A
1
2
B
Tool Kit
C
D
E
F
Chapter 3
Analysis of Financial Statements
3
4
5 Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios
6 of other firms and by examining the trends in ratios over time. We can also combine ratios to make the
7 analysis more revealing, one below are exceptionally useful for this type of analysis.
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
3-1 Financial Analysis
Input Data:
2013
$27.00
50
40%
11.0%
$28
$20
Year-end common stock price
Year-end shares outstanding (in millions)
Tax rate
After-tax cost of capital
Lease payments
Required sinking fund payments
2012
$40.00
50
40%
10.5%
$28
$20
Figure 3-1
MicroDrive Inc. Balance Sheets and Income Statements for Years Ending December 31
(Millions of Dollars, Except for Per Share Data)
Balance Sheets
Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets
32
33
34
35
36
37
38
39
40
41
42
43
44
Liabilities and Equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total liabilities
Preferred stock (400,000 shares)
Common stock (50,000,000 shares)
Retained earnings
Total common equity
Total liabilities and equity
45
46
47
48
49
50
51
52
Net sales
Costs of goods sold except depreciation
Depreciation
Other operating expenses
Earnings before interest and taxes (EBIT)
Less interest
Income Statements
2013
2012
$
50
500
1,000
1,550
2,000
3,550
$
200
280
300
780
1,200
1,980
100
500
970
1,470
3,550
$
$
$
$
$
$
$
$
2013
$
5,000
3,800
200
500
$
500
120
$
$
$
$
$
$
60
40
380
820
1,300
1,700
3,000
190
130
280
600
1,000
1,600
100
500
800
1,300
3,000
2012
$
4,760
3,560
170
480
$
550
100
A
B
53
Pre-tax earnings
54 Taxes (40%)
55
Net Income before preferred dividends
56 Preferred dividends
57
58
59
60
61
62
63
64
Net Income available to common stockholders
C
D
$
$
$
E
380
152
228
8
$
220
$
$
F
450
180
270
8
262
Other Data
Common dividends
Addition to retained earnings
Lease payments
Bonds' required sinking fund payments
Common stock price per share
$50
$170
$28
$20
$27
$48
$214
$28
$20
$40
A
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
B
C
D
E
F
Calculated Data: Operating Performance and Cash Flows
2013
$1,050
$3,050
$300
9.8%
($260)
420
2012
$790
$2,490
$330
13.3%
N/A
$432
$700
$1,350
$720
$2,000
2013
$4.40
$1.00
$29.40
$8.40
$14.00
($5.20)
2012
$5.24
$0.96
$26.00
$8.64
$14.40
N/A
2013
2012
Industry
Average
2.0
0.7
2.2
0.8
2.2
0.8
2013
2012
Industry
Average
1.4
2.5
36.5
4.0
1.6
2.8
29.1
4.5
1.8
3
30
5
2013
2012
Industry
Average
41.7%
1.01
52.3%
55.8%
4.2
37.7%
0.87
36.1%
53.3%
5.5
25.0%
0.46
20.0%
45.0%
10.0
4.3
5.1
12.0
2013
2012
Industry
Average
Net operating working capital (NOWC)
Total operating capital
Net operating profit after taxes (NOPAT)
Return on capital (ROIC)
Free cash flow (FCF)
Net cash flow (Net income + Depreciation)
$
Earnings before interest, taxes, depreciation & amortization
(EBITDA) = EBIT + Depreciation & amortization
Market capitalization (# shares x price per share)
Calculated Data: Per-share Information
Earnings per share (EPS)
Dividends per share (DPS)
Book value per share (BVPS)
Cash flow per share (CFPS)
EDITDA per share
Free cash flow per share (FCFPS)
3-2 Liquidity Ratios
Liquidity ratios
Current Ratio = CA/CL
Quick Ratio = (CA - Inventories)/CL
3-3 Asset Management Ratios
Asset Management ratios
Total Asset Turnover = Sales/TA
Fixed Asset Turnover = Sales/Fixed assets
Days Sales Outstanding = Accounts receivable/Daily sales
Inventory Turnover = COGS/Inventories
3-4 Debt Management Ratios
Debt Management ratios
Debt Ratio = Debt-to-Assets Ratio = Total debt/TA
Debt-to-Equity Ratio = Total debt/Total common equity
Market Debt Ratio = Total debt/(Total debt + Market Cap)
Liabilities-to-Assets Ratio = TL/TA
Times Interest Earned = EBIT/Interest expense
EBITDA Coverage Ratio =
(EBIT + Depreciation + Lease pmt)
108 (Interest + Principal pmt + Lease pmt)
109
110 3-5 Profitability Ratios
111
112 Profitability ratios
113
114
115
116
117
118
119
120
121
A
B
C
Profit Margin = Net income/Sales
Basic Earning Power = EBIT/TA
Return on Assets = Net income/TA
Return on Equity = Net income/Total common equity
D
E
F
4.4%
14.1%
6.2%
15.0%
5.5%
18.3%
8.7%
20.2%
6.2%
20.2%
11.0%
19.0%
2013
2012
Industry
Average
6.1
7.6
10.5
3.2
4.6
6.3
2.8
1.5
4.0
1.8
3-6 Market Value Ratios
Market Value ratios
Price-to Earnings Ratio = Price/(Net income/# shares)
Price-to-Cash Flow Ratio =
Price
122 (Net income + Depreciation)/# shares
Price-to-EBITDA Ratio =
Price
123 (EBIT + Depreciation)/# shares
1.9
124 Market-to-Book Ratio = Price/(Total common equity/#shares)
0.9
125
126 3-7 Trend Analysis, Common Size Analysis, and Percentage Change Analysis
127
128 TREND ANALYSIS
Trend analysis allows you to see how a firm's results are changing over time. For instance, a firm's ROE may be slightly below the
129 benchmark, but if it has been steadily rising over the past four years, that should be seen as a good sign.
130
A trend analysis and graph have been constructed on this data regarding MicroDrive's ROE over the past 5 years. (MicroDrive and
indusry average data for earlier years has been provided.)
131
132
133
ROE
Industry
134
MicroDrive
135
2009
15.0%
14.0%
136
2010
18.0%
15.0%
137
2011
21.0%
18.0%
138
2012
20.2%
17.0%
139
2013
15.0%
19.0%
140
141 Figure 3-2
142 MicroDrive, Inc.: Return on Common Equity
143
144
ROE
145
(%)
146
147
22.0%
148
149
20.0%
150
Industry
18.0%
151
152
16.0%
153
MicroDrive
14.0%
154
155
12.0%
A
156
157
158
159
160
161
162
163
164
165
166
167
168
169
B
12.0%
C
D
E
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2009
2010
2011
2012
2013
F
A
B
C
D
E
F
170 COMMON SIZE ANALYSIS
171 In common size income statements, all items for a year are divided by the sales for that year.
172
173 Figure 3-3
MicroDrive Inc.: Common Size Income Statements
174
Industry
175
Composite
MicroDrive
176
2013
2013
2012
177 Net sales
100.0%
100.0%
100.0%
178 Costs of goods sold except depreciation
75.5%
76.0%
74.8%
179 Depreciation
3.0%
4.0%
3.6%
180 Other operating expenses
10.0%
10.0%
10.1%
181
Earnings before interest and taxes (EBIT)
11.5%
10.0%
11.6%
182 Less interest
1.2%
2.4%
2.1%
183
Pre-tax earnings
10.4%
7.6%
9.5%
184 Taxes (40%)
4.1%
3.0%
3.8%
185
Net Income before preferred dividends
6.2%
4.6%
5.7%
186 Preferred dividends
0.0%
0.2%
0.2%
187 Net Income available to common stockholders
6.2%
4.4%
5.5%
188
189
190
191 In common sheets, all items for a year are divided by the total assets for that year.
192
193 Figure 3-4
194 MicroDrive Inc.: Common Size Balance Sheets
195
196
197
198
199
200
201
202
203
204
Industry Composite
2013
Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets
1.8%
0.0%
14.0%
26.3%
42.1%
57.9%
100.0%
1.4%
0.0%
14.1%
28.2%
43.7%
56.3%
100.0%
2.0%
1.3%
12.7%
27.3%
43.3%
56.7%
100.0%
205
206
207
208
209
210
211
212
213
214
215
Liabilities and Equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total liabilities
Preferred stock
Total common equity
Total liabilities and equity
7.0%
0.0%
12.3%
19.3%
25.4%
44.7%
0.0%
55.3%
100.0%
5.6%
7.9%
8.5%
22.0%
33.8%
55.8%
2.8%
41.4%
100.0%
6.3%
4.3%
9.3%
20.0%
33.3%
53.3%
3.3%
43.3%
100.0%
216
217
218
219 PERCENT CHANGE ANALYSIS
220
2013
MicroDrive
2012
A
B
C
D
E
F
221 In percent change analysis, all items are divided by the that item's value in the beginning, or base, year.
222
223 Figure 3-5
224 MicroDrive Inc.: Income Statement Percent Change Analysis
Percent
225
Base year = 2012
Change in
226
2013
227 Net sales
5.0%
228 Costs of goods sold except depreciation
6.7%
229 Depreciation
17.6%
230 Other operating expenses
4.2%
231
Earnings before interest and taxes (EBIT)
(9.1%)
232 Less interest
20.0%
233
Pre-tax earnings
(15.6%)
234 Taxes (40%)
(15.6%)
235
Net Income before preferred dividends
(15.6%)
236 Preferred dividends
0.0%
237 Net income available to common stockholders
(16.0%)
238
239
240
241
242 MicroDrive, Inc.: Balance Sheet Percent Change Analysis (not in textbook)
Percent
243
Base year = 2012
Change in
244
2013
245 Assets
246 Cash and equivalents
(16.7%)
247 Short-term investments
(100.0%)
248 Accounts receivable
31.6%
249 Inventories
22.0%
250
Total current assets
19.2%
251 Net plant and equipment
17.6%
252 Total assets
18.3%
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
Liabilities and Equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Total liabilities
Preferred stock (400,000 shares)
Common stock (50,000,000 shares)
Retained earnings
Total common equity
Total liabilities and equity
5.3%
115.4%
7.1%
30.0%
20.0%
23.8%
0.0%
0.0%
21.3%
13.1%
18.3%
DUPONT ANALYSIS (Section 3-8)
MicroDrive
2013
ROE =
15.0%
Profit margin
x
TA turnover x
4.40%
1.41
Equity
multiplier
2.415
A
B
C
271
MicroDrive
2012
20.2%
272
Industry Average
20.3%
273
274 Suppose MicroDrive can improve its total asset turnover ratio.
275
276
Improved TA turover ratio =
1.8
277
278
279
ROE =
19.1%
D
5.50%
6.20%
E
1.59
1.80
Profit margin
x
TA turnover x
4.40%
1.80
F
2.308
1.818
Equity
multiplier
2.415
G
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
H
G
53
54
55
56
57
58
59
60
61
62
63
64
H
G
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
H
G
H
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
ance, a firm's ROE may be slightly below the
en as a good sign. 129
130
ROE over the past 5 years. (MicroDrive and
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
Tool Kit
Chapter 3
Analysis of Financial Statements
Financial statements are analyzed by calculating certain key
ratios and then comparing them with the ratios of other firms and
by examining the trends in ratios over time. We can also combine
ratios to make the analysis more revealing, one below are
3-1 Financial Analysis
Input Data:
2013
Year-end common stock price
$27.00
Year-end shares outstanding (in millions)50
Tax rate
40%
After-tax cost of capital
11.0%
Lease payments
$28
Required sinking fund payments
$20
2012
$40.00
50
40%
10.5%
$28
$20
Figure 3-1
MicroDrive Inc. Balance Sheets and Income Statements for Years Ending December 31
(Millions of Dollars, Except for Per Share Data)
Balance Sheets
Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets
2013
2012
$
$
50
500
1,000
$ 1,550
2,000
$ 3,550
60
40
380
820
$ 1,300
1,700
$ 3,000
Liabilities and Equity
Accounts payable
$ 200
Notes payable
280
Accruals
300
Total current liabilities
$ 780
Long-term bonds
1,200
Total liabilities
$ 1,980
Preferred stock (400,000 shares)
100
Common stock (50,000,000 shares)
500
Retained earnings
970
Total common equity
$ 1,470
Total liabilities and equity
$ 3,550
$ 190
130
280
$ 600
1,000
$ 1,600
100
500
800
$ 1,300
$ 3,000
Income Statements
2013
Net sales
$ 5,000
Costs of goods sold except depreciation
3,800
Depreciation
200
Other operating expenses
500
Earnings before interest and taxes
$ (EBIT)
500
Less interest
120
Pre-tax earnings
$ 380
Taxes (40%)
152
Net Income before preferred dividends
$ 228
Preferred dividends
8
2012
$ 4,760
3,560
170
480
$ 550
100
$ 450
180
$ 270
8
Net Income available to common stockholders
$ 220
$ 262
Other Data
Common dividends
$50
Addition to retained earnings
$170
Lease payments
$28
Bonds' required sinking fund payments $20
Common stock price per share
$27
$48
$214
$28
$20
$40
Calculated Data: Operating Performance and Cash Flows
2013
2012
Net operating working capital (NOWC)
$1,050
$790
Total operating capital
$3,050
$2,490
Net operating profit after taxes (NOPAT)
$300
$330
Return on capital (ROIC)
9.8%
13.3%
Free cash flow (FCF)
($260)
N/A
Net cash flow (Net income + Depreciation)
$
420
$432
Earnings before interest, taxes,
depreciation & amortization
(EBITDA) = EBIT + Depreciation
$700
$720
Market capitalization (# shares x price per share)
$1,350
$2,000
Calculated Data: Per-share Information
2013
$4.40
$1.00
$29.40
$8.40
$14.00
($5.20)
2012
$5.24
$0.96
$26.00
$8.64
$14.40
N/A
2013
2012
Industry
Average
2.0
0.7
2.2
0.8
2.2
0.8
2013
2012
Industry
Average
Earnings per share (EPS)
Dividends per share (DPS)
Book value per share (BVPS)
Cash flow per share (CFPS)
EDITDA per share
Free cash flow per share (FCFPS)
3-2 Liquidity Ratios
Liquidity ratios
Current Ratio = CA/CL
Quick Ratio = (CA 3-3 Asset Management Ratios
Asset Management ratios
Total Asset Turnover = Sales/TA
1.4
1.6
Fixed Asset Turnover = Sales/Fixed assets
2.5
2.8
Days Sales Outstanding = Accounts receivable/Daily
36.5
29.1
sales
Inventory Turnover = COGS/Inventories 4.0
4.5
3-4 Debt Management Ratios
2013
2012
1.8
3
30
5
Industry
Average
Debt Management ratios
Debt Ratio = Debt-to-Assets Ratio = Total
41.7%
debt/TA
37.7%
25.0%
Debt-to-Equity Ratio = Total debt/Total 1.01
common equity
0.87
0.46
Market Debt Ratio = Total debt/(Total52.3%
debt + Market
36.1%
Cap) 20.0%
Liabilities-to-Assets Ratio = TL/TA 55.8%
53.3%
45.0%
Times
Interest
Earned
=
EBIT/Interest
expense
4.2
5.5
10.0
EBITDA Coverage
Ratio =
(EBIT +
Depreciation + Lease
pmt)
4.3
5.1
12.0
2013
2012
Industry
Average
Profitability ratios
Profit Margin = Net income/Sales
4.4%
5.5%
Basic Earning Power = EBIT/TA
14.1%
18.3%
Return on Assets = Net income/TA
6.2%
8.7%
Return on Equity = Net income/Total common
15.0% equity
20.2%
6.2%
20.2%
11.0%
19.0%
3-5 Profitability Ratios
3-6 Market Value Ratios
2012
Industry
Average
Market Value ratios
Price-to Earnings Ratio = Price/(Net income/#
6.1 shares)
7.6
10.5
2013
Price-to-Cash Flow
Ratio =
Price
(Net income +
Depreciation)/#
3.2
4.6
6.3
Price-to-EBITDA
Ratio =
Price
(EBIT +
Depreciation)/#
1.9
2.8
4.0
Market-to-Book Ratio = Price/(Total common
0.9 equity/#shares)
1.5
1.8
3-7 Trend Analysis, Common Size Analysis, and Percentage Change Analysis
TREND ANALYSIS
Trend analysis allows you to see how a firm's results are changing over time. For
instance, a firm's ROE may be slightly below the benchmark, but if it has been steadily
rising over the past four years, that should be seen as a good sign.
A trend analysis and graph have been constructed on this data regarding MicroDrive's
ROE over the past 5 years. (MicroDrive and indusry average data for earlier years has
been provided.)
2009
2010
2011
2012
2013
ROE
MicroDrive Industry
15.0%
14.0%
18.0%
15.0%
21.0%
18.0%
20.2%
17.0%
15.0%
19.0%
Figure 3-2
MicroDrive, Inc.: Return on Common Equity
ROE
(%)
22.0%
20.0%
Indust
ry
18.0%
16.0%
Micro
Drive
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2009
2010
2011
2012
2013
COMMON SIZE ANALYSIS
In common size income statements, all items for a year are divided by the sales for that year.
Figure 3-3
MicroDrive Inc.: Common Size Income Statements
Industry
Composit
e
MicroDrive
2013
2013
2012
Net sales
100.0%
100.0%
100.0%
Costs of goods sold except depreciation
75.5%
76.0%
74.8%
Depreciation
3.0%
4.0%
3.6%
Other operating expenses
10.0%
10.0%
10.1%
Earnings before interest and taxes
11.5%
(EBIT) 10.0%
11.6%
Less interest
1.2%
2.4%
2.1%
Pre-tax earnings
10.4%
7.6%
9.5%
Taxes (40%)
4.1%
3.0%
3.8%
Net Income before preferred dividends
6.2%
4.6%
5.7%
Preferred dividends
0.0%
0.2%
0.2%
Net Income available to common stockholders
6.2%
4.4%
5.5%
In common sheets, all items for a year are divided by the total assets for that year.
Figure 3-4
MicroDrive Inc.: Common Size Balance Sheets
Industry
Composit
e
MicroDrive
2013
2013
2012
Assets
Cash and equivalents
1.8%
1.4%
2.0%
Short-term investments 0.0%
0.0%
1.3%
Accounts receivable
14.0%
14.1%
12.7%
Inventories
26.3%
28.2%
27.3%
Total current assets 42.1%
43.7%
43.3%
Net plant and equipment57.9%
56.3%
56.7%
Total assets
100.0%
100.0%
100.0%
Liabilities and Equity
Accounts payable
7.0%
Notes payable
0.0%
Accruals
12.3%
Total current liabilities
19.3%
Long-term bonds
25.4%
Total liabilities
44.7%
Preferred stock
0.0%
Total common equity
55.3%
Total liabilities and equity
100.0%
5.6%
7.9%
8.5%
22.0%
33.8%
55.8%
2.8%
41.4%
100.0%
6.3%
4.3%
9.3%
20.0%
33.3%
53.3%
3.3%
43.3%
100.0%
PERCENT CHANGE ANALYSIS
In percent change analysis, all items are divided by the that item's value in the beginning, or base, year.
Figure 3-5
MicroDrive Inc.: Income Statement Percent Change Analysis
Percent
Change in
2013
Net sales
5.0%
Costs of goods sold except depreciation
6.7%
Depreciation
17.6%
Other operating expenses
4.2%
Earnings before interest and taxes
(9.1%)
(EBIT)
Less interest
20.0%
Pre-tax earnings
(15.6%)
Base year = 2012
Taxes (40%)
(15.6%)
Net Income before preferred dividends
(15.6%)
Preferred dividends
0.0%
Net income available to common stockholders
(16.0%)
MicroDrive, Inc.: Balance Sheet Percent Change Analysis (not in textbook)
Percent
Change in
2013
Base year = 2012
Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets
(16.7%)
#######
31.6%
22.0%
19.2%
17.6%
18.3%
Liabilities and Equity
Accounts payable
5.3%
Notes payable
115.4%
Accruals
7.1%
Total current liabilities
30.0%
Long-term bonds
20.0%
Total liabilities
23.8%
Preferred stock (400,000 shares) 0.0%
Common stock (50,000,000 shares) 0.0%
Retained earnings
21.3%
Total common equity
13.1%
Total liabilities and equity
18.3%
DUPONT ANALYSIS (Section 3-8)
MicroDrive
MicroDrive
Industry Average
2013
2012
Profit
ROE = margin x
15.0%
4.40%
20.2%
5.50%
20.3%
6.20%
TA
turnover
Equity
x
multiplier
1.41
2.415
1.59
2.308
1.80
1.818
Suppose MicroDrive can improve its total asset turnover ratio.
Improved TA turover ratio =
1.8
Profit
ROE = margin x
19.1%
4.40%
TA
turnover
Equity
x
multiplier
1.80
2.415
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