Working with Financial Statements

Transcription

1 Working with Financial Statements Lakehead University September 2005

2 Overview of the Lecture 3.2 Standardizes Financial Statements 3.3 Ratio Analysis 3.4 Dupont Identity 3.5 Using Financial Statement Information 2

3 Standardized Financial Statements Rewriting financial statements in their common-size format means: Dividing all items on the income statement by sales; Dividing all items on the balance sheet by total assets. 3

4 Standardized Financial Statements Common-size analysis expresses each item on financial statements as a ratio and thus allows comparisons across years for the same firm. It allows to see how the firm s use of debt relatively to its size (total assets) is evolving over time. It allows to see how the firm s profits, relatively to the level of sales, are evolving over time. 4

5 Unibroue, Inc. Dec. 31, 2002 and Dec. 31, 2001, Income Statements ($000) Sales 23,622 21,580 Cost of goods sold 11,824 11,540 Gross profit 11,798 10,040 Selling, gen. and admin. expenses (SGA) 7,669 6,543 Amortization 2,073 1,833 Earnings before interest and taxes (EBIT) 2,056 1,664 Interest expense Foreign exchange gain (14) (14) Pretax income (EBT) 1, Taxes Net income Number of shares outstanding (weighted average) 6,111,875 6,235,451 Earnings per share $0.16 $0.10 Stock price (December) $2.43 $2.00 5

6 Unibroue, Inc. Dec. 31, 2002, and Dec. 31, 2001, Balance Sheets ($000) Assets Cash 2,300 1,714 Short-term investments Accounts receivable 3,891 4,435 Income taxes receivable Inventories 4,128 3,417 Prepaid expenses Total current assets 10,903 10,600 Net fixed assets 23,085 22,426 Total assets 33,988 33,086 Liabilities and Stockholders Equity Accounts payables and accrued liabilities 3,199 2,257 Instalments on long-term debt Total current liabilities 4,136 3,209 Long-term debt 5,125 5,992 Future income taxes 2,573 2,248 Total liabilities 11,835 11,449 Capital stock 8,670 9,414 Contributed surplus Retained earnings 12,506 11,545 Total equity 22,154 21,637 Total liabilities and equity 33,988 33,086 6

7 Unibroue, Inc. Dec. 31, 2002 and Dec. 31, 2001, Common-Size Income Statements (%) Sales Cost of goods sold Gross profit Selling, gen. and admin. expenses (SGA) Amortization Earnings before interest and taxes (EBIT) Interest expense Foreign exchange gain (0.06) (0.06) Pretax income (EBT) Taxes Net income

8 Unibroue, Inc. Dec. 31, 2002, and Dec. 31, 2001, Common-Size Balance Sheets (%) Assets Cash Short-term investments Accounts receivable Income taxes receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets Liabilities and Stockholders Equity Accounts payables and accrued liabilities Instalments on long-term debt Total current liabilities Long-term debt Future income taxes Total liabilities Capital stock Contributed surplus Retained earnings Total equity Total liabilities and equity

9 Standardized Financial Statements Common-base-year financial statements are such that all items on each statement is divided by the corresponding item on the base year financial statements. Common-base-year financial allows to look at the trends in financial statement items. 9

10 Unibroue, Inc and 2001 CBY Income Statements (%, Base Year = 2001) Sales Cost of goods sold Gross profit Selling, gen. and admin. expenses (SGA) Amortization Earnings before interest and taxes (EBIT) Interest expense Foreign exchange gain (100.00) (100.00) Pretax income (EBT) Taxes Net income

11 Unibroue, Inc and 2001 CBY Balance Sheets (%, Base Year = 2001) Assets Cash Short-term investments Accounts receivable Income taxes receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets Liabilities and Stockholders Equity Accounts payables and accrued liabilities Instalments on long-term debt Total current liabilities Long-term debt Future income taxes Total liabilities Capital stock Contributed surplus Retained earnings Total equity Total liabilities and equity

12 Standardized Financial Statements It is also possible to construct common-size, common-base-year, financial statements. Combining common-size and common-base-year analyses means looking at the trend in the common-size financial statements. 12

13 Ratio Analysis How to compare financial statements from different companies? Computing ratios is a good way to do so. A ratio standardizes an item on a statement, i.e. it makes it comparable to the same item on a different statement. Ratios put absolute numbers in perspective. 13

14 Ratio Analysis What can we do with ratios? Cross-Sectional Analysis: Analyze different companies in a given year. Times-Series Analysis: Analyze the same company over different years. Combined Analysis: Do both. 14

15 Ratio Analysis The ratios of a company should be compared to those of its competitors or to the average ratios of firms in the same industry. There are different categories of ratios, some ratios are more important than others depending on the industry a firm operates in. 15

16 Ratio Analysis Financial ratios are grouped in many categories: 1. Short-term solvency, or liquidity, ratios 2. Long-term solvency, or financial leverage, ratios 3. Asset management, or turnover, ratios (activity) 4. Profitability ratios 5. Market value ratios 16

17 Ratio Analysis: Liquidity Ratios Current Ratio Current ratio = Unibroue s current ratio was Current assets Current liabilities 10,903 4,136 = 2.64 in ,600 3,209 = 3.30 in

18 Ratio Analysis: Liquidity Ratios Current Ratio One problem with the current ratio is that it considers assets that may never convert to cash, such as inventories. The quick, or acid-test ratio provides a solution to this problem. 18

19 Ratio Analysis: Liquidity Ratios Quick, or Acid-Test Ratio Quick Ratio = Unibroue s quick ratio was Current Assets Inventories Current liabilities 10,903 4,128 4,136 = 1.64 in ,600 3,417 3,209 = 2.24 in

20 Ratio Analysis: Liquidity Ratios Quick, or Acid-Test Ratio Like the current ratio, the acid-test ratio also considers assets that are not 100% liquid. The cash ratio provides a solution to this problem. 20

21 Ratio Analysis: Liquidity Ratios Cash Ratio Cash ratio = Unibroue s cash ratio was Cash (and Marketable Securities) Current liabilities 2,300 4,136 2,114 3,209 = 0.56 in 2002 = 0.66 in

22 Ratio Analysis: Liquidity Ratios Cash Ratio One must compare a firm s cash ratio with those of its competitors. The cash ratio is a very conservative measure of liquidity. Other liquidity ratios: NWC to total assets = Interval measure = NWC Total assets Current assets Average daily operating costs, where Average daily operating costs = (COGS + SGA)/

23 Ratio Analysis: Leverage Ratios Debt-Equity Ratio The debt-equity ratio is computed as follows: Debt/equity ratio = Total Debt Total Equity For Unibroue, we have Debt/equity ratio = 11,834 22,154 11,449 21,636 = 0.53 in 2002 = 0.53 in

24 Ratio Analysis: Leverage Ratios Total Debt Ratio Total debt ratio = Unibroue s total debt ratio was Total assets Total equity Total assets 33,988 22,154 33,988 = 0.35 in ,086 21,637 33,086 = 0.35 in

25 Ratio Analysis: Leverage Ratios Equity Multiplier Equity Multiplier = Total assets Total equity The equity multiplier for Unibroue was 33,988 22,154 33,086 21,636 = 1.53 in 2002 = 1.53 in

26 Ratio Analysis: Leverage Ratios Equity Multiplier Note that Equity multiplier = 1 + Debt/equity ratio. 26

27 Ratio Analysis: Leverage Ratios Long-Term Debt Ratio Investors might be more interested in long-term debt, since short-term liabilities (accounts payable and bank borrowings, for instance) are constantly changing. The long-term debt ratio ignores short-term liabilities: Long-term debt ratio = Long-term debt Long-term debt + Total equity 27

28 Ratio Analysis: Leverage Ratios Times Interest Earned Cash Coverage Times interest earned ratio = EBIT Interest Cash coverage ratio = EBIT + Depreciation Interest 28

29 Ratio Analysis: Activity Ratios Inventory Turnover Inventory turnover = COGS Inventory Average Age of Inventory Average Age of Inventory = 365 Inventory Turnover 29

30 Ratio Analysis: Activity Ratios Inventory Turnover For Unibroue, the inventory turnover in 2002 was 11, 824 4,128 = 2.86 and the average age of inventory was = 127 days. 30

31 Ratio Analysis: Activity Ratios Receivables Turnover Receivables turnover = Average Collection Period Sales Accounts receivable Days Sales in Receivables = 365 Receivables Turnover 31

32 Ratio Analysis: Activity Ratios Receivables Turnover Unibroue s receivables turnover in 2002 was 23, 622 3,891 = 6.07 and its average collection period was = 60 days. 32

33 Ratio Analysis: Activity Ratios Payable Turnover Payables turnover = COGS Accounts payable Average Payment Period Average Payment period = 365 Payables Turnover 33

34 Ratio Analysis: Activity Ratios Payable Turnover Unibroue s payables turnover in 2002 was 11, 824 3,199 = 3.70 and its average payment period was = 99 days. 34

35 Ratio Analysis: Activity Ratios Other Activity Ratios NWC turnover = Sales/NWC Fixed asset turnover = Sales/Net fixed assets Total asset turnover = Sales/Total assets 35

36 Ratio Analysis: Profitability Ratios Profit Margin Profit Margin = Net Income/Sales Unibroue s profit margin was , ,580 = 4.07% in 2002 = 2.82% in

37 Ratio Analysis: Profitability Ratios Gross Profit Margin Gross Profit Margin = Gross Income/Sales Unibroue s gross profit margin was 11,798 23,622 11,540 21,580 = 49.9% in 2002 = 46.5% in

38 Ratio Analysis: Profitability Ratios Operating Profit Margin Operating Profit Margin = EBIT/Sales Unibroue s operating profit margin was 2,056 23,622 1,664 21,580 = 8.7% in 2002 = 7.7% in

39 Ratio Analysis: Profitability Ratios Return on Assets (ROA) ROA = Net Income/Total Assets Unibroue s return on assets was , ,086 = 2.83% in 2002 = 1.84% in

40 Ratio Analysis: Profitability Ratios Return on Equity (ROE) ROE = Net Income/Total Equity Unibroue s return on equity was , ,637 = 4.34% in 2002 = 2.81% in

41 Ratio Analysis: Market Value Ratios Price/Earnings (P/E) Ratio P/E ratio = Stock price/earnings per share This ratio usuall involves expected future earnings. Nevertheless, we could say that Unibroue s P/E ratio was = in 2002 = in

42 Ratio Analysis: Market Value Ratios Market-to-Book Ratio (ME/BE) ME/BE ratio = Stock price/book equity per share, where book equity per share means total equity, as it appears on the balance sheet, divided by the number of shares outstanding. For Unibroue, this ratio was ,154/6, ,637/6,235 = 0.67 on Dec. 31, 2002, = 0.58 on Dec. 31,

43 Ratio Analysis: Market Value Ratios Market-to-Book Ratio (ME/BE) Since the book value of assets is usually below its market value, a stock with a market-to-book ratio below one may be considered a good buy. On the other hand, a market-to-book ratio below one is the sign that management has not been very successful at creating value and thus might not be able to create value in the future either. 43

44 Ratio Analysis: Market Value Ratios Dividend Payout Ratio Dividend Payout Ratio = Common Share Dividend Earnings Available to Common Shareholders 44

45 Ratio Analysis: The Dupont System ROE = = Net income Total equity Net income Total equity Sales Sales Total assets Total assets = Net income Sales Sales Total assets Total assets Total equity = Profit margin Total asset turnover }{{} ROA Equity Multiplier 45

46 Ratio Analysis: The Dupont System For Unibroue in 2002, we have ROE = 4.34% = NI Sales Sales TA TA TE = ,622 23,622 33,988 33,988 22, 154 = 4.07%

47 Ratio Sleeman Unibroue Profitability ratios (%) Gross Profit margin Operating Profit margin Net Profit margin Return on assets Return on equity Financial leverage ratios Total debt ratio Debt/equity ratio Long-term debt ratio Times interest earned

48 Unibroue, Inc and 2001 Income Statements (in thousands of $) Sales 23,622 21,580 Cost of goods sold 11,824 11,540 Selling and administrative expenses (SGA) 7,669 6,543 Amortization 2,073 1,833 Earnings before interest and taxes 2,056 1,664 Interest expense Foreign exchange gain (14) (14) Pretax income 1, Taxes Net income Number of shares outstanding 6,111,875 6,235,451 Earnings per share $0.16 $0.10 Stock price (December) $2.43 $

49 Ratio Sleeman Unibroue Liquidity ratios Current ratio Acid-test ratio Market value ratios P/E ratio Market-to-book ratio Asset management ratios Average age of inventory (days) Average collection period (days) Average payment period (days) Total asset turnover

50 The Case of Unibroue Unibroue s long-term debt level is low compared to Sleeman and brewers in general. Long-term debt ratios in this industry are usually around 40-50%. Unibroue s profits margin is also low compared to other brewers: Anheuser-Busch: 13.2% in 2001 Coors: 5.1% in Return on equity: Anheuser-Busch: 41.6% in 2001 Coors: 13.1% in

51 U.S. Number for Brewers in 2002 Ratio Industry Average ROE 53.3% ROA 11.2% Oper Profit Margin 18.9% Net Profit Margin 12.1% Interest Coverage 7.9 times 51

52 Some U.S. Distillers and Wine Makers in 2001 Ratio Brown-Forman Constellation Brands ROE 18.3% 17.6% ROA 11.5% 4.9% Net Profit Margin 11.6% 4.9% 52