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Unformatted text preview: AEM1200, Introduction to Business Management. AEM1200, Friday 10/3 Financial Statement Analysis Ratio analysis Interpreting results of ratio analysis The DuPont method Objectives of Financial Statement Analysis Objectives Find out how liquid is an enterprise Find liquid Find out how profitable is an enterprise Find profitable Find out how efficient is an enterprise Find efficient Using Accounting Information Using Solvency Ratios
Short-Term Current Ratio Current Assets Current Liabilities Quick Ratio Current Liabilities Long-Term Debt to Equity Total Liabilities Equity Cash + Marketable Securities + Receivables Using Acc’ting Info. (cont’d)Using Profitability Ratios
Profitability = Operating Success
Return on Sales Net Income Net Sales Return on Equity Net Income Owner’s Equity Earnings Per Share Net Income # Common Shares Using Acc’ting Info. (Con’td)Using Activity Ratios
Inventory Turnover Cost of Goods Sold Avg. Inventory A/R Turnover Net Acc’ts Receivable Net Daily Credit Sales Current Ratio- Walmart Current $46,588 $51,754 = 0.90 Quick(Acid-Test) Ratio Quick(Acid-Test) $10,213 $51,754 = 0.20 Debt to Equity Ratio Debt $151,193 = $61,573 2.46 Profitability Ratios Profitability
Return on Sales $ 11,284 = 3.27% $344,992 Return on Equity $11,284 = 18.33% $61,573 Earnings per Share $ 11,284 = $2.71 4,164 Activity Ratios Activity Inventory Turnover $344,992 = 10.24 $33,685 Comparison: WalMart and Target Comparison:
Wal-Mart Wal-Mart Target Wal-Mart Wal-Mart Target (2007) (2006) (2007) (2007) (2006) (2007) Ideal 2 1
Close to 1 Current ratio Acid-test ratio 0.90 0.20 0.90 0.19 1.60 3.60% 21.1% 2.68$ 9.2 1.35 0.70 1.88 4.68% 19.0% 3.21$ 5.0 Debt-to-equity ratio 2.46 Return on sales Return on equity 3.27% 18.33% High High High
Varies per Varies industry industry Earnings per share 2.71$ Inventory turnover 10.24 Caveats on Financial Statement Analysis Caveats Industry matters! Size matters! You can be tighter in some areas of your You financial structure, if you have more leeway in others. others. Keeping Tabs: The DuPont Model Keeping Take-aways Take-aways
Financial statement analysis tries to discern the Financial liquidity, profitability and effectiveness of an enterprise; enterprise; Ratio analysis, the standard technique used to Ratio perform financial statement analysis, depends on industry, size, and interdependences within the financial statements; the The DuPont methods is a “simple” way to The combine the strengths of ratio analysis. combine ...
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This note was uploaded on 05/30/2009 for the course AEM 1200 taught by Professor Perez,p.d. during the Spring '06 term at Cornell University (Engineering School).
- Spring '06