4-1

Any Questions

V

4-2

Analysis of Financial

Statements

Welcome Back! No TVM…..I promise!

Green = Balance Sheet Blue = Income Statement

4-3

Excellent PPT in Book

One ratio at a time

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For every dollar of ….…

Important Concept

4-5

Balance Sheet: Assets

CashA/RInventories

Total CAGross FALess: Dep.

Net FATotal Assets

20057,282

632,1601,287,3601,926,8021,202,950 263,160 939,7902,866,592

2006E85,632

878,0001,716,4802,680,1121,197,160 380,120 817,0403,497,152

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Balance Sheet: Liabilities and Equity

Accts payableNotes payableAccruals

Total CLLong-term debtCommon stockRetained earnings

Total EquityTotal L & E

2005524,160

636,808 489,6001,650,568

723,432460,000

32,592 492,5922,866,592

2006E436,800

300,000 408,0001,144,800

400,0001,721,176 231,1761,952,3523,497,152

4-7

Income Statement

SalesCOGSOther expenses

EBITDADepr. & Amort.

EBITInterest Exp.EBTTaxesNet income

20056,034,0005,528,000 519,988 (13,988) 116,960 (130,948) 136,012 (266,960) (106,784) (160,176)

2006E7,035,600

5,875,992 550,000

609,608 116,960

492,648 70,008

422,640 169,056 253,584

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Other Data

No. of sharesEPSDPSStock priceLease pmts

2006E250,000

$1.014$0.220$12.17

$40,000

2005100,000-$1.602$0.110

$2.25$40,000

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This week I’ll send an Income Statement and

Balance Sheet which holds all the data you’ll need. Also attached will be an Excel Spreadsheet to post your answers.

4-10

What are the five major categories of ratios, and what questions do they answer?

Liquidity: Can we make required payments?

4-11

Calculate D’Leon’s forecasted current ratio and quick ratio for 2006.

Current ratio = Current assets / Current liabilities

= $2,680 / $1,145= 2.34x

Quick ratio = (CA – Inventories) / CL= ($2,680 – $1,716) / $1,145= 0.84x

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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

4-13

What is the inventory turnover vs. the industry average?

2006E 2005 2004 Ind.InventoryTurnover

4.1x 4.70x 4.8x 6.1x

Inv. turnover = Sales / Inventories= $7,036 / $1,716= 4.10x

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Comments on Inventory Turnover

Inventory turnover is below industry average.

D’Leon might have old inventory, or its control might be poor.

4-15

DSO is the average number of days after making a sale before receiving cash.

DSO = Receivables / Avg sales per day

= Receivables / (Annual sales/365)

= $878 / ($7,036/365)

= 45.6 days

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Appraisal of DSO

2006E 2005 2004 Ind.

DSO 45.6 38.2 37.4 32.0

D’Leon collects on sales too slowly, and is getting worse.

D’Leon has a poor credit policy.

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Asset management: right amount of assets vs. sales? Fixed assets and total assets turnover ratios vs. the industry average

FA turnover = Sales / Net fixed assets= $7,036 / $817 = 8.61x

TA turnover = Sales / Total assets

= $7,036 / $3,497 = 2.01x

4-18

Asset management: right amount of assets vs. sales?Evaluating the FA turnover and TA turnover ratios

2006E 2005 2004 Ind.

FA TO 8.6x 6.4x 10.0x 7.0x

TA TO 2.0x 2.1x 2.3x 2.6x

FA turnover projected to exceed the industry average.

TA turnover below the industry average. Caused by excessive currents assets (A/R and Inv).

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Debt management: Right mix of debt and equity?Calculate the debt ratio, times-interest-earned, and EBITDA coverage ratios.

Debt ratio = Total debt / Total assets= ($1,145 + $400) / $3,497 = 44.2%

TIE = EBIT / Interest expense

= $492.6 / $70 = 7.0x

4-20

Calculate the debt ratio, TIE, and EBITDA coverage ratios.

EBITDA=

(EBITDA + Lease pmts)

coverage Int exp + Lease pmts + Principal pmts

= $609.6 + $40

$70 + $40 + $0

= 5.9x

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How do the debt management ratios compare with industry averages?

2006E 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

D/A and TIE are better than the industry average, but EBITDA coverage still trails the industry.

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Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?Profitability ratios: Profit margin and Basic earning power

Profit margin = Net income / Sales= $253.6 / $7,036 =

3.6%

BEP = EBIT / Total assets

= $492.6 / $3,497 = 14.1%

4-23

Appraising profitability with the profit margin and basic earning power

2006E 2005 2004 Ind.PM 3.6% -2.7% 2.6% 3.5%

BEP 14.1% -4.6% 13.0% 19.1%

Profit margin was very bad in 2005, but is projected to exceed the industry average in 2006. Looking good.

.

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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%

4-25

Appraising profitability with ROA and ROE

2006E 2005 2004 Ind.ROA 7.3% -5.6% 6.0% 9.1%

ROE 13.0% -32.5% 13.3% 18.2%

Both ratios rebounded from the previous year, but are still below the industry average. More improvement is needed.

Wide variations in ROE illustrate the effect that leverage can have on profitability.

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Market value: Do investors like what they see as reflected in P/E and M/B ratios?Calculate the Price/Earnings, Price/Cash flow, and Market/Book ratios.

P/E = Price / Earnings per share= $12.17 / $1.014 = 12.0x

P/CF = Price / Cash flow per share= $12.17 / [($253.6+$117.0)

÷ 250]= 8.21x

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Calculate the Price/Earnings, Price/Cash flow, and Market/Book ratios.

M/B = Market price / Book value per share= $12.17 / ($1,952 / 250) = 1.56x

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

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Analyzing the market value ratios

P/E: How much investors are willing to pay for $1 of earnings.

P/CF: How much investors are willing to pay for $1 of cash flow.

M/B: How much investors are willing to pay for $1 of book value equity.

For each ratio, the higher the number, the better.

P/E and M/B are high if ROE is high and risk is low.