Transcript Financial Ratios

AEC 422
Financial Decision Making
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Monforte Case in-class discussion Wed
Oct 8
Look at ratio analysis for Monforte
Implications for discount rate and
project feasibility evaluation; risk
Overview of Financial
Management
1.
2.
3.
Financial Ratio Analysis
Capital Budgeting including
Payback, Rate of Return,
Profitability Index and Net
Present Value
Economic Feasibility
Financial Management
Lecture Objectives
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Purpose is to illustrate proper capital
budgeting analysis.
We will look at:
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-Financial Ratio Analysis
-Payback
-Net Present Value
-Rate of Return
-Profitability Index
FINANCIAL STATEMENT
ANALYSIS
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Analysis of Consolidated Financial
Statements
Basically these are corporate Report
Cards
Shows how well the firm is Performing
Important that statements be prepared
consistently over time for comparison
purposes
Green Mountain Coffee Stock Prices –
10 Years
Source: Fidelity Investment Research, 2014
Financial Statement
Analysis
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Sometimes it’s common to report
financial statements as “
Common
Size“ meaning that the statements
show their components as a percent of
some base (such as
Percent of sales)
See Monforte financials
For our analyses we’ll be using standard
consolidated financial statements
Why Evaluate Financial
Statements?
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Internal Uses
 Performance evaluation for firm
 Performance evaluation among
divisions
 Planning for the future (Pro
Forma statements)
Why Evaluate Financial
Statements?
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External Uses
 Useful for investors and business
partners
 Suppliers evaluate whether to
grant credit to the firm?
 Important to help evaluate firm
financial health
BALANCE SHEET
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A systematic listing of
Assets
and
Liabilities
A snapshot of the business showing
everything Owned and Owed
 Assets are items of value Owned
 Liabilities are items of value
Owed
BALANCE SHEET
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Owners Equity shows what percent of
the firm is owned by the Owners/
Investors
An accounting equation
Total Assets -Total Liabilities
=
Owners Equity
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INCOME STATEMENT
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A summary of revenues and expenses over
the accounting period
Revenues (sales) = Price X Quantity
Gross Margin (GM) = Sales
- Cost of Goods Sold
Gross Margin
Income Statement
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When combined with a cash flow
statement, shows financial progress (or
lack there of) over time
Can analyze activity and profitability
when combined with balance sheet
information
CASH FLOW STATEMENT
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Represents the cash revenues and cash
expenditures for a specified time period
Three activities impacting cash flow include:
Operating
Investing
Financing
OPERATING CASH FLOW
(Starts With Net Income and Adds
Back Non-Cash Items)
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Net Income After Taxes Adjusted for:
-Depreciation
-Changes in A/R
-Changes in Inventory
-Changes in Other Current Assets
-Changes in any Accrued Expenses
-Change in any other Current Liabilities
Investing Cash Flow
(Determine all Changes in Long Term
Assets Employed in the Business_
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Changes
Changes
Changes
Changes
assets
in
in
in
in
Fixed Assets
Notes Receivable
securities or investments
intangible non-current
Financing Cash Flow
(Examines all Changes in Loans, Equity
Accounts, but doesn’t Include Net Income
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Change in Borrowings
Changes in Capital Stock
Minus Dividends Paid
TOTAL CASH FLOW
+/+/+/=
Operating Cash Flow
Investing Cash Flow
Financing Cash Flow
Total Cash Flow
+
Cash Flow at
Beginning of Period
=
Cash Flow at
End of Period
Value of Cash Flow Statement
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Can be used to determine Sources and
Uses of cash for the level and timing of
borrowing and investing/financing activities
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Provides a source of Cash Receipts shown in
the income statement
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Uniquely adapted for evaluating the affect of
adding, deleting or expanding enterprises
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Can help identify periods of cash Surpluses
Ways to Track Financial
Performance Over Time
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One is time trend analysis, i.e. a
History
Second, comparative financial analyses
compared to the firm’s “peers”
Often use both approaches to track
performance over time
Problems with Comparative
Financial Analyses
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Conglomerate firms statements hard to
compare to “peers”—Too unique
Peer firms may be scattered around the globe
making Comparisons
difficult
Firms often use different accounting
standards, particularly for valuing Inventory
Problems with Comparative
Financial Analysis
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Different
Fiscal
years
Unusual or transient events cloud
these statements (such as a one
time business expense write-off or
a one time sale of a portion of the
business).
Financial Statement Analysis
Using Ratios
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Why Use Ratios?
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4.
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Easy to
Calculate
Allows easy Comparisons with the
firm’s past performance
Allows comparison with like firms or
“peers”
Relatively easy to Understand
Helps communicate firm’s financial
position to others such as Creditors,
Investors and
Suppliers.
Shortcomings of Ratio
Analysis
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Merely Indicators —deteriorating ratios
may sound the “alarm” but not tell you
the
Source of the problem
Inter firm comparisons
Difficult
Data using balance sheet can be
misleading in that it is a Snapshot
at
one point in time
Need to know industry well before
jumping to too many Conclusions
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Liquidity Ratios
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Measure of the firm’s ability to meet
financial obligations in the Short-Term.
Theoretically a firm could be strong in
owners equity as a share of assets, for
example, yet be starved for funds in the
short term to pay current bills.
Two ratios are recommended:
Current Ratio and
Quick
Ratio
Current Ratio
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Defined as those assets that can be
converted into cash quickly to meet
current obligations
Current Ratio =
Current
Current
Assets
Liabilities
Quick Ratio
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Another measure of how assets can be
converted into cash quickly, but
removing the effects of Inventory.
Why?
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Inventory is often the least Liquid current
asset
Book values of inventory are often not very
reliable as some inventory may turn out to
be damaged or obsolete or even missing
Quick Ratio
Quick Ratio =
Current Assets – Inventory
Current
Liabilities
Solvency Ratios
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Sometimes called “Leverage“ratios
Represents state of the firm’s total
financial resources showing that, if sold,
the firm could meet all its Financial
Obligations
More of a Long run indicator
Lenders tend to look at these closely to
see if they could recover Loaned funds
Solvency Ratios
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Remember that a firm may not only be
solvent, but so solvent that additional
borrowing may be in order!
Three ratios are recommended:
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2.
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Debt to Assets
Equity to Assets
Debt to Equity
Debt to Assets
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Defined as a measure of the firm’s Total
Liabilities to Total Assets.
Debt to Assets
=
Total Liabilities
Total Assets
Equity to Asset Ratio
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Similar to Debt to Assets only we’re
looking at Owners Equity instead of
debt
Equity to Assets =
Owners Equity
Total Assets
Debt to Equity Ratio
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Shows the amount of debt owed to the
owners position in the firm (equity)
Debt to Equity
=
Total Liabilities
Total O. Equity
Activity Ratios
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A means of measuring the intensity
with which the assets of the firm are
being used. Some call these “Efficiency“
ratios
Three ratios are particularly useful:
Three Useful Activity
Ratios
Asset Turnover
Fixed Asset Turnover
Inventory Turns
Asset Turnover Ratio
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Defined as how fast the assets
employed in the firm are turning over
relative to sales. Varies widely by
industry
Asset Turnover
=
Total
Total
Sales
Assets
Fixed Asset Turnover
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Shows the how many sales are being
generated for the fixed assets employed
in the firm.
Fixed Asset Turnover
=
Total Sales
Fixed Assets
GMCR Efficiency Ratios: 20032013
Inventory Turnover Ratio
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Inventory Turns defined as the rate at
which inventory is turning over relative
to sales (normally calculated as an
annual figure
Inventory Turns =
Cost of Goods Sold
Average Annual Invent.
Profitability Ratios
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They are what they say they are—measures
of profits relative to assets and profits.
Four ratios are commonly calculated:
Gross Profit
Margin
Net Profit Margin
Return on Assets
Return on Investment
Gross Profit Margin
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Gross Margin relative to sales is one indicator
of how well the firm is being managed with
respect to prices received, combination of
products handled, net prices paid for
products before processing
Gross Margin is sometimes referred to as
Markup”
Gross Margin or
Total Sales
Sales – Cost Goods Sold
Total Sales
Gross Product Margin
GMCR 8 quarters ending 6/30/11
Net Profit Margin
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Defined as net income to
Net Profit Margin
=
Total Sales.
Net Income
Total Sales
Return on Assets (ROA)
Defined as how much net income is
being generated for all the Assets
employed by the firm.
Net Income
Return on Assets =
Total Assets
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Note this can also be calculated by
multiplying net profit margin X Asset
turns
Return on Investment (ROI)
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Shows how much the owners are
receiving for their investment in the
firm
Return on Investment =
Net Income
Owners Equity
Market Based Measures
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Provides a measure of capital or
financial market of an individual firm
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Three common measures:
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Price Earnings Ratio
Beta
Market Capitalization
Market Based Measures
Price Earnings Ratio relates price of stock to
the Price per Share
Called the “Multiple“ because it shows how
much investors are willing to pay per $ of
Earnings
P/E Ratio =
Market Price Per Share
Earnings Per Share
GMCR Earnings Per Share