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9780273713654 pp06
1.
6.1 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Chapter 6Chapter 6 Financial StatementFinancial Statement AnalysisAnalysis
2.
6.2 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. After Studying Chapter 6,After Studying Chapter 6, you should be able to:you should be able to: 1. Understand the purpose of basic financial statements and their contents. 2. Understand what is meant by “convergence” in accounting standards. 3. Explain why financial statement analysis is important to the firm and to outside suppliers of capital. 4. Define, calculate, and categorize (according to liquidity, financial leverage, coverage, activity, and profitability) the major financial ratios and understand what they can tell us about the firm. 5. Define, calculate, and discuss a firm’s operating cycle and cash cycle. 6. Use ratios to analyze a firm's health and then recommend reasonable alternative courses of action to improve the health of the firm. 7. Analyze a firm’s return on investment (i.e., “earning power”) and return on equity using a DuPont approach. 8. Understand the limitations of financial ratio analysis. 9. Use trend analysis, common-size analysis, and index analysis to gain additional insights into a firm's performance.
3.
6.3 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • Financial Statements • A Possible Framework for Analysis • Balance Sheet Ratios • Income Statement and Income/Balance Sheet Ratios • Trend Analysis • Common-Size and Index Analysis FinancialFinancial Statement AnalysisStatement Analysis
4.
6.4 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • Trade CreditorsTrade Creditors – Focus on the liquidity of the firm. • BondholdersBondholders – Focus on the long-term cash flow of the firm. • ShareholdersShareholders – Focus on the profitability and long-term health of the firm. Examples of External UsesExamples of External Uses of Statement Analysisof Statement Analysis
5.
6.5 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • PlanPlan – Focus on assessing the current financial position and evaluating potential firm opportunities. • ControlControl – Focus on return on investment for various assets and asset efficiency. • UnderstandUnderstand – Focus on understanding how suppliers of funds analyze the firm. Examples of Internal UsesExamples of Internal Uses of Statement Analysisof Statement Analysis
6.
6.6 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • Convergence of Accounting StandardsConvergence of Accounting Standards: Aims to narrow or remove differences so that investors can better understand financial statements prepared under different accounting frameworks • IASB – International Accounting Standards Board has the responsibility of IFRS • IFRS – International Financial Reporting Standards (EU countries adopted) • US GAAP – US Generally Accepted Accounting Principles determined by FASB • FASB – Financial Accounting Standards Board determines accounting standards for financial statements Global Accounting StandardsGlobal Accounting Standards
7.
6.7 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Income StatementIncome Statement • A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance SheetBalance Sheet • A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity. Primary Types ofPrimary Types of Financial StatementsFinancial Statements
8.
6.8 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. Cash $ 90 Acct. Rec.cc 394 Inventories 696 Prepaid Expdd 5 Accum Tax Prepay 10 Current AssetsCurrent Assetsee $1,195$1,195 Fixed Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329) Net Fix. AssetsNet Fix. Assets $ 701$ 701 Investment, LT 50 Other Assets, LT 223 Total AssetsTotal Assetsbb $2,169$2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a Basket Wonders’ BalanceBasket Wonders’ Balance Sheet (Asset Side)Sheet (Asset Side)
9.
6.9 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested. Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxesdd 16 Other Accrued Liab.dd 100 Current Liab.Current Liab.ee $$ 500500 Long-Term Debtff 530 Shareholders’ Equity Com. Stock ($1 par)gg 200 Add Pd in Capitalgg 729 Retained Earningshh 210 TotalTotal EquityEquity $$1,1391,139 Total Liab/EquityTotal Liab/Equitya,ba,b $2,169$2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands) Dec. 31, 2007 Basket Wonders’ BalanceBasket Wonders’ Balance Sheet (Liability Side)Sheet (Liability Side)
10.
6.10 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officers’ salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. Net Sales $ 2,211 Cost of Goods Soldbb 1,599 Gross Profit $ 612 SG&A Expensescc 402 EBITd $ 210 Interest Expensee 59 EBTff $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in REIncrease in RE $ 53$ 53 Basket Wonders Statement of Earnings (in thousands)Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007for Year Ending December 31, 2007a Basket Wonders’Basket Wonders’ Income StatementIncome Statement
11.
6.11 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Analytical Tools UsedAnalytical Tools Used Sources and Uses Statement Statement of Cash Flows Cash Budgets 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. Trend/Seasonal ComponentTrend/Seasonal Component How much funding will be required in the future? Is there a seasonal component? Framework forFramework for Financial AnalysisFinancial Analysis
12.
6.12 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Health of a Firm Financial Ratios 1. Individually 2. Over time 3. In combination 4. In comparison 1. Analysis of the funds needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. Framework forFramework for Financial AnalysisFinancial Analysis
13.
6.13 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Examples:Examples: Volatility in sales Volatility in costs Proximity to break-even point 1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm. Business riskBusiness risk relates to the risk inherent in the operations of the firm. Framework forFramework for Financial AnalysisFinancial Analysis
14.
6.14 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. A Financial Manager must consider all three jointly when determining the financing needs of the firm. DeterminingDetermining thethe financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm. Framework forFramework for Financial AnalysisFinancial Analysis
15.
6.15 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. NegotiationsNegotiations withwith suppliers ofsuppliers of capital.capital. DeterminingDetermining thethe financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of the funds needs of the firm.needs of the firm. 2. Analysis of the financial2. Analysis of the financial condition and profitabilitycondition and profitability of the firm.of the firm. 3. Analysis of the business3. Analysis of the business risk of the firm.risk of the firm. Framework forFramework for Financial AnalysisFinancial Analysis
16.
6.16 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Types ofTypes of ComparisonsComparisons InternalInternal ComparisonsComparisons ExternalExternal ComparisonsComparisons A Financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other. Use of Financial RatiosUse of Financial Ratios
17.
6.17 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Examples: Risk ManagementRisk Management AssociationAssociation Dun & BradstreetDun & Bradstreet Almanac ofAlmanac of Business andBusiness and IndustrialIndustrial Financial RatiosFinancial Ratios This involves comparing the ratios of one firm with those of similarsimilar firms or with industry averages. SimilaritySimilarity is important as one should compare “apples to apples.” External Comparisons andExternal Comparisons and Sources of Industry RatiosSources of Industry Ratios
18.
6.18 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. CurrentCurrent Current AssetsCurrent Assets Current LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to cover its current liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios $1,195$1,195 $500$500 = 2.392.39 Liquidity RatiosLiquidity Ratios
19.
6.19 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 2.39 2.15 2.26 2.09 1.91 2.01 Year 2007 2006 2005 CurrentCurrent RatioRatio Ratio is stronger than the industry average. Liquidity RatioLiquidity Ratio ComparisonsComparisons
20.
6.20 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Acid-Test (Quick)Acid-Test (Quick) Current Assets - InvCurrent Assets - Inv Current LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007 Shows a firm’s ability to meet current liabilities with its most liquid assets. Balance Sheet Ratios Liquidity Ratios $1,195 – $696$1,195 – $696 $500$500 = 1.001.00 Liquidity RatiosLiquidity Ratios
21.
6.21 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 1.00 1.25 1.04 1.23 1.11 1.25 Year 2007 2006 2005 Acid-Test RatioAcid-Test Ratio Ratio is weaker than the industry average. Liquidity RatioLiquidity Ratio ComparisonsComparisons
22.
6.22 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account. • Note that this industry has a relatively high level of inventories. RatioRatio BWBW IndustryIndustry Current 2.39 2.15 Acid-Test 1.00 1.25 Summary of the LiquiditySummary of the Liquidity Ratio ComparisonsRatio Comparisons
23.
6.23 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Current Ratio 1.5 1.7 1.9 2.1 2.3 2.5 2005 2006 2007 Analysis Year RatioValue BW Industry Current Ratio – TrendCurrent Ratio – Trend Analysis ComparisonAnalysis Comparison
24.
6.24 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Acid-Test Ratio 0.5 0.8 1.0 1.3 1.5 2005 2006 2007 Analysis Year RatioValue BW Industry Acid-Test Ratio – TrendAcid-Test Ratio – Trend Analysis ComparisonAnalysis Comparison
25.
6.25 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • The current ratio for the industryindustry has been rising slowly at the same time the acid-test ratio has been relatively stable. • This indicates that inventoriesinventories are a significant problem for BWBW. • The current ratio for BWBW has been rising at the same time the acid-test ratio has been declining. Summary of the LiquiditySummary of the Liquidity Trend AnalysesTrend Analyses
26.
6.26 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Debt-to-EquityDebt-to-Equity Total DebtTotal Debt Shareholders’ EquityShareholders’ Equity For Basket Wonders December 31, 2007 Shows the extent to which the firm is financed by debt. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $1,139$1,139 = 0.900.90 Financial Leverage RatiosFinancial Leverage Ratios
27.
6.27 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 0.90 0.90 0.88 0.90 0.81 0.89 Year 2007 2006 2005 Debt-to-Equity RatioDebt-to-Equity Ratio BW has average debt utilization relative to the industry average. Financial LeverageFinancial Leverage Ratio ComparisonsRatio Comparisons
28.
6.28 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Debt-to-Total-AssetsDebt-to-Total-Assets Total DebtTotal Debt Total AssetsTotal Assets For Basket Wonders December 31, 2007Shows the percentage of the firm’s assets that are supported by debt financing. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $2,169$2,169 = 0.470.47 Financial Leverage RatiosFinancial Leverage Ratios
29.
6.29 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 0.47 0.47 0.47 0.47 0.45 0.47 Year 2007 2006 2005 Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio BW has average debt utilization relative to the industry average. Financial LeverageFinancial Leverage Ratio ComparisonsRatio Comparisons
30.
6.30 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Total CapitalizationTotal Capitalization Total DebtTotal Debt Total CapitalizationTotal Capitalization For Basket Wonders December 31, 2007 Shows the relative importance of long-term debt to the long-term financing of the firm. Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030 $1,669$1,669 = 0.620.62 (i.e., LT-Debt + Equity) Financial Leverage RatiosFinancial Leverage Ratios
31.
6.31 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 0.62 0.60 0.62 0.61 0.67 0.62 Year 2007 2006 2005 Total Capitalization RatioTotal Capitalization Ratio BW has average long-term debt utilization relative to the industry average. Financial LeverageFinancial Leverage Ratio ComparisonsRatio Comparisons
32.
6.32 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Interest CoverageInterest Coverage EBITEBIT Interest ChargesInterest Charges For Basket Wonders December 31, 2007Indicates a firm’s ability to cover interest charges. Income Statement Ratios Coverage Ratios $210$210 $59$59 = 3.563.56 Coverage RatiosCoverage Ratios
33.
6.33 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 3.56 5.19 4.35 5.02 10.30 4.66 Year 2007 2006 2005 Interest Coverage RatioInterest Coverage Ratio BW has below average interest coverage relative to the industry average. CoverageCoverage Ratio ComparisonsRatio Comparisons
34.
6.34 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Interest Coverage Ratio 3.0 5.0 7.0 9.0 11.0 2005 2006 2007 Analysis Year RatioValue BW Industry Coverage Ratio – TrendCoverage Ratio – Trend Analysis ComparisonAnalysis Comparison
35.
6.35 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • This indicates that low earningslow earnings (EBIT) may be a potential problem for BWBW. • Note, we know that debt levelsdebt levels are in line with the industryindustry averages. • The interest coverage ratio for BWBW has been falling since 2005. It has been below industryindustry averages for the past two years. Summary of the CoverageSummary of the Coverage Trend AnalysisTrend Analysis
36.
6.36 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Receivable TurnoverReceivable Turnover Annual Net Credit SalesAnnual Net Credit Sales ReceivablesReceivables For Basket Wonders December 31, 2007Indicates quality of receivables and how successful the firm is in its collections. Income Statement/ Balance Sheet Ratios Activity Ratios $2,211$2,211 $394$394 = 5.615.61 (Assume all sales are credit sales.) Activity RatiosActivity Ratios
37.
6.37 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Avg Collection PeriodAvg Collection Period Days in the YearDays in the Year Receivable TurnoverReceivable Turnover For Basket Wonders December 31, 2007 Average number of days that receivables are outstanding. (or RT in days) Income Statement/ Balance Sheet Ratios Activity Ratios 365365 5.615.61 = 65 days65 days Activity RatiosActivity Ratios
38.
6.38 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 65.0 65.7 71.1 66.3 83.6 69.2 Year 2007 2006 2005 Average Collection PeriodAverage Collection Period BW has improved the average collection period to that of the industry average. ActivityActivity Ratio ComparisonsRatio Comparisons
39.
6.39 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Payable Turnover (PT)Payable Turnover (PT) Annual Credit PurchasesAnnual Credit Purchases Accounts PayableAccounts Payable For Basket Wonders December 31, 2007 Indicates the promptness of payment to suppliers by the firm. Income Statement/ Balance Sheet Ratios Activity Ratios $1551$1551 $94$94 = 16.516.5 (Assume annual credit purchases = $1,551.) Activity RatiosActivity Ratios
40.
6.40 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. PT in DaysPT in Days Days in the YearDays in the Year Payable TurnoverPayable Turnover For Basket Wonders December 31, 2007 Average number of days that payables are outstanding. Income Statement/ Balance Sheet Ratios Activity Ratios 365365 16.516.5 = 22.1 days22.1 days Activity RatiosActivity Ratios
41.
6.41 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 22.1 46.7 25.4 51.1 43.5 48.5 Year 2007 2006 2005 Payable Turnover in DaysPayable Turnover in Days BW has improved the PT in Days. Is this good?Is this good? ActivityActivity Ratio ComparisonsRatio Comparisons
42.
6.42 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Inventory TurnoverInventory Turnover Cost of Goods SoldCost of Goods Sold InventoryInventory For Basket Wonders December 31, 2007Indicates the effectiveness of the inventory management practices of the firm. Income Statement/ Balance Sheet Ratios Activity Ratios $1,599$1,599 $696$696 = 2.302.30 Activity RatiosActivity Ratios
43.
6.43 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 2.30 3.45 2.44 3.76 2.64 3.69 Year 2007 2006 2005 Inventory Turnover RatioInventory Turnover Ratio BW has a very poor inventory turnover ratio. ActivityActivity Ratio ComparisonsRatio Comparisons
44.
6.44 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Inventory Turnover Ratio 2.0 2.5 3.0 3.5 4.0 2005 2006 2007 Analysis Year RatioValue BW Industry Inventory Turnover Ratio –Inventory Turnover Ratio – Trend Analysis ComparisonTrend Analysis Comparison
45.
6.45 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Total Asset TurnoverTotal Asset Turnover Net SalesNet Sales Total AssetsTotal Assets For Basket Wonders December 31, 2007Indicates the overall effectiveness of the firm in utilizing its assets to generate sales. Income Statement/ Balance Sheet Ratios Activity Ratios $2,211$2,211 $2,169$2,169 = 1.021.02 Activity RatiosActivity Ratios
46.
6.46 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 1.02 1.17 1.03 1.14 1.01 1.13 Year 2007 2006 2005 Total Asset Turnover RatioTotal Asset Turnover Ratio BW has a weak total asset turnover ratio. Why is this ratio considered weak?Why is this ratio considered weak? ActivityActivity Ratio ComparisonsRatio Comparisons
47.
6.47 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Gross Profit MarginGross Profit Margin Gross ProfitGross Profit Net SalesNet Sales For Basket Wonders December 31, 2007 Indicates the efficiency of operations and firm pricing policies. Income Statement/ Balance Sheet Ratios Profitability Ratios $612$612 $2,211$2,211 = 0.2770.277 Profitability RatiosProfitability Ratios
48.
6.48 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 27.7% 31.1% 28.7 30.8 31.3 27.6 Year 2007 2006 2005 Gross Profit MarginGross Profit Margin BW has a weak Gross Profit Margin. ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
49.
6.49 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Gross Profit Margin 25.0 27.5 30.0 32.5 35.0 2005 2006 2007 Analysis Year RatioValue(%) BW Industry Gross Profit Margin –Gross Profit Margin – Trend Analysis ComparisonTrend Analysis Comparison
50.
6.50 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Net Profit MarginNet Profit Margin Net Profit after TaxesNet Profit after Taxes Net SalesNet Sales For Basket Wonders December 31, 2007Indicates the firm’s profitability after taking account of all expenses and income taxes. Income Statement/ Balance Sheet Ratios Profitability Ratios $91$91 $2,211$2,211 = 0.0410.041 Profitability RatiosProfitability Ratios
51.
6.51 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 4.1% 8.2% 4.9 8.1 9.0 7.6 Year 2007 2006 2005 Net Profit MarginNet Profit Margin BW has a poor Net Profit Margin. ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
52.
6.52 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Net Profit Margin 4 5 6 7 8 9 10 2005 2006 2007 Analysis Year RatioValue(%) BW Industry Net Profit Margin –Net Profit Margin – Trend Analysis ComparisonTrend Analysis Comparison
53.
6.53 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Return on InvestmentReturn on Investment Net Profit after TaxesNet Profit after Taxes Total AssetsTotal Assets For Basket Wonders December 31, 2007Indicates the profitability on the assets of the firm (after all expenses and taxes). Income Statement/ Balance Sheet Ratios Profitability Ratios $91$91 $2,160$2,160 = 0.0420.042 Profitability RatiosProfitability Ratios
54.
6.54 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 4.2% 9.6% 5.0 9.1 9.1 10.8 Year 2007 2006 2005 Return on InvestmentReturn on Investment BW has a poor Return on Investment. ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
55.
6.55 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Return on Investment 4 6 8 10 12 2005 2006 2007 Analysis Year RatioValue(%) BW Industry Return on Investment –Return on Investment – Trend Analysis ComparisonTrend Analysis Comparison
56.
6.56 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Return on EquityReturn on Equity Net Profit after TaxesNet Profit after Taxes Shareholders’ EquityShareholders’ Equity For Basket Wonders December 31, 2007Indicates the profitability to the shareholders of the firm (after all expenses and taxes). Income Statement/ Balance Sheet Ratios Profitability Ratios $91$91 $1,139$1,139 = 0.080.08 Profitability RatiosProfitability Ratios
57.
6.57 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. BW Industry 8.0% 18.0% 9.4 17.2 16.6 20.4 Year 2007 2006 2005 Return on EquityReturn on Equity BW has a poor Return on Equity. ProfitabilityProfitability Ratio ComparisonsRatio Comparisons
58.
6.58 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Trend Analysis of Return on Equity 7.0 10.5 14.0 17.5 21.0 2005 2006 2007 Analysis Year RatioValue(%) BW Industry Return on Equity –Return on Equity – Trend Analysis ComparisonTrend Analysis Comparison
59.
6.59 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. ROIROI2007 = 0.041 × 1.02 = 0.0420.042 or 4.2%4.2% ROIROIIndustry = 0.082 × 1.17 = 0.0960.096 or 9.6%9.6% (Note: values are rounded)(Note: values are rounded) ROIROI = Net profit margin × Total asset turnover Earning PowerEarning Power = Sales profitability × Asset efficiency Return on Investment andReturn on Investment and the Du Pont Approachthe Du Pont Approach
60.
6.60 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. ROEROE2007 = 0.041 × 1.02 × 1.90 = 0.0800.080 ROEROEIndustry = 0.082 × 1.17 × 1.88 = 0.1800.180 (Note: values are rounded)(Note: values are rounded) Return On EquityReturn On Equity = Net profit margin X Total asset turnover X Equity Multiplier Equity MultiplierEquity Multiplier = Total Assets Shareholders’ Equity Return on Equity andReturn on Equity and the Du Pont Approachthe Du Pont Approach
61.
6.61 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • The profitability ratios for BWBW have ALL been falling since 2005. Each has been below the industryindustry averages for the past three years. • This indicates that COGSCOGS and administrative costsadministrative costs may both be too high and a potential problem for BWBW. • Note, this result is consistent with the low interest coverage ratio. Summary of the ProfitabilitySummary of the Profitability Trend AnalysesTrend Analyses
62.
6.62 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. • Inventories are too high. • May be paying off creditors (accounts payable) too soon. • COGS may be too high. • Selling, general, and administrative costs may be too high. Summary of Ratio AnalysesSummary of Ratio Analyses
63.
6.63 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues. Common-Size AnalysisCommon-Size Analysis
64.
6.64 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Regular (thousands of $) Common-Size (%) Assets 2005 2006 2007 2005 2006 2007 Cash 148 100 90 12.10 4.89 4.15 AR 283 410 394 23.14 20.06 18.17 Inv 322 616 696 26.33 30.14 32.09 Other CA 10 14 15 0.82 0.68 0.69 Tot CA 763 1,140 1,195 62.39 55.77 55.09 Net FA 349 631 701 28.54 30.87 32.32 LT Inv 0 50 50 0.00 2.45 2.31 Other LT 111 223 223 9.08 10.91 10.28 Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0 Basket Wonders’ CommonBasket Wonders’ Common Size Balance SheetsSize Balance Sheets
65.
6.65 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Regular (thousands of $) Common-Size (%) Liab+Equity 2005 2006 2007 2005 2006 2007 Note Pay 290 295 290 23.71 14.43 13.37 Acct Pay 81 94 94 6.62 4.60 4.33 Accr Tax 13 16 16 1.06 0.78 0.74 Other Accr 15 100 100 1.23 4.89 4.61 Tot CL 399 505 500 32.62 24.71 23.05 LT Debt 150 453 530 12.26 22.16 24.44 Equity 674 1,086 1,139 55.11 53.13 52.51 Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0 Basket Wonders’ Common-Basket Wonders’ Common- Size Balance SheetsSize Balance Sheets
66.
6.66 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Regular (thousands of $) Common-Size (%) 2005 2006 2007 2005 2006 2007 Net Sales 1,235 2,106 2,211 100.0 100.0 100.0 COGS 849 1,501 1,599 68.7 71.3 72.3 Gross Profit 386 605 612 31.3 28.7 27.7 Adm. 180 383 402 14.6 18.2 18.2 EBIT 206 222 210 16.7 10.5 9.5 Int Exp 20 51 59 1.6 2.4 2.7 EBT 186 171 151 15.1 8.1 6.8 EAT 112 103 91 9.1 4.9 4.1 Cash Div 50 50 50 4.0 2.4 2.3 Basket Wonders’ Common-Basket Wonders’ Common- Size Income StatementsSize Income Statements
67.
6.67 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year. Index AnalysesIndex Analyses
68.
6.68 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Regular (thousands of $) Indexed (%) Assets 2005 2006 2007 2005 2006 2007 Cash 148 100 90 100.0 67.6 60.8 AR 283 410 394 100.0 144.9 139.2 Inv 322 616 696 100.0 191.3 216.1 Other CA 10 14 15 100.0 140.0 150.0 Tot CA 763 1,140 1,195 100.0 149.4 156.6 Net FA 349 631 701 100.0 180.8 200.9 LT Inv 0 50 50 100.0 inf. inf. Other LT 111 223 223 100.0 200.9 200.9 Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4 Basket Wonders’Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets
69.
6.69 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Regular (thousands of $) Indexed (%) Liab+Equity 2005 2006 2007 2005 2006 2007 Note Pay 290 295 290 100.0 101.7 100.0 Acct Pay 81 94 94 100.0 116.0 116.0 Accr Tax 13 16 16 100.0 123.1 123.1 Other Accr 15 100 100 100.0 666.7 666.7 Tot CL 399 505 500 100.0 126.6 125.3 LT Debt 150 453 530 100.0 302.0 353.3 Equity 674 1,086 1,139 100.0 161.1 169.0 Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4 Basket Wonders’Basket Wonders’ Indexed Balance SheetsIndexed Balance Sheets
70.
6.70 Van Horne
and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer. Regular (thousands of $) Indexed (%) 2005 2006 2007 2005 2006 2007 Net Sales 1,235 2,106 2,211 100.0 170.5 179.0 COGS 849 1,501 1,599 100.0 176.8 188.3 Gross Profit 386 605 612 100.0 156.7 158.5 Adm. 180 383 402 100.0 212.8 223.3 EBIT 206 222 210 100.0 107.8 101.9 Int Exp 20 51 59 100.0 255.0 295.0 EBT 186 171 151 100.0 91.9 81.2 EAT 112 103 91 100.0 92.0 81.3 Cash Div 50 50 50 100.0 100.0 100.0 Basket Wonders’ IndexedBasket Wonders’ Indexed Income StatementsIncome Statements
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