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FINANCIAL ANALYSIS

FINANCIAL ANALYSIS. 1. Financial Statement Analysis 2. Common Size Statement Analysis 3. Ratio Analysis 4. Sources/ Uses of Funds 5. Statement of Cash Flow 6. Free Cash Flow, MVA, EVA. Table 3-1 Allied Food Products: December 31 Balance Sheets ($ Millions).

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FINANCIAL ANALYSIS

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  1. FINANCIAL ANALYSIS • 1. Financial Statement Analysis • 2. Common Size Statement Analysis • 3. Ratio Analysis • 4. Sources/ Uses of Funds • 5. Statement of Cash Flow • 6. Free Cash Flow, MVA, EVA

  2. Table 3-1 Allied Food Products: December 31 Balance Sheets ($ Millions) • ASSETS 2005 2004 LIABILITIES & EQUITY 2005 2004 • Cash & equivalents $ 10 $ 80 Accounts payable $ 60 $ 30 • Notes payable 110 60 • Accounts receivable 375 315 Accruals 140 130 • Inventories 615 415 Total current liabilities $ 310 $ 220 • Total current assets $1,000 810 Long-term bonds 750 580 • Net plant & Total debt $1,060 $ 800 • equipment 1,000 870 • Common stock • (50,000,000 shares) 130 130 • Retained earnings 810 750 • Total common equity $ 940 $ 880 • Total assets $2,000 $1,680 Total liabilities & equity $2,000 $1,680

  3. Table 3-2 Allied Food Products: Income Statements for Years Ending December 31 ($ Millions, except for per-share data) • 2005 2004 • Net sales $ 3,000.0 $ 2,850.0 • Operating costs except depreciation 2,616.2 2,497.0 • Earnings before interest, taxes, and depreciation • (EBITDA) $ 383.8 $ 353.0 • Depreciation 100.0 90.0 • Earnings before interest & taxes (EBIT) $ 283.8 $ 263.0 • Less interest 88.0 60.0 • Earnings before taxes (EBT) $ 195.8 $ 203.0 • Taxes (40%) 78.3 81.2 • Net income $ 117.5 $ 121.8 • Common dividends $ 57.5 $ 53.0 • Addition to retained earnings $ 60.0 $ 68.8 • Per-share data: • Common stock price $ 23.00 $ 26.00 • Earnings per share (EPS)a $ 2.35 $ 2.44 • Dividends per share (DPS)a $ 1.15 $ 1.06 • Book value per share (BVPS)a $ 18.80 $ 17.60 • Cash flow per share (CFPS)a $ 4.35 $ 4.24

  4. Table 3-2 Allied Food Products: Income Statements for years ending December 31 ($ Millions, except for per-share data) • a There are 50,000,000 shares of common stock outstanding. Note that EPS is based on earnings after preferred dividends - that is, on net income available to common stockholders. Calculations of EPS, DPS, and BVPS for 2004 are as follows: • EPS = Net income = $117,500,000 = $2.35 • Common shares outstanding 50,000,000 • DPS = Dividends paid to common stockholders = $57,500,000 = $1.15 • Common shares outstanding 50,000,000 • BVPS = Total common equity = $940,000,000 = $18.80 • Common shares outstanding 50,000,000 • CFPS = Net income + Depreciation + Amortization = $217,500,000 = $4.35 • Common shares outstanding 50,000,000 • =

  5. Table 3-4 Allied Food Products: Statement of Retained Earnings for year ending December 31, 2005($ Millions) • Balance of retained earnings, Dec 31, 2004 $ 750.0 • Add: Net income, 2005 117.5 • Less: Dividends to common stockholders (57.5)a • Balance of retained earnings, Dec 31, 2005 $ 810.0 • a Here, and throughout the book, parentheses are used to denote negative numbers.

  6. Income Statement Common Size Analysis • % of Sales Ind. ave • Net sales $ 3,000 100 % • Costs excluding depreciation 2,616. 2 87. 2 62 % • Depreciation 100 3. 3 8 • Total operating costs 2,716. 2 90. 5 % 70 % • Net Operating Income, or Earnings • before interest and taxes (EBIT) $ 283. 8 9. 5 % 30 % • Less interest expense 88 2. 9 5 • Earnings before taxes (EBT) $ 195. 8 6. 5 22 • Taxes ( 40% ) 78. 3 2. 6 4 • Net Income available to C. S. 117. 5 3. 9 18 • Common Dividends 57. 5 1. 9 8 • Add. to Retained Earnings 60 2. 0 9

  7. Balance Sheet Common Size Analysis • % of Total Assets Ind. Ave. Comment • Cash / Securities $10 0. 50 % 10% very low • Accounts Receivable 375 18. 75 15 OK • Inventories 615 30. 75 40 low • Total Current Assets $1,000 50 % 65 % low, risky • Net Plant & Equip. 1,000 50 45 OK • Total Assets $2,000 100 % • Accounts payable $ 60 3 % 7 OK • Notes payable 110 5. 5 4 slightly high • Accruals 140 7 10 slightly low • Total Current Lia. $310 15. 5 % 21 low • Long-term Bonds 750 37. 5 22 high • Total Debt 1,060 53% 43 high • Common stock 130 6. 5 15 low • Retained earnings 810 40. 5 40 OK • Total Common Equity $940 47% 65 low • Total Lia. & Equity $2,000 100%

  8. Allied Food Products: Summary of Financial Ratios ($ Millions) • Ind. • Ratio Formula Calculations Ratio Avg Comment • Liquidity • Current Current assets $1,000 = 3.2x 4.2x Poor • Current liabilities $310 • Quick, or Current assets - Inventories $385 = 1.2x 2.2x Poor • acid test Current liabilities $310

  9. Allied Food Products: Summary of Financial Ratios ($ Millions) • Ind. • Ratio Formula Calculations Ratio Avg Comment • Asset Management • Inventory Sales $3,000 = 4.9x 10.9x Poor • turnover Inventories $615 • Days sales Receivables $375 = 46 days 36 days Poor • outstanding (DSO) Annual sales/365 $8.22 • Fixed assets Sales $3,000 = 3.0x 2.8x O.K. • turnover Net fixed assets $1,000 • Total assets Sales $3,000 = 1.5x 1.8x Somewhat • turnover Total assets $2,000 low

  10. Allied Food Products: Summary of Financial Ratios ($ Millions) • Ind. • Ratio Formula Calculations Ratio Avg Comment • Debt Management • Total debt to Total debts $1,060 = 53% 40.0% High • total assets Total assets $2,000 (risky) • Times-interest Earnings before interest & taxes (EBIT) $283.8 = 3.2x 6.0x Low • earned (TIE) Interest charges $88 (risky) • EBITDA EBITDA + Lease payments $383.8 + $28 • coverage I nterest + Principal + Lease $88 + $20 + $28 • charges payments payments • $411.8 = 3.0 x 4.3x Low • $136(risky)

  11. Allied Food Products: Summary of Financial Ratios ($ Millions) • Ind. • Ratio Formula Calculations Ratio Avg Comment • Profitability • Profit margin Net income available to common stockholders $117.5 = 3.9% 5.0% Poor • on sales Sales $3,000 • Basic earning Earnings before interest & taxes (EBIT) $283.8 = 14.2% 18% Poor • power (BEP) Total assets $2,000 • Return on total Net income available to common stockholders $117.5 = 5.9% 9.0% Poor • assets (ROA) Total assets $2,000 • Return on Net income available to common stockholders $117.5 = 12.5% 15% Poor • common equity Common equity $940 • (ROE)

  12. Allied Food Products: Summary of Financial Ratios ($ Millions) • Ind. • Ratio Formula Calculations Ratio Avg Comment • Market Value • Price/earnings Price per share $23.00 = 9.8x 11.3x Low • (P/E) Earnings per share $2.35 • Price/cash flow Price per share $23.00 = 5.3x 5.4x Low • Cash flow per share $4.35 • Market/book Market price per share $23.00 = 1.2x 1.7x Low • (M/B) Book value per share $18.80

  13. Allied Food Products: Summary of Financial Ratios ($ Millions) • Ratio Formula • Other Ratios • Dividend payout ratio : Div. = $57.5 = 48.9% • N I $117.5 • Retention ratio: 1 - payout ratio = 1 – 48.9% = 51.1% or • Retained earnings = $60 = 51.1% • N I $117.5

  14. Du Pont Analysis (Allied Food Products) • ROE = Profit x Total assets x Equity • marginturnovermultiplier • NI = NI x Sales x TA • Equity SalesTAEquity • Firm: 12.5% = 3.9% x 1.5 x 2.13 • Industry: 15.0% = 5.0% x 1.8 x 1.67

  15. Allied Food Products: Changes in Balance Sheet Accounts During 2005 ($ Millions) • CHANGE 12/31/05 12/31/04 Sources Uses • Cash & marketable securities $ 10 $ 80 $ 70 • Accounts receivable 375 315 $ 60 • Inventories 615 415 200 • Gross plant & equipment 1,500 1,270 230 • Less Accum. Depreciation (500) (400) 100 • Net plant & equipment 1,000 870 • Accounts payable 60 30 30 • Notes payable 110 60 50 • Accruals 140 130 10 • Long-term bonds 750 580 170 • Common stock 130 130 • Retained earnings 810 750 60 • Totals $490 $490

  16. Allied Food Products: Statement of Cash Flows for 2005 ($ Millions) • OPERATING ACTIVITIES • Net income $117.5 • Additions (Sources of Cash) • Depreciationa 100.0 • Increase in accounts payable 30.0 • Increase in accruals 10.0 • Subtractions (Uses of Cash) • Increase in accounts receivable (60.0) • Increase in inventories (200.0) • Net cash provided by operating activities ($ 2.5) • LONG-TERM INVESTING ACTIVITIES • Cash used to acquire fixed assetsb ($230.0) • FINANCING ACTIVITIES • Increase in notes payable $ 50.0 • Increase in bonds 170.0 • Payment of common dividends (57.5) • Net cash provided by financing activities $ 162.5 • Net decrease in cash & marketable securities ($ 70.0) • Cash & securities at beginning of year 80.0 • Cash & securities at end of year $ 10.0

  17. Allied Food Products: Statement of Cash Flows for 2005 ($ Millions) • a Depreciation is a non-cash expense that was deducted when calculating net income. It must be added back to show the correct cash flow from operations. • b The net increase in fixed assets is $130 million; however, this net amount is after a deduction for the year’s depreciation expense. Depreciation expense should be added back to show the increase in gross fixed assets. From the company’s income statement, we see that 2004 depreciation expense is $100 million; thus, the acquisition of fixed assets equals $230 million.

  18. Stock Markets and Stock Reporting • I. Stock markets • A. New York stock exchange (NYSE) • B. American stock exchange (AMEX) • C. Over-the-counter (OTC) markets • D. Smaller regional markets • Ii. Stock market reporting • 52 weeks Yld. P-E sales net • High low stock div. % Ratio 100s high low close chg. • 1757/8 102 IBM 4.40 3.8 16 27989 1181/4 1151/4 1171/4 +13/4 • Dividend yield = D/P • = $4.40 / $117.25 = 3.8%

  19. Free Cash Flow, MVA, EVA, and Stock Valuation

  20. FREE CASH FLOW • 2004 2005 • CA (Current Asset) 810 1,000 • AP (Account Payable) -30 -60 • Accruals -130 -140 • Total Operating Working Capital (TOWC) 650 800 • Net Fixed Asset 870 1,000 • Total Operating Capital (TOC) 1,520 1,800 • Net Investment in Oper. Cap (NIOC)  280 • Depreciation (2002) 100 • Gross Investment in Operating Cap (GIOC) 380

  21. FREE CASH FLOW • NET OPERATING PROFIT AFTER TAX (NOPAT): • NOPAT = EBIT ( 1 – TAX ) • 283.8 (1- 0.4) = 170.3 • FREE CASH FLOW CALCULATION: • FCF = NOPAT – NIOC • = 170.3 - 280 = - 109.7 • FCF = NOPAT + Depreciation – GIOC • = 170.3 + 100 – 380 = - 109.7 • (NOPAT + Depreciation = Operating Cash Flow)

  22. STOCK VALUATION • Total Corporation Value = • PV (FCF1)+PV (FCF2)+....+ PV ( FCFn) + PV (Terminal Value) • Where i = WACC • Terminal Value = FCF n +1 • WACC - g • Value of Common Stock Equity = • Total Corp. Value – Market Value of Debt – Market Value of Preferred Stock

  23. MARKET VALUE ADDED (MVA) • MVA measure the effects of managerial actions since the inception of a company • MVA = Market Value – Book Value • MVA = (Stock Price * No of shares) – Common Stock Equity • MVA = ( 23 * 50 mil shares) – 940 • MVA = $ 210

  24. ECONOMIC VALUE ADDED (EVA) • EVA measures the managerial effectiveness in a given year • EVA = Net Oper. Profit After Tax- After Tax Dollar Cost of Operating Capital • EVA = NOPAT – (Total Operating Capital * WACC) • EVA = EBIT (1–T) – (TOC * WACC) • EVA = 283.8 (1-0.4) – (1800 * 10%) • EVA = 170.3 – 180 • EVA = $ - 9.7

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