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Unformatted text preview: AEM2200 Business Management and Organizations
Business Friday 9/30 Financial Analysis Basic financial analysis techniques Case studies The Fundamental Problem of
Creating long term value through
investment and profits while meeting
short term obligations
short Likely Outcomes of Financial Analysis
The company is sound, no need for further financing;
The company needs short term funds to deal with
variations in seasonal patterns or one time events;
The company needs long term funds to help with growth
or with significant one-time outlays;
The company needs additional equity investment to
engage in promising (but risky) business opportunities or
to allow it to overcome a serious competitive setback;
The company needs resources to allow for an orderly
sale or dissolution, in the face of obsolescence or of
bankruptcy. Financial Analysis Techniques
Sources and uses analysis
Projection Ratio Analysis
Solvency ratios Current ratio: Current assets / Current liabilities
Acid ratio: (Current assets – inventory) / Current liabilities
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
Accounts receivable turnover :
Accounts receivable / Daily sales
Accounts Accounts payable turnover:
Accounts payable / Daily CGS Current Ratio- Walmart
$58,484 = 0.887 Quick(Acid-Test) Ratio
$58,484 = 0.214 Debt to Equity Ratio
Debt $180,663 =
$71,247 2.54 Profitability Ratios
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
Increases in assets represent uses of funds
Reductions in assets represent sources of
Increases in liabilities and owner’’s equity
represent sources of funds
Reductions in liabilities and owner’’s equity
represent uses of funds
uses The Most Conservative
Increases in assets
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
If you can and know how, use Excel!
Look at liquidity and efficiency ratios: is the firm in short
term trouble (low liquidity ratios)? Is it leveraged? Does it
have assets or future income streams to borrow against?
Look at the sources and uses … What is the company
investing in? Whose money has it been investing?
Look at the projections. What problems can be
anticipated? Dynashears, Inc.
Questions to Consider
Why was Dynashears unable to repay its
bank loan by March 31st, 1991, as originally
Should Mr. Winthrop extend the Dynashears’
loan, and indeed increase it?
Which of the following options is best for Mr.
Winthrop? Extend and increase the loan;
Extend and increase the loan, but ask for security;
Refuse the loan. Butler Lumber Company
Questions to Consider
Why does Mr. Butler have to borrow so much
money to support this profitable company?
Do you agree with his estimate of the
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)?
Should Mr. Dodge approve the loan? If yes,
under what conditions?
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- Spring '07