Slide 1Slide 2Standardized Financial StatementsFinancial Statements AnalysisSample Balance SheetCommon Size Balance SheetsSample Income StatementCommon Size Income Statement 2011Ratio AnalysisRatio AnalysisRatio AnalysisRatio AnalysisCategories of Financial RatiosSample Balance Sheet1- Computing Liquidity Ratios- Liquidity Ratios- Liquidity RatiosSample Income Statement- Liquidity Ratios2 - Computing Long-term Solvency RatiosSample Balance SheetSample Balance Sheet- Long-term Solvency RatiosSample Income Statement- LT Solvency Ratios3- Asset management/turnover ratios- Turnover Ratios- Turnover Ratios4 - Computing Profitability Ratios- Profitability Ratios5 - Computing Market Value Ratios- Market Value MeasuresComputing Market Value MeasuresThe DuPont IdentityDeriving theDu Pont IdentityDeriving the DuPont IdentityUsing the DuPont IdentityExpanded DuPont Analysis – DuPont DataExtended Du Pont ChartWhy Evaluate Financial Statements?BenchmarkingPotential ProblemsMore Potential ProblemsQuick QuizSlide 45Slide 46Slide 47Slide 483-1Working with Financial StatementsChapter 3Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin3-2Chapter Outline•Standardized Financial Statements•Ratio Analysis•The DuPont Identity•Using Financial Statement Information3-3Standardized Financial StatementsCommon-Size Balance Sheets:Compute all accounts as a percent of total assetsCommon-Size Income Statements:Compute all line items as a percent of salesFinancial Statements AnalysisCommon-Size Balance SheetsCompute all accounts as a percent of total assetsCommon-Size Income StatementsCompute all line items as a percent of salesThe result indicates the growth rate of each account, or the trend in each accountStandardized financial statements makes it easier to compare financial information, particularly as the company grows.Also useful for comparing companies of different sizes, particularly within the same industry.3-5Sample Balance Sheet2011 2010 2011 2010Cash 696 58 A/P 307 303A/R 956 992 N/P 26 119Inventory 301 361 Other CL 1,662 1,353Other CA 303 264 Total CL 1,995 1,775Total CA 2,256 1,675 LT Debt 843 1,091Net FA 3,138 3,358 C/S 2,556 2,167Total Assets5,394 5,033 Total Liab. & Equity5,394 5,033XYZ CorporationDecember 31, 201X(Figures in millions of dollars)Common Size Balance Sheets3-6 2011 2010 Change 2011 2010 ChangeCash 12.9% 1.2% 11.8% A/P 5.7% 6.0% -0.3%A/R 17.7% 19.7% -2.0% N/P 0.5% 2.4% -1.9%Inventory 5.6% 7.2% -1.6% Other CL 30.8% 26.9% 3.9%Other CA 5.6% 5.2% 0.4% Total CL 37.0% 35.3% 1.7%Total CA 41.8% 33.3% 8.5% LT Debt 15.6% 21.7% -6.0%Net FA 58.2% 66.7% -8.5% C/S 47.4% 43.1% 4.3%Total Assets100.0% 100.0% 0.0% Total Liab. & Equity100.0% 100.0% 0.0%3-7Sample Income StatementRevenues $5,000Cost of Goods Sold (2,006)Expenses (1,740)Depreciation (116)EBIT 1,138Interest Expense (7)Taxable Income 1,131Taxes(442)Net Income $689EPS $3.61Dividends per share $1.08XYZ CorporationJanuary 1 – December 31, 201X( Figures in millions of dollars)Common Size Income Statement 2011 3-8Revenues $5,000 100.0%Cost of Goods Sold -2,006 -40.1%Expenses -1,740 -34.8%Depreciation -116 -2.3%EBIT 1,138 22.8%Interest Expense -7 -0.1%Taxable Income 1,131 22.6%Taxes -442 -8.8%Net Income $689 13.8%EPS $3.61 0.1%Dividends per share $1.08 0.0%3-9Ratio AnalysisThe goal of ratio analysis is to take the numbers from both the income statement and balance sheet and to interpret this information in a meaningful way. There is simply too much information to grasp at one time.Means for comparing and investigating the relationship between different pieces of information3-10Ratio AnalysisRatios are simply the construction of a numeratorNumerator____________Denominatorand a denominator using data from a balance sheet and/or an income statement.3-11Ratio Analysis•Ratios allow for better comparison through time or between companies•As we look at each ratio, ask yourself what the ratio is trying to measure and why that information is important?Ratio AnalysisWhat is the unit of measurement?Percent of a $, days, turnover?What does the value indicate?How can we improve the company’s ratio?3-13Categories of Financial Ratios1.Short-term solvency or liquidity ratios2.Long-term solvency or financial leverage ratios3.Asset management or turnover ratios4.Profitability ratios5.Market value ratios3-14Sample Balance Sheet2011 2010 2011 2010Cash69658 A/P 307 303A/R 956 992 N/P 26 119Inventory301361 Other CL 1,662 1,353Other CA 303 264Total CL1,9951,775Total CA2,2561,675 LT Debt 843 1,091Net FA 3,138 3,358 C/S 2,556 2,167Total Assets5,394 5,033 Total Liab. & Equity5,394 5,033XYZ CorporationDecember 31, 201X(Figures in millions of dollars)3-151- Computing Liquidity RatiosMeasure of the firm’s ability to meet its short-term obligations. Primarily of interest to suppliers and other short-term creditors.Current Ratio = CA / CL2,256 / 1,995 = 1.13 timesQuick Ratio = (CA – Inventory) / CL(2,256 – 301) / 1,995 = .98 timesCash Ratio = Cash / CL696 / 1,995 = .35 times3-16- Liquidity RatiosCurrent Ratio = CA / CL2,256 / 1,995 = 1.13 times•the firm’s ability to cover CL with it’s CA.•XYZ has $1.13 in CA for every $1 in CL •has its CL covered 1.1 times over. •To a creditor such as a supplier the higher the current ratio the better to a firm this may indicate an inefficient use of cash3-17- Liquidity RatiosQuick Ratio = (CA – Inventory) / CL(2,256 – 301) / 1,995 = .98 times•Quite a bit lower than the current ratio•Relatively large inventories are often sign of short-term troubleCash Ratio = Cash / CL696 / 1,995 = .35 times•Of interest to very short term creditor•Too much cash reduces the return earned by the company.3-18Sample Income StatementRevenues $5,000Cost of Goods Sold(2,006)Expenses(1,740)Depreciation (116)EBIT 1,138Interest Expense (7)Taxable Income 1,131Taxes(442)Net Income $689EPS $3.61Dividends per share $1.08XYZ CorporationJanuary 1 – December 31, 201X( Figures in millions of dollars)3-19- Liquidity RatiosNWC to Total Assets = NWC / TA(2,256 – 1,995) / 5,394 = .05Interval Measure = CA / average daily operating costs2,256 / ((2,006 + 1,740)/365) = 219.8 days3-202 - Computing Long-term Solvency RatiosIndicate degree of debt financing by a company, as well as ability to meet long-term obligations -primarily of interest to bondholders. Total Debt Ratio = (TA – TE) / TA(5,394 – 2,556) / 5,394 = 52.61%The firm finances almost