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Analysis of Financial
Statements
Ratio Analysis
Du Pont system
Effects of improving ratios
Limitations of ratio analysis
Qualitative factors
4-1
2005
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
4-2
Balance sheet:
Liabilities and Equity
2006E
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
2005
524,160
636,808
489,600
1,650,568
723,432
460,000
32,592
492,592
2,866,592
4-3
Income statement
2006E
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
2005
6,034,000
5,528,000
519,988
(13,988)
116,960
(130,948)
136,012
(266,960)
(106,784)
(160,176)
4-4
Other data
2006E
No. of shares 250,000
EPS
$1.014
DPS
$0.220
Stock price
$12.17
Lease pmts $40,000
2005
100,000
-$1.602
$0.110
$2.25
$40,000
4-5
Trend analysis
Peer (or Industry) analysis
4-6
4-7
Comments on liquidity
ratios
2006E 2005
2004
Ind.
Current
Ratio
2.34x
1.20x
2.30x
2.70x
Quick Ratio
0.84x
0.39x
0.85x
1.00x
4.1x
4.70x
2004
Ind.
4.8x
6.1x
4-10
Comments on
Inventory Turnover
4-11
4-12
Appraisal of DSO
DSO
2006E
2005
2004
Ind.
45.6
38.2
37.4
32.0
2006E
2005
2004
Ind.
FA TO
8.6x
6.4x
10.0x
7.0x
TA TO
2.0x
2.1x
2.3x
2.6x
$609.6 + $40
$70 + $40 + $0
= 5.9x
4-17
2005
2004
Ind.
D/A
44.2%
82.8%
54.8%
50.0%
TIE
7.0x
-1.0x
4.3x
6.2x
EBITDA
coverage
5.9x
0.1x
3.0x
8.0x
Profitability ratios:
Profit margin and Basic earning
power
Profit margin = Net income / Sales
= $253.6 / $7,036 = 3.6%
BEP
14.1%
4-19
2006E
2005
2004
Ind.
PM
3.6%
-2.7%
2.6%
3.5%
BEP
14.1%
-4.6%
13.0%
19.1%
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 / $1,952 = 13.0%
4-21
2006E
2005
2004
Ind.
ROA
7.3%
-5.6%
6.0%
9.1%
ROE
13.0%
-32.5%
13.3%
18.2%
4-23
2006E
2005
2004
Ind.
P/E
12.0x
-1.4x
9.7x
14.2x
P/CF
8.21x
-5.2x
8.0x
11.0x
M/B
1.56x
0.5x
1.3x
2.4x
4-26
4-28
= 3.6%
x
=
13.0%
1.8
PM
TA TO
EM
ROE
2004
2.6%
2.3
2.2
13.3%
2005
-2.7%
2.1
5.8
-32.5%
2006E
3.6%
2.0
1.8
13.0%
Ind.
3.5%
2.6
2.0
18.2%
4-29
An example:
The effects of improving
ratios$ 878 Debt $1,545 Other
A/R
CA
Net FA
TA
1,802
Equity
1,952
817
_____
$3,497 Total L&E
$3,497
4-31
Repurchase stock
Expand business
Reduce debt
All these actions would likely
improve the stock price.
4-33
Qualitative factors to be
considered when evaluating a
companys
future
financial
Are the firms
revenues
tied to one
performance
key customer, product, or supplier?