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Analysis of Financial
Statements
Ratio Analysis
Du Pont system
Effects of improving ratios
Limitations of ratio analysis
Qualitative factors
3-1
2002
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
3-2
Balance sheet:
Liabilities and Equity
2003E
Accts payable
436,800
Notes payable
300,000
Accruals
408,000
Total CL
1,144,800
Long-term debt
400,000
Common stock
1,721,176
Retained earnings
231,176
Total Equity
1,952,352
Total L & E
3,497,152
2002
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
3-3
Income statement
2003E
Sales
7,035,600
COGS
5,875,992
Other expenses
550,000
EBITDA
609,608
Depr. & Amort.
116,960
EBIT
492,648
Interest Exp.
70,008
EBT
422,640
Taxes
169,056
Net income
253,584
2002
6,034,000
5,528,000
519,988
(13,988)
116,960
(130,948)
136,012
(266,960)
(106,784)
(160,176)
3-4
Other data
2003E
No. of shares 250,000
EPS
$1.014
DPS
$0.220
Stock price
$12.17
Lease pmts $40,000
2002
100,000
-$1.602
$0.110
$2.25
$40,000
3-5
3-6
3-7
3-8
2003
2002
2001
Ind.
2.34x
1.20x
2.30x
2.70x
Inventory
Turnover
2003
2002
2001
Ind.
4.1x
4.70x
4.8x
6.1x
3-10
Comments on
Inventory Turnover
3-11
3-12
Appraisal of DSO
DSO
2003
2002
2001
Ind.
45.6
38.2
37.4
32.0
2003
2002
2001
Ind.
FA TO
8.6x
6.4x
10.0x
7.0x
TA TO
2.0x
2.1x
2.3x
2.6x
(EBITDA+Lease pmts)
Int exp + Lease pmts + Principal pmts
$609.6 + $40
$70 + $40 + $0
= 5.9x
3-17
D/A
TIE
EBITDA
coverag 5.9x
0.1x
3.0x
8.0x
e
D/A and TIE are better than the
industry average, but EBITDA coverage
still trails the industry.
3-18
Profitability ratios:
Profit margin and Basic earning
power
Profit margin = Net income / Sales
= $253.6 / $7,036 = 3.6%
BEP
14.1%
3-19
Profitability ratios:
Return on assets and Return on
equity
ROA= Net income / Total assets
= $253.6 / $3,497 = 7.3%
ROE = Net income / Total common
equity
= $253.6 / $1,952 = 13.0%
3-21
2003
7.3%
2002 2001
Ind.
-5.6% 6.0% 9.1%
13.0%
13.3% 18.2%
32.5%
3-23
2003
12.0x
8.21x
1.56x
2002
-1.4x
-5.2x
0.5x
2001
9.7x
8.0x
1.3x
Ind.
14.2x
11.0x
2.4x
3-26
2001
2002
2003E
Ind.
PM
TA TO
2.6%
2.3
-2.7%
2.1
3.6%
2.0
3.5%
2.6
1.8
EM
2.2
5.8
1.8
2.0
ROE
13.3%
-32.5%
13.0%
18.2%
3-28
Trend analysis
Analyzes a firms
financial ratios over
time
Can be used to
estimate the
likelihood of
improvement or
deterioration in
financial condition.
3-30
An example:
The effects of improving
ratios
A/R
878
Debt
1,545 Other
CA
Net FA
TA
1,802
Equity 1,952
817
_____
3,497 Total L&E
3,497
3-32
Repurchase stock
Expand business
Reduce debt
All these actions would likely
improve the stock price.
3-34
Qualitative factors to be
considered when evaluating a
companys
future
financial
Are the firms
revenues
tied to 1
performance
key customer, product, or supplier?