MANAJEMEN PRODUKSI &

OPERASI

KONSEP FINANCE DALAM

GALANGAN KAPAL
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 Finance

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 Finance

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 Finance

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 Finance

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 Introduction

• This chapter introduces financial statement

analysis techniques that are used to evaluate a
company’s performance.

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 Financial Ratios Are Used By
• Management:
– Planning and evaluating
– Identifying and assessing merger candidates
• Credit Managers
– Estimate the riskiness of potential borrowers
• Investors
– Evaluate corporate securities

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 Words of Caution
• Ratios are only as good as the information on
which they are based
• Ratios become most valuable when:
– Compared to the ratios of a peer group
– Analyzed over time
• Ratios are symptoms, not causes
• Ratios should cause one to ask questions; rarely
do they provide answers themselves
• When comparing ratios among different firms,
ensure the ratios are calculated using the same
method

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 Types of Ratios
• Liquidity

• Asset management

• Financial leverage

• Profitability

• Market-based

• Dividend policy

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 Major Financial Statements
• Balance sheet
– Shows the firms assets & liabilities as of a certain date
(such as December 31, 200X)
• Income statement
– Measures the flow of revenue and expenses over a
reporting period (such as a year or a quarter)
• Cash flow statement
– A statement of the organization’s sources and uses of
cash resources during a reporting period

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 Abbreviations Used
• EBIT – Earnings Before Interest & Taxes

• ROI – Return on Investment

• ROE – Return on Equity

• P/E Ratio – Price to Earnings Ratio

• EAT – Earnings After Tax

• r – Return on total capital

• k – Cost of capital

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 Liquidity Ratios
Current Assets
Current Ratio =
Current Liabilities

• Used to indicate the ability of the firm to fund

its liabilities as they come due.
• Higher ratio normally preferred to a lower
ratio
– High ratio may indicate poor asset
management.
– Low ratio may indicate difficulty meeting
short-term financial obligations
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 Liquidity Ratios
Current Assets - Inventory
Quick Ratio =
Current Liabilities

• Similar to the current ratio but includes

only the most liquid of the current
assets
• A more conservative measure of
liquidity

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 Asset Management Ratios
Accounts Receivable
Collection Period =
 Annual Credit Sales  365
• Indicates number of days that, on average, it takes to
collect an account receivable.
• Long collection period may indicate problems with credit
quality or credit granting procedures.
• The collection period should always be compared to the
firm’s stated credit policy.

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 Asset Management Ratios
Cost of Sales
Inventory Turnover =
Average Inventory
• Shows how many times inventory is turned over
during a year
• High ratio is preferred over a low ratio
• Low ratio may indicate stale inventory needing
to be sold at discount or poor sales forecasting
• A high ratio may be indicative of lost sales from
stock-outs

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 Asset Management Ratios
Sales
Fixed Asset Turnover =
Net Fixed Assets

• Indicates the number of dollars of sales

generated per dollar of fixed assets
• High ratio is often preferred to a low ratio
• High ratio may indicate obsolete fixed
assets
• Ratio should be put into context with its
industry
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 Asset Management Ratios
Sales
Total Asset Turnover =
Total Assets

• Indicates the number of dollars of sales

generated per dollar of total assets
• Similar to the Fixed Asset Turnover
Ratio, but the Total Asset Turnover ratio
includes both current and fixed assets
in the denominator

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 Financial Leverage Ratios
Total Debt
Debt Ratio =
Total Assets

• The amount of debt per dollar of total

assets
• A high number indicates more risk for
creditors
• A low number indicates that the assets
have been financed mainly by the
shareholders
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 Financial Leverage Ratios
Total Debt
Debt-to-Equity Ratio =
Total Equity

• The amount of debt per dollar of equity

• A high ratio indicates that more of the
firm is financed by creditors (higher risk
of default)
• A low ratio indicates that more of the
firm is financed by the shareholders (but
harder to earn a high return on equity)

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 Financial Leverage Ratios
EBIT
Times Interest Earned =
Interest Charges

• Indicates the earnings “cushion” that the firm

has before it will not be able to meet its
interest payments
• A higher number is preferred to a lower
number

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 Profitability Ratios
Sales - Cost of Goods Sold
Gross Profit Margin =
Sales

• Percentage “Gross Profit” from each $1

of sales
• The Gross Profit Margin must cover all
other costs, including profit (the return
to the investors)

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 Profitability Ratios
Earnings After Taxes
Net Profit Margin =
Sales

• The proportion of each dollar of sales that

the firm retains as profit, after all
expenses, including taxes, have been paid
• A Net Profit Margin of 0.05 indicates that
the firm retains $5.00 in profit from each
$100 of sales that it makes

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 Profitability Ratios
Earnings After Taxes
ROI =
Total Assets

• The ROI indicates the annual percentage

return on each dollar of capital invested in
the firm (by both creditors and shareholders)
• Both shareholders & creditors prefer a high
ROI

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 Profitability Ratios
Earnings After Taxes
ROE =
Shareholders' Equity

• The ROE indicates the annual percentage

return on each dollar of owner’s equity
invested in the firm

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 Profitability Ratios

• The relationship between ROI & ROE is

expressed in the following formula:

ROE = ROI  Leverage

Assets
= ROI 
Owner's Equity

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 Market Based Ratios
Market Price Per Share
P/E Ratio =
Earnings Per Share

• Indicates how much the market is willing to

pay for each $1 of firm earnings
• A high number suggests the firm has
excellent growth prospects, is very low risk
or both
• Based on accounting earnings, which differ
substantially from cash flow over short
periods of time
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 Market Based Ratios
Market Price Per Share
Market to Book Ratio =
Book Value Per Share

• Indicates how much the market is willing

to pay for each $1 of Owners’ Equity, as
shown on the Balance Sheet
• A high number indicates the firm has
hidden or undervalued assets stored on
its Balance Sheet

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 Dividend Policy Ratios
Dividends Per Share
Payout Ratio =
Earnings Per Share

• Indicates the percentage of each $1 of net income

that is paid out to its shareholders in the form of a
dividend
• High growth firms usually have a low dividend payout
ratio
• Slow growth firms have fewer investment
opportunities and thus pay out a larger percentage of
income to their shareholders
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 Dividend Policy Ratios

Dividends Per Share

Dividend Yield =
Market Price Per Share

• Indicates the percentage of the share price

that is paid out annually in the form of a
dividend
• A high dividend yield may indicate:
– A depressed share price
– A firm with low growth prospects

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 Common –Size Analysis
• Common size balance sheet: a balance sheet in
which a firm’s assets and liabilities are expressed
as a percentage of total assets

• Common size income statement: an income

statement in which a firm’s income and expense
items are expressed as a percentage of sales

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 Trend Analysis
• An examination of a firm’s
performance over time

• Frequently based on one or more

financial ratios over a period of three
or more years

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 Dupont Analysis
• Used to help identify the source of a
problem by “drilling into” the
component parts of a ratio

Example:
See Figure 3.2 (page 84) for an
illustration of a Modified DuPont
Analysis that analyzes the ROI for
the Maple Manufacturing Company

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 Relationships Among Ratios
EAT Sales EAT
ROI =  
Sales Total Assets Total Assets

EAT Sales Total Assets

ROE =  
Sales Total Assets Equity

Sometimes called
the equity multiplier

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 Forecasting with Financial Ratios
• Edward Altman popularized the use of forecasting
potential bankruptcy with the use of discriminant
analysis
• Uses 5 ratios to generate a “Zeta Score”
– Net working capital/Total assets
– Retained earnings/Total assets
– EBIT/Total assets
– Market value equity/Book value total debt
– Sales/Total assets
• A number below 2.65 indicated a higher probability of
bankruptcy

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 Sources of Financial Information

• Dun and Bradstreet

• Financial Post
• Moody’s
• Standard and Poor’s
• Annual reports and 10K Filings
• Trade associations and journals
• Computerized databases

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 Quality and Financial Analysis
• The quality of a firm’s earnings is
positively related to:
– the proportion of cash earnings to total
earnings
– the proportion of recurring income to total
income.

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 Quality and Financial Analysis
• The quality of a firm’s balance sheet is:
– positively related to the ratio of the market
value of the firm’s assets to book value of
the assets
– inversely related to the amount of its hidden
liabilities

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 Problems in Reporting
• Time of revenue recognition
• Establishment of reserves
• Amortization of intangible assets
• Including all losses and debt
• “Pro forma” profitability measures

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 Balance Sheet Quality Issues
• Charging off assets

• Hidden liabilities

• Hidden assets

• Off balance sheet financing

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 Problems Caused by Inflation
• Inventory profit as a result of timing of price
increases
• Inventory valuation methods
– LIFO vs. FIFO
• Rising interest rates causing a decline in the
value of long-term debt
• Differences in the reporting of earnings
• Recognition of sales

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 Analysis of a Firm’s Market Value
• Market value added
(MVA) = Market value – Capital
– The capital market’s assessment of the
accumulated NPV of all of the firm’s past and
present projected investment projects

• Economic value added

(EVA) = (r – k)  Capital
– The yearly contribution of operations to the
creation of MVA
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 Forecasting Methods
• Percent of sales
• Cash budgets
• Pro forma statement of cash flow
• Computerized financial forecasting models
• Forecasting with financial ratios

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 Percent of Sales Forecasting
• Used to forecast amount of additional financing
required, due increased sales

Total Forecasted Forecasted

Financing = Increase in – Increase in
Needed Assets Current Liabilities

• Some portion of the financing will be generated

internally, as shown below:

Increase in Forecasted
Retained = Earnings – Dividends
Earnings after Tax
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 Additional Financing Needed
• Difference between total financing needed and internal
financing provided is equal to:

Additional (external) Financing Needed =

 Assets  Sales  Current Liabilities  Sales  

  
 Sales Sales 
 Earnings After Taxes - Dividends 

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 The Cash Flow Concept
• Accounting income is not the same as
cash flow
• Cash flow is the relevant source of value
for the firm
• After Tax Cash Flow
– Earnings After Taxes + Noncash
charges
– Noncash charges = Depreciation +
Deferred Taxes

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 Cash Flow Statement
• Presents the effects of operating, investing,
and financing on the cash balance
– Direct method presents the effects to net cash
provided by operating, investing, and financing
– Indirect method presents the adjustments to
net income showing the effects to net cash

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 Cash Budgeting
• Forecasts receipts and disbursements over
future periods of time.

• Budgeting considerations:
– Receipt of credit sales lag projected sales
– Payments for purchases may precede sales
based upon available credit terms.
– Other scheduled receipts and disbursements
• Long-term loans, capital expenditures,
dividend payments, wages, rent…

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 Pro Forma Cash Flow Statement
• Measures the increases (and decreases) in cash and cash
equivalents arising from:
– operations
– investing activities
– financing activities
• Amounts from operating, investing and financing activities
are added to cash and cash equivalents at the start of year
• Total of the above should equal the balance of expected cash
and cash equivalents at the end of year

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 Accuracy of Financial Statements
• External auditor

• Generally accepted accounting

principles

• Corporations pose for a financial

statement like people pose for a picture

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 Forecasting and Financial Planning
• Deterministic model
– Uses single-value forecasts of each financial
variable
• Probabilistic model
– Utilize probability distributions for input data
• Optimization model
– Choose the optimal levels of some variables

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 Major Points
• There are a variety of financial ratios analyzing various
financial features of a firm (i.e. liquidity, profitability, etc)
• Most information for ratio analysis derives from primary
financial statements
• Ratios indicate symptoms of problems
• Findings should be placed in context with the firm’s
historical and industry trends
• Forecasting models help management avoid potential
financial problems

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 Any Question?

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