AEM2200-0930ToPost - AEM2200 Business Management and...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: AEM2200 Business Management and Organizations Business Friday 9/30 Financial Analysis Basic financial analysis techniques Case studies The Fundamental Problem of Financial Management Financial Creating long term value through Creating investment and profits while meeting short term obligations short Likely Outcomes of Financial Analysis Likely The company is sound, no need for further financing; The company needs short term funds to deal with The variations in seasonal patterns or one time events; variations The company needs long term funds to help with growth The or with significant one-time outlays; or The company needs additional equity investment to The engage in promising (but risky) business opportunities or to allow it to overcome a serious competitive setback; to The company needs resources to allow for an orderly The sale or dissolution, in the face of obsolescence or of bankruptcy. bankruptcy. Financial Analysis Techniques Financial Ratio analysis Sources and uses analysis Projection Ratio Analysis Ratio Solvency ratios Current ratio: Current assets / Current liabilities Current Current Acid ratio: (Current assets – inventory) / Current liabilities (Current Acid Debt to equity (also leverage): (Total debt + equity) / equity Profitability ratios Return to equity Return to sales Earnings per share Efficiency ratios Inventory turnover : COGS / Inventory COGS Inventory Accounts receivable turnover : Accounts Accounts receivable / Daily sales Accounts Accounts payable turnover: Accounts payable / Daily CGS Current Ratio- Walmart Current $51,893 $58,484 = 0.887 Quick(Acid-Test) Ratio Quick(Acid-Test) $12,484 $58,484 = 0.214 Debt to Equity Ratio Debt $180,663 = $71,247 2.54 Profitability Ratios Profitability Return on Sales $16,389 = 3.91% $418,952 Return on Equity $16,389 = 23% $71,247 Earnings per Share $ 16,389 = $4.47 3,670 Activity Ratios Activity Inventory Turnover $315,287 = 8.68 $36,318 Sources and Uses Analysis: Rules Rules Increases in assets represent uses of funds Increases uses Reductions in assets represent sources of Reductions funds funds Increases in liabilities and owner’’s equity s represent sources of funds sources Reductions in liabilities and owner’’s equity s represent uses of funds uses The Most Conservative Position Position Increases in assets = Retained earnings Retained Projection Projection With two years $(t+1) = $(t) + ($(t) - $(t-1)) With more than two years Geometric projection Average / regression projection “Graphic” projection With assumptions Fit assumption into one of the previous models ie. fixed sales, no interest payments, no dividend distribution… Remember to check for consistency (aka balance!) Some Advice Some If you can and know how, use Excel! Look at liquidity and efficiency ratios: is the firm in short Look term trouble (low liquidity ratios)? Is it leveraged? Does it have assets or future income streams to borrow against? have Look at the sources and uses … What is the company Look investing in? Whose money has it been investing? investing Look at the projections. What problems can be Look anticipated? anticipated? Dynashears, Inc. Dynashears, Questions to Consider Why was Dynashears unable to repay its Why bank loan by March 31st, 1991, as originally forecast? forecast? Should Mr. Winthrop extend the Dynashears’ loan, and indeed increase it? loan, Which of the following options is best for Mr. Which Winthrop? Winthrop? Extend and increase the loan; Extend and increase the loan, but ask for security; Refuse the loan. Butler Lumber Company Butler Questions to Consider Why does Mr. Butler have to borrow so much Why money to support this profitable company? money Do you agree with his estimate of the Do company's loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume 1991 sales of $3.6 million)? sales Should Mr. Dodge approve the loan? If yes, Should under what conditions? under ...
View Full Document

Ask a homework question - tutors are online