Chap003(WW-FIN357)NT (2)

Chap003(WW-FIN357)NT (2) - Chapter 3 Financial Statement...

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Unformatted text preview: Chapter 3 Financial Statement Analysis and Long-Term Planning 3-2 Chapter Outline 3.1 Financial Statement Analysis 3.2 Ratio Analysis 3.3. The Du Pont Identity 3.4 Using Financial Statement Information 3.5 Long-Term Financial Planning 3.6 External Financing and Growth 3.7 Caveats of Financial Planning Models 3-3 Key Concepts and Skills Standardize financial statements for comparison purposes Compute and interpret important financial statement ratios Develop a financial plan using the percentage of sales approach Understand how capital structure and dividend policies affect a firms ability to grow 3-4 Why are Financial Ratios Useful? Standardize numbers Provide distillation of financial statements Facilitate comparisons within and between firms (at same time and over time) Highlight weaknesses and strengths 3.1 Financial Statement Analysis 3-5 Standardizing Financial Statements Common Size Balance Sheet: Divide all items by total assets Common Size Income Statement: Divide all items by Sales $ or % Change Analysis: Balance sheet or income statement Find dollar or percentage change year- over-year or from base year 3-6 3.2 Ratio Analysis As you examine each ratio, ask yourself: How is the ratio computed? What is the ratio trying to measure? What is the unit of measurement? What does the value indicate? How can the companys ratio be improved? 3-7 1. ShortTerm Solvency (Liquidity) Ratios Can the firm make required payments as they come due? 1. Activity or Asset Management Ratios Does the firm have the right amount of assets for the level of sales? 5 major categories of ratios and the questions they answer: Ratio Analyses 3-8 3. Financial Leverage or Debt Ratios Does the firm have the right mix of debt and equity financing? 3. Profitability Ratios Do sales prices exceed unit costs? Are sales sufficient as reflected in PM, ROE, and ROA? 3. Market value Ratios Are managers creating value for shareholders? Ratio Analyses 3-9 Short-Term Solvency Measures Current ratio: Current assets Current liabilities Quick ratio (or Acid test): (Current assets Inventory) Current liabilities Cash ratio: Cash Current liabilities 3-10 Long-Term Solvency Measures Total debt ratio: Total debt Total assets Debt-equity ratio: Total debt Total equity 3-11 Long-Term Solvency Measures Equity multiplier: Total assets Total equity Interest coverage ratio (TIE): Earnings before interest and taxes Interest (EBIT Interest) Cash coverage ratio (TIE): (EBIT + Depreciation) Interest 3-12 Activity Ratios Inventory turnover: Cost of goods sold Inventory Days sales in inventory: Days in period (365) Inventory turnover 3-13 Activity Ratios Receivables turnover: Sales Accounts receivable Average collection period: Days in period (365) Receivables turnover Total asset turnover: Sales Total assets 3-14...
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Chap003(WW-FIN357)NT (2) - Chapter 3 Financial Statement...

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