return required by investors (the cost of common equity), the higher will be the M/B.]
P/E ratios can rise if a decline in EPS is not expected to be permanent.
M/B ratio is low. “Normalized” P/E probably low too.
= x x .
Use the Du Pont Equation to get an overview of the firm’s financial position
ROE = x x
13.30% 2.60 2.3 2.2
6.40% 1.15 2.3 2.4
18.20% 3.50 2.6 2.0