CHAPTER 3:
Transcription
CHAPTER 3:
MGMT 31000 Financial Management CHAPTER 3: Working with Financial Statements Agenda 1. Cash Flow and Financial Statements: A Closer Look Understand sources and uses of cash 2. Ratio Analysis Know how to compute and interpret important financial ratios 3. The Du Pont Identity Be able to compute and interpret the Du Pont Identity MGMT 31000 - Financial Management 2 Sources and Uses of Cash Sources 1. 2. Cash inflow – occurs when we “sell” something Decrease in asset account 3. Accounts receivable, inventory, and net fixed assets Increase in liability or equity account Accounts payable, other current liabilities, and common stock Uses 1. 2. Cash outflow – occurs when we “buy” something Increase in asset account 3. Cash and other current assets Decrease in liability or equity account Notes payable and long-term debt MGMT 31000 - Financial Management 3 MGMT 31000 - Financial Management 4 Source vs. Use? Source Increase in accounts payable Use √ Increase in accounts receivable √ Decrease in notes payable √ Increase in retained earnings √ Increase in common stock √ Net fixed assets acquisitions Decrease in inventory √ √ Decrease in long-term debt MGMT 31000 - Financial Management √ 5 MGMT 31000 - Financial Management 6 2. Ratio Analysis The goal of ratio analysis is to take the numerous lines 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. 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 Ratios are used both internally and externally MGMT 31000 - Financial Management 7 Categories of Ratios Short-term solvency or liquidity ratios The ability to pay bills in the short-run Long-term solvency or financial leverage ratios The ability to meet long-term obligations Asset management or turnover ratios Efficiency of asset use Profitability ratios Efficiency of operations and how that translates to profit Valuation ratios The MV of the firm relative to the BV MGMT 31000 - Financial Management 8 Categories of Financial Ratios 3-9 Short-term Solvency Ratios Current Ratio: Ability to pay current liabilities Current Ratio Quick Ratio: Ability to pay current liabilities without converting inventory to sales Quick Ratio Current Assets Current Liabilitie s (Current Assets - Inventory) Current Liabilitie s Cash Ratio: Ability to pay current liabilities with cash on hand Cash Ratio Cash Current Liabilitie s MGMT 31000 - Financial Management 10 Long-term Solvency Ratios Total Debt Ratio: Measure of all debts and maturities Total Debt Ratio Total Debt E 1 Total Assets A Debt-Equity Ratio: Use of debt and equity in capital structure Debt-Equity Ratio Total Debt Total Equity Equity Multiplier: A company’s total assets per dollar of equity Equity Multiplier Total Assets D 1 Total Equity E MGMT 31000 - Financial Management 11 Long-term Solvency Ratios (cont’d) Times Interest Earned: Ability to pay its interest expense Times Interest Earned Ratio EBIT Interst Expenses MGMT 31000 - Financial Management 12 Turnover Ratios Inventory Turnover: Number of times each year inventory is turned. Inventory Turnover Cost of Goods Sold Inventory Days’ Sales in Inventory: How long inventory sits before being turned. Days' Sales in Inventory 365 days Inventory Turnover Total Asset Turnover: How many sales are generated per dollar of assets. Asset Turnover Sales Total Assets MGMT 31000 - Financial Management 13 Turnover Ratios (cont’d) Receivables Turnover: How fast receivables are collected. Receivables Turnover Sales Account Receivable Days’ sales in Receivables: How long it takes to collect on credit sales. 365 days Days' Sales in Receivables Receivables Turnover MGMT 31000 - Financial Management 14 Profitability Ratios Profit Margin: Profit for every dollar in sales Profit Margin Return on Assets (ROA): Profit per dollar of assets. ROA Net Income Sales Net Income Total Assets Return on Equity (ROE): Profit per dollar of stockholders’ equity. ROE Net Income Total Book Value of Equity MGMT 31000 - Financial Management 15 Market Value Ratios Earnings Per Share (EPS): Profitability available to each share EPS Price-Earnings (P/E) Ratio: How much investors are willing to pay per dollar of current earnings. P/E Ratio Net Income # Shares Outstanding Market Capitalization Share Price Net Income EPS Market-to-Book Ratio: Compare how investors value the stock to the financial statement value. Market - to - Book Ratio Market Value of Equity Book Value of Equity MGMT 31000 - Financial Management 16 Market Value Ratios (cont’d) EBITDA Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough measure of the cash a firm has ‘earned’ from its operations (i.e. a rough measure of operating cash flows). Enterprise Value: Estimate how much it would cost to take over the business (i.e. purchase all of the equity and repay the debt). EV Market Value of Equity Book Value of Liabilities - Cash EV-EBITDA ratio Enterprise Value - EBITDA Ratio = MGMT 31000 - Financial Management EV EBITDA 17 Exercise.. Global’s 2012 B/S (Excerpted) Current Assets Current liabilities Cash 21.2 Accounts payable Accounts Receivable 18.5 Notes payable/short-term debt Inventories 15.3 Current maturities of long-term debt Other Current Assets Total Current Assets 2.0 57.0 Other current liabilities Total current liabilities Current Ratio = 57.0/48.0=1.19 Quick Ratio = (57.0-15.3)/48.0=0.87 Cash Ratio = 21.2/48.0=0.44 MGMT 31000 - Financial Management 29.2 3.5 13.3 2.0 48.0 18 Exercise… Global’s 2012 B/S Assets 2009 Liabilities and Stockholders' Equity Current Assets Current liabilities Cash 21.2 Accounts payable Accounts Receivable 18.5 Notes payable/short-term debt Inventories 15.3 Current maturities of long-term debt Other Current Assets Total Current Assets 2.0 57.0 Long-Term Assets Other current liabilities Total current liabilities 22.2 Long-term debt Buildings 36.5 Capital lease obligations Equipment 39.7 (18.7) Total debt 13.3 2.0 48.0 99.9 0.0 99.9 7.6 Other long-term liabilities 0.0 79.7 Goodwill and intangible assets 20.0 Other Long-term assets 21.0 Total Liabilities Total assets 3.5 Deferred taxes Net Property, plant, and equipment Total long-term assets 29.2 Total Debt Ratio = (177.7-22.2)/177.7 =0.88 Debt-Equity Ratio = (3.5+13.3+99.9) /22.2 = 5.26 Long-Term Liabilities Land Less Accumulated Depreciation 2009 Total long-term liabilities 120.7 Stockhoders' Equity 177.7 Total Liabilities and Stockholders' Equity MGMT 31000 - Financial Management Equity Multiplier = 177.7/22.2= 8.00 107.5 155.5 22.2 177.7 19 Exercise… Global’s 2012 I/S Total Sales Cost of Sales Gross Profit Selling, general, and administrative expense Research and development Depreciation and amortization Operating Income Other income Earnings before interest and taxes (EBIT) Interest income (expense) Pretax income Taxes Net Income 2009 186.7 (153.4) 33.3 (13.5) (8.2) (1.2) 10.4 0.0 10.4 (7.7) 2.7 (0.7) 2.0 Times Interest Earned = 10.4/7.7= 1.35 MGMT 31000 - Financial Management 20 Exercises.. Global’s 2012 B/S (Excerpted) Assets Current Assets Cash Accounts Receivable Inventories Other Current Assets Total Current Assets 2009 21.2 18.5 15.3 2.0 57.0 Long-Term Assets Total long-term assets 120.7 Total assets 177.7 Global’s 2009 I/S (Excerpted) Total Sales Cost of Sales Gross Profit 2009 186.7 (153.4) 33.3 Asset Turnover =186.7/177.7=1.05 Inventory Turnover =153.4/15.3=10.03 Days’ sales in inventory = 365/10.03 =36.40 Receivables Turnover = 186.7/18.5=10.09 Days’ sales in receivables = 365/10.09=36.17 MGMT 31000 - Financial Management 21 Exercises.. Global’s 2012 I/S (Excerpted) Total Sales Cost of Sales Gross Profit SG&A Research and development Depreciation and amortization Operating Income Other income Earnings before interest and taxes (EBIT) Interest income (expense) Pretax income Taxes Net Income 2009 186.7 (153.4) 33.3 (13.5) (8.2) (1.2) 10.4 0.0 10.4 (7.7) 2.7 (0.7) 2.0 Profit Margin=2.0/186.7=0.01 EBITDA= EBIT + Depreciation & Amortization = 10.4+1.2=11.6 ROA=2.0/177.7=0.01 ROE=2.0/22.2=0.09 • Book Assets = 177.7 • Book Equity = 22.2 MGMT 31000 - Financial Management 22 3. The Du Pont Identity ROE = NI / TE ROE = (NI / Sales) (Sales / TA) (TA / TE) ROE = PM * TAT * EM Profit margin (PM) is a measure of the firm’s operating efficiency how well it controls costs Total asset turnover (TAT) is a measure of the firm’s asset use efficiency how well does it manage its assets Equity multiplier (EM) is a measure of the firm’s financial leverage MGMT 31000 - Financial Management 23 Using the Du Pont Identity XYZ Corporation has the following financial information for the previous year: Sales: $8M Profit Margin (PM) = 8% Current Assets (CA) = $2M Fixed Assets (FA) = $6M Net Working Capital (NWC) = $1M Long Term Debt (LTD) = $3M MGMT 31000 - Financial Management 24 Using the Du Pont Identity Compute the ROE using the DuPont Analysis. 1. 2. 3. 4. 5. 6. 7. 8. Total assets = CA + FA = $2M + $6M = $8M TAT = Sales / TA = $8M / $8M = 1 NWC = CA – CL CL = CA – NWC = $2M - $1M = $1M Total liabs. = CL + LTD = $1M + $3M = $4M Total equity = total assets – total liabs. = $8M - $4M = $4M EM = assets / equity = $8M / $4M = 2 ROE = PM x TAT x EM = 8% x 1 x 2 = 16% Without DuPont, ROE = NI / TE = PM * Sales / TE = 8% x $8M / 4M = 16% MGMT 31000 - Financial Management 25 Potential Problems 1. There is no underlying theory, so there is no way to know which ratios are most relevant 2. Benchmarking is difficult for diversified firms 3. Globalization and international competition makes comparison more difficult because of differences in accounting regulations 4. Varying accounting procedures, i.e. FIFO vs. LIFO 5. Different fiscal years MGMT 31000 - Financial Management 26 Example: Determinants of ROE Problem: For the year ended November 2012, Wal-Mart Stores and Target had the following accounting measures: (in $ billion) Wal-Mart Target 403.9 65.3 Net Income 13.7 2.6 Total Assets 167.8 47.0 Book Equity 65.5 13.6 Sales Compare the two firms’ profitability, asset turnover, equity multiplier, and ROE during this period. If Target had been able to match Wal-Mart’s asset turnover in 2012, what would its ROE have been? MGMT 31000 - Financial Management 27 Example: (cont’d) Solution: Wal-Mart Target Net profit margin 13.7/403.9=3.39% 2.6/65.3=3.98% Asset turnover 403.9/167.8=2.41 65.3/47.0=1.39 Equity multiplier 167.8/65.5=2.56 47.0/13.6=3.46 ROE 13.7/65.5=20.91% 2.6/13.6=19.1% Mainly due to its lower asset turnover, Target had a lower ROE than Wal-Mart. If Target had been able to match Wal-Mart’s asset turnover, its ROE would have been 3.98%× 2.41× 3.46=33.2% MGMT 31000 - Financial Management 28 Example: Computing EV Problem: In January 2009, H.J. Heinz Co. (HNZ) had A share price of $36.95 314.44 million shares outstanding A market-to-book ratio of 7.99 A book debt-equity ratio of 3.7 Cash of $0.93 billion. What was Heinz’s enterprise value? MGMT 31000 - Financial Management 29 Example: (cont’d) Solution: Heinz’s market cap = $36.95 × 314.44 million shares = $11.62 billion. Heinz’s book value of equity =11.62/7.99=$1.45 billion. Given a book debt-equity ratio of 3.7, Heinz had total debt of 1.45 X 3.7 = $5.37 billion. Thus, Heinz’s EV was 11.62+5.37–0.93 = $16.06 billion. MGMT 31000 - Financial Management 30 More Exercises on EV.. Problem In January 2009, Rylan Corporation had a market capitalization of 110 million, a market-to-book ratio of 2.2, a book debt to equity ratio of 1.4, and cash of $6.3 million. What was Rylan’s enterprise value? Solution: Rylan’s book value of equity is 11/2.2=$50 million. Given a book debt-equity ratio of 1.4, Rylan had total debt of 1.4 X 50 = $70 million. Thus, Rylan’s EV was 110+70–6.3 = $173.7 million. MGMT 31000 - Financial Management 31 Quick Quiz 1. How do you determine sources and uses of cash? 2. What are the major categories of ratios and how do you interpret them? • You do not need to memorize the formulas for any of the ratios studied. They will be provided to you during exams. 3. What are some of the problems associated with financial statement analysis? MGMT 31000 - Financial Management 32 Practice Question 9. (p 85) Sources and Uses of Cash [LO4] Based only on the following information for Shinoda Corp., did cash go up or down? By how much? Classify each event as a source or use of cash. MGMT 31000 - Financial Management 33 Practice Question 18. (p 86) Using the DuPont Identity [LO3] Y3K, Inc., has sales of $6,189, total assets of $2,805, and a debt–equity ratio of 1.40. If its return on equity is 13 percent, what is its net income? MGMT 31000 - Financial Management 34 Practice Question 22. (p 86) Return on Equity [LO2] Firm A and firm B have debt–total asset ratios of 45% and 35% and returns on total assets of 9% and 12%, respectively. Which firm has a greater return on equity? MGMT 31000 - Financial Management 35 Practice Question 24. (p 86) Cost of Goods Sold [LO2] Saunders Corp. has current liabilities of $435,000, a quick ratio of .95, inventory turnover of 6.2, and a current ratio of 1.6. What is the cost of goods sold for the company? MGMT 31000 - Financial Management 36