ANALYSIS
FINANCIAL Common Sizing Percentage Changes Profitability Ratios Liquidity Ratios Solvency Ratios Stockholder Ratios Industry Specific Ratios Benchmarks
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Financial Statement Analysis
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WHY ARE WE DOING THIS?
Purpose of accounting data: data making a business decision. Aid in
Business ratios are statistics. statistics Statistics summarize large data to make them easier to understand. Ratios are not GAAP. With the exception of EPS, GAAP GAAP does not tell how to calculate ratios. Why is this true? Ratios are for individual decisions. Use ratios in decisions a way needed to make a particular decision.
Financial Statement Analysis
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COMMON SIZING
Common Sizing - expressing individual components of financial statements as a percentage of one number. Financial Statement Balance Sheet Income Statement Cash Flow Statement Components Expressed as a Percentage of: Total Assets Sales No Logical Denominator
Financial Statement Analysis
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PERCENTAGE CHANGES
Growth Ratios
Percentage growth is determined by:
This Years Results - Last Years Results Last Years Results = Percentage Change
Percentage of growth is most commonly calculated for: Sales Net Income Total Assets
Financial Statement Analysis
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COMMON SIZING and GROWTH
What Happened? The following are balance sheet data summarized as a percentage of total assets:
Cash Accounts Receivable Inventory Prepaid Items PP&E Total Assets Accounts Payable Unearned Revenue LT Debt Owners Equity Total Assets ($) This Year 5% 20% 30% 5% 40% 100% 19% 10% 33% 38% $1,050,000 Last Year 10% 15% 25% 5% 45% 100% 10% 15% 35% 40% $1,000,000
By what percentage did total assets grow? ($1,050,000 - $1,000,000) / $1,000,000 = 5% How did the dollar amount of LT Debt and Owners Equity change? LTD TY [ ] LTD LY
(.33) $1,050,000 [ ] (.35) $1,000,000
The dollar amount of LTD and OE stayed about the same.
OE TY [ ] OE LY
(.38) $1,050,00 [ ] (.40) $1,000,000
$346,500 $350,000
$399,000 $400,000
Is the company better off this year than last year?
Financial Statement Analysis
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PROFITABILITY RATIOS
1. Profit Margin on Sales Indicates: The relation of profits to sales. Profit Margin Interpretation: Higher - less sales are needed to generate a desired level of profit. How is the ratio improved? Hint: The denominator is the top of the IS and the numerator is the bottom of the IS. What is in between? 2. Return on Assets = Net Income Sales
Indicates: How assets are utilized to achieve a profit. Return on = ____Net Income____ Assets Average Total Assets Options: Some add interest expense to the numerator to put leveraged and unleveraged entities on equal basis. Interpretation: Higher - greater ability to produce profits.
Financial Statement Analysis
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3.
Return on Stockholders' Equity
Indicates: The degree of profitability attributable to stockholders. Differs from ROA to extent that the entity is leveraged (has debt). Return = on Equity _____Net Income_______ Average Stockholders Equity
Options: Some subtract PS dividends from numerator to evaluate only amounts available to CS. Interpretation: Higher - a greater degree of profits available to stockholders. 4. Profit per Employee
Indicates: The productivity of employees. Profit per Employee Interpretation: Higher - employees are being utilized more efficiently.
IMPORTANCE OF EMPLOYEES Company Employees* Wal-Mart 1,341,500 US Postal Service 854,400 McDonalds 413,000 United Parcel Service 365,500 General Motors 355,500 Ford 335,000
* Source: Forbes 2002
=
_____Net Income________ Average Number of Employees
Metro Equivalent Phoenix Indianapolis Atlanta Miami St. Louis Cincinnati
On January 23, 2005, Ford announced layoffs of 30,000, greater than the population of Laramie, Wyoming.
Financial Statement Analysis
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What Investments Create Value? Drive Future Earnings?
Energy (ExxonMobil, ChevronTexaco) Machinery, Exploration Steel (US Steel) - Machinery Food Services (McDonalds) Employees, Real Estate Retail (Wal-Mart) - Employees (Service and Purchasing Prowess), Real Estate, Banking (Citibank) - Employees Pharmaceuticals (Merck, Pfizer) - Research and Development, Sales Force Software (Microsoft) - Research and Development
Financial Statement Analysis
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Median Industry Returns
Industry Revenues Assets Equity Employee
Aerospace Airlines Apparel Automobiles Banking Computers Electronics Food Insurance Metals Petroleum Pharmaceuticals Telecommunication Textiles Utilities
5 5 7 4 14 5 5 2 4 4 5 14 6 3 8
6 6 9 4 1.2 5 7 4 1 5 6 13 2 5 3
21 16 19 17 16 16 15 10 13 13 14 27 6 11 11
6.3 11.1 11.5 11.6 37.3 19.3 12.2 2.1 79.1 10.9 54.5 40.5 19.8 4.1 29.2
Source: ROA, ROE, and Percent of Sales are from Fortune 500.
Financial Statement Analysis
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LIQUIDITY RATIOS
Liquidity ability to meet short term obligations
1. Days Payable Outstanding
Indicates: The number of days to settle payables. Days Payable = Outstanding 365 * Average Accounts Payable Purchases*
* Purchases = COGS + Ending Inventory Beginning Inventory Interpretation: Higher - entity is taking longer to pay, or creditors are extending better terms Lower - entity is paying faster, or creditors are reducing terms 2. Current (or Working Capital) Ratio
Indicates: Whether the corporation has resources to meet obligations due next period. Current Ratio Interpretation: Less than 1 - corporation will not meet obligations due during the next period without additional resources. Greater than 1 - corporation is currently able to meet current liabilities as they become due. = Current Assets_ Current Liabilities
Financial Statement Analysis
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3.
Quick (or Acid-Test) Ratio
Indicates: Whether the corporation has liquid resources to meet obligations due next period. Quick Ratio Interpretation: Certain current assets are more liquid than others; inventories are usually not immediately available for the liquidation of current liabilities and are not included in this ratio. 4. Defense Ratio = Cash + Marketable Securities + Net Receivables Current Liabilities
Indicates: Number of days a business could operate without obtaining additional liquid assets. Defense Ratio Interpretation: Lower ratios indicate less ability to satisfy payees (employees, vendors, etc.) Net Working Capital Computed in dollars. Indicates the amount of money on hand to meet current obligations. Net Working Capital = Current Assets Current Liabilities = Cash + Marketable Securities + Net Receivables Average Daily Operating Cash Outflow
Difficult to determine
Financial Statement Analysis
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SOLVENCY RATIOS
Solvency ability to meet long-term obligations
1. Debt Ratios
Indicates: The degree to which a corporation utilizes debt to acquire assets. Debt to Equity Debt to Total Assets Interpretation: Higher - greater degree of assets are financed by creditors. 2. Times Interest Earned (or Debt Service Ratio) = = Total Liabilities Total Equity Total Liabilities Total Assets
Indicates: The relation of interest expense to income or the ability to service debt (ability to pay interest). Times Interest Earned Interpretation: Higher - greater ability to service its debt. If TIE = 2 - half of income is used to service debt If TIE = 10 - one-tenth of income is used to service debt = Net Income + Interest Expense + Tax Expense Interest Expense
Financial Statement Analysis
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3.
Times Interest Earned (Cash Basis)
Indicates: The ability to service debt (ability to pay interest expense). Times Interest Earned = Cash Flow From Operations + Interest Paid Interest Paid
We prefer to be paid in cash, not income. Thats why we like TIE on the cash basis.
Financial Statement Analysis
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STOCKHOLDER RATIOS
1. Dividend Payout Ratio Indicates: The degree to which net income will be returned to stockholders in the form of cash. Dividend Payout = Dividends Paid Net Income
Interpretation: Higher dividend payout ratios indicate less earnings retained and greater cash return to stockholders. Reality - Newer companies do not pay dividends because earnings are reinvested. 2. Dividend Yield
Indicates: Measures the cash return to a new investor. Dividend Yield = Dividends per Share Current Stock Price
Interpretation: Higher yields indicate faster return on investment.
Financial Statement per Analysis
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3.
Earnings Share
Indicates: the portion of net income attributable to each common share Earnings Per share = Net Income PS Dividends Average Shares Outstanding
Rule: Required to be at the bottom of the income statement. Did you know:
EPS is the only ratio GAAP tells us how to calculate?
Diluted EPS must also be shown if the company has stock options, convertible bonds and preferred stock, or other agreements that potentially reduce the earnings attributable to common stockholders
Financial Statement Analysis
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4.
Price / Earnings Ratio
Indicates: relationship between the market price of a share of common stock and the earnings per share. Price / Earnings Interpretation: indicates expected earnings of the company. indicates whether the shares are "expensive" or "inexpensive." a payback period for stocks Note: A negative P/E ratio (due to a loss in the denominator) is not interpretable. = Market Price per Share Earnings per Share
Financial Statement Analysis
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Understanding Price / Earnings Ratios
The following are recent P/E ratios for several corporations:
Amazon EBay Symantec Amgen Adobe Systems Southwest Airlines Intuit Cisco Systems Microsoft UT Starcom Intel Home Depot Pfizer Merck ExxonMobil Tosoro
For third quarter of 2005
63.0 47.6 27.0 26.7 24.4 23.8 22.3 21.5 21.4 19.0 18.3 15.2 13.6 12.6 12.4 11.7
P/E
Relative P/E
3.37 2.55 1.44 1.45 1.30 1.30 1.19 1.16 1.14 1.02 0.98 0.82 0.71 0.66 0.67 0.64
Note: Relative PE = Corporate PE / Average PE
Discussion Questions
1. 2. 3. Do more established corporations have higher or lower P/E ratios? Why? What is the average P/E ratio of publicly-traded corporations? What do investors anticipate when they purchase securities whose P/E ratio is significantly higher than the industry average?
Financial Statement Analysis
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INDUSTRY SPECIFIC RATIOS
Many corporations disclose ratios that are unique to their industry. For example Southwest Airlines Co. discloses:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Fleet Size Average Fleet Age Passenger Revenue per Passenger Mile Operating Revenue per Available Seat Mile Operating Expense per Available Seat Mile Passenger Carried per Employee Aircraft Utilization On-Time Performance Baggage Handling Complaints Customer Complaints Revenue Passengers Carried Available Seat Miles Revenue Passenger Miles Passenger Load Factor Cities Served Average Length of Passenger Haul Trips Flown Average Passenger Fare Number of Employees
Financial Statement Analysis
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BENCHMARKS
Results of calculated ratios are often compared to: Prior Year Results Closest Competitors Industry Averages Industry averages may be obtained from:
Dun and Bradstreet, Industry Norms and Key Business Ratios Robert Morris and Assoc., Annual Statement Studies Leo Troy, Almanac of Business and Industrial Financial Ratios
Financial Statement Analysis
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RATIO ANALYSIS
FedEx v. UPS
Fiscal Year 2000 FedEx
$ 18,257 106 449 688 688 16,773 631 3,285 0 7,084 1,159 11,527 2,891 6,742 4,785 10,648 4,664 1,625 0 $38.80 $2.36 28.5% 0.0% 61.5% 10.1% 100.0% 25.1% 58.5% 41.5% Percent 100.0% 0.6% 2.5% 3.8% 3.8% $ 29,771 205 1,900 2,795 2,795 22,313 883 7,124 0 12,329 2,209 21,662 4,501 11,927 9,735 23,028 12,474 2,742 786 $59.19 $2.54 32.9% 0.0% 56.9% 10.2% 100.0% 20.8% 55.1% 44.9%
Corporation Name
(in Millions) Income Statement Revenue Interest Expense Tax Expense Income from Cont Op Net Income Prior Year Revenue Prior Year Income Balance Sheet Current Assets Investments Fixed Assets Other Assets Total Assets Current Liabilities Total Liabilities Stockholders' Equity Prior Year Total Assets Prior Year Equity Cash Flow Cash Flow from Operations Dividends Paid Per Share Market Price Earnings Per Share
ups
Percent 100.0% 0.7% 6.4% 9.4% 9.4%
Financial Statement Analysis
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RATIO ANALYSIS
FedEx v. UPS
Fiscal Year 2000 Corporation Name Ratio Analysis Sales Growth Income Growth Asset Growth Current Ratio Debt to Equity Times Interest Earned (Acc) Times Interest Earned (Cash) Profit Margin Return on Assets Return on Equity Price Earnings Ratio Dividend Payout Ratio Dividend / CFO FedEx 8.8% 9.0% 8.3% 1.14 1.41 11.73 20.57 3.8% 6.2% 14.6% 16.44 0.00 0.00 ups 33.4% 216.5% -5.9% 1.58 1.23 23.90 23.64 9.4% 12.5% 25.2% 23.30 0.28 0.29
Financial Statement Analysis
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RATIO ANALYSIS
FedEx v. UPS A. Which corporation has the highest growth?
B.
Which corporation is the most profitable?
C.
Which corporation is more highly leveraged (greatest proportion of debt)?
D.
Which corporation may be the most in need working capital?
E.
Which corporation is best able to service their debt?
F.
Which corporation do investors have higher expectations?
Financial Statement Analysis
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ExxonMobil v. Chevron See ExxonMobil and Chevron spreadsheet.
Did ExxonMobil grow during 2003 or 2004? Was ExxonMobil more profitable during 2003 or 2004? Was there a significant change in ExxonMobils capital structure during 2004? Was Exxon...