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Ch 3 Slide Show - CHAPTER3 1 TopicsinChapter Ratioanalysis...

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1 CHAPTER 3 Analysis of Financial Statements
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2 Topics in Chapter Ratio analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors
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3 Value =                         +                         +     + FCF 1 FCF 2 FCF (1 + WACC) 1 (1 + WACC) (1 + WACC) 2 Free cash flow (FCF) Market interest rates Firm’s business risk Market risk aversion Firm’s debt/equity mix Cost of debt Cost of equity Weighted average cost of capital (WACC) Net operating profit after taxes Required investments in operating capital = Determinants of Intrinsic Value: Using Ratio Analysis ...
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4 Overview Ratios facilitate comparison of: One company over time One company versus other companies Ratios are used by: Lenders to determine creditworthiness Stockholders to estimate future cash flows and  risk Managers to identify areas of weakness and  strength
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5 Income Statement 2010 2011E Sales $5,834,400  $7,035,600 COGS 4,980,000  5,800,000 Other expenses 720,000  612,960 Deprec. 116,960  120,000    Tot. op. costs 5,816,960  6,532,960    EBIT 17,440  502,640 Int. expense 176,000  80,000    EBT (158,560) 422,640 Taxes (40%) (63,424) 169,056 Net income ($  95,136) $ 253,584
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6 Balance Sheets: Assets 2010 2011E Cash $      7,282  $     14,000 S-T invest. 20,000  71,632 AR 632,160  878,000 Inventories 1,287,360  1,716,480    Total CA 1,946,802  2,680,112    Net FA 939,790  836,840 Total assets $2,886,592   $3,516,952
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7 Balance Sheets: Liabilities &  Equity 2010 2011E Accts. payable $    324,000  $    359,800 Notes payable 720,000  300,000 Accruals 284,960  380,000    Total CL 1,328,960  1,039,800 Long-term debt 1,000,000  500,000 Common stock 460,000  1,680,936 Ret. earnings 97,632  296,216    Total equity 557,632  1,977,152 Total L&E $2,886,592   $3,516,952
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8 Other Data 2010 2011E Stock price $6.00 $12.17 # of shares 100,000  250,000 EPS -$0.95 $1.01 DPS $0.11 $0.22 Book val. per sh. $5.58 $7.91 Lease payments $40,000 $40,000 Tax rate 0.4 0.4
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9 Liquidity Ratios Can the company meet its short-term  obligations using the resources it  currently has on hand?
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10 Forecasted Current and Quick  Ratios for 2011. CR 10  =           =               = 2.58. QR 10  = =                             = 0.93. CA CL $2,680 $1,040 $2,680 - $1,716 $1,040 CA - Inv. CL
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11 Comments on CR and QR 2011E 2010 2009 Ind. CR 2.58 1.46 2.3 2.7 QR 0.93 0.5 0.8 1.0 Expected to improve but still below the  industry average. Liquidity position is weak.
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12 Asset Management Ratios How efficiently does the firm use its  assets? How much does the firm have tied up in  assets for each dollar of sales?
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13 Inventory Turnover Ratio vs.  Industry Average Inv. turnover = =                =  4.10. Sales Inventories $7,036 $1,716 2011E 2010 2009 Ind. Inv. T. 4.1 4.5 4.8 6.1
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14 Comments on Inventory  Turnover Inventory turnover is below industry  average.
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