Purpose of a Ratio Analysis Types of Ratios Analyzing your Business with Financial Ratios

Transcription

1 Financial Statements and Rati Analysis ACCORD Crpratin Bridgette Winicki Outline Filling in yur Financial Statements Incme Statement Balance Sheet Cash Flw Statement Purpse f a Rati Analysis Types f Ratis Analyzing yur Business with Financial Ratis

2 Filling in Yur Financial Statements Filling in yur financial statements can be very easy if yu keep gd recrds f yur financial and accunting activities. If it is yur first time filling them ut fr yur cmpany then yu culd easily pull a sample spreadsheet fr the internet t shw yu what yu will have t fill ut, r yu can use the excel link prvided. If yu have already made financial statements, then yu can fill them ut fr each year but simply imputing yur current data where yur ld data was. Building/using a rati analysis allws yu t have all yur financial statements and the rati analysis all in ne spreadsheet By building prper spreadsheets fr financial statements, yu will be able t update it every year by imputing yur financials Updates calculatins autmatically Makes this prcess easier fr yu! Or if yu want t use the Rati Analysis prvided, then just fill in yur infrmatin! This prvides yu with in-depth financial statements as well as a simplified versin Since the Rati Analysis prvided was simplified frm a spreadsheet made fr publically listed cmpanies, there may be cme accunts that yu d nt even have t fill in T get a better understanding f financial statements, we re ging t take a lk at a lcal startup business t see hw they can utilize the financial statements/rati analysis

3 Incme Statement American Je's Breath f Life- Incme Statement Fiscal year ends in December TTM Revenue / Sales Cst f revenue Grss prfit Grss Margin % % % 42.43% 84.07% 84.07% % Operating expenses Payrll Marketing/Prmtin Rent Utilities Insurance Depreciatin and amrtizatin Payrll Taxes Other perating expenses Ttal perating expenses Operating incme EBITDA Interest Expense Incme befre incme taxes Taxes Incurred Net Prfit Net Prfit/Sales % % % % % % This incme statement prvides past years infrmatin, current infrmatin, and prjected infrmatin t allw a business t be able t see hw they have perfrmed ver the years. Since yu d nt have all the accunts that publically listed cmpanies include int their financial statements, yur financials will lk much cleaner and easier t use. If yu are nt quite clear n what the accunts are that are used in an incme statement then hpefully we can give that a little mre clarificatin. Revenue/Sales- the amunt f mney that a cmpany actually receives during a specific perid, including discunts and deductins fr returned merchandise. It is the "tp line" r "grss incme" figure frm which csts are subtracted t determine net incme Cst f Revenue- the ttal cst f manufacturing and delivering a prduct r service, designed t represent the direct csts assciated with the gds and services the cmpany prvides Grss Prfit- a cmpany's ttal revenue (equivalent t ttal sales) minus the cst f gds sld. Grss prfit is the prfit a cmpany makes after deducting the csts assciated with making and selling its prducts, r the csts assciated with prviding its services

4 Grss Margin- a cmpany's ttal sales revenue minus its cst f gds sld (COGS) (als knwn as cst f revenue), divided by ttal sales revenue, expressed as a percentage Operating Expenses- expenditures that a business incurs t engage in any activities nt directly assciated with the prductin f gds r services (see an alternative definitin at the bttm). These expenditures are the same as selling, general and administrative expenses EBITDA- (Earnings Befre Interest, Taxes, Depreciatin, and Amrtizatin) - a measure f a cmpany's perating perfrmance. Essentially, it's a way t evaluate a cmpany's perfrmance withut having t factr in financing decisins, accunting decisins r tax envirnments EBITDA = Net Prfit + Interest +Taxes + Depreciatin + Amrtizatin Interest Expense- a nn-perating expense shwn n the incme statement. It represents interest payable n any brrwings bnds, lans, cnvertible debt r lines f credit. It is essentially calculated as the interest rate times the utstanding principal amunt f the debt Net Prfit- the actual prfit after wrking expenses nt included in the calculatin f grss prfit have been paid Net Prfit/Sales (Net Prfit Margin) - this is a frmula added int the incme statement that is knwn as a financial leverage ratis. Net prfit margin is the rati f net prfits t revenues fr a cmpany r business segment. Typically expressed as a percentage, net prfit margins shw hw much f each dllar cllected by a cmpany as revenue translates int prfit. The equatin t calculate net prfit margin is: net margin = net prfit / revenue

5 Balance Sheet American Je's Breath f Life- Balance Sheet Fiscal year ends in December Assets Current assets Cash and cash equivalents Receivables Inventries Prepaid expenses Other current assets Ttal current assets Nn-current assets Prperty, plant and equipment Grss prperty, plant and equipment Accumulated Depreciatin Net prperty, plant and equipment Other lng-term assets Ttal nn-current assets Ttal assets Liabilities and stckhlders' equity Liabilities Current liabilities Current Brrwing Accunts Payable Taxes Payable Other current liabilities Ttal current liabilities Nn-current liabilities Lng-term debt Deferred taxes liabilities Regulatry liabilities Other lng-term liabilities Ttal nn-current liabilities Ttal liabilities Stckhlders' equity Paid-in capital Retained earnings Accumulated ther cmprehensive incme Ttal stckhlders' equity Ttal liabilities and stckhlders' equity This balance sheet prvides past years infrmatin, current infrmatin, and prjected infrmatin t allw a business t be able t see hw they have perfrmed ver the years. Since yu d nt have all the accunts that publically listed cmpanies include int their financial statements, yur financials will lk much cleaner and easier t use. If yu are nt quite clear n what the accunts are that are used in a financial statement then hpefully we can give that a little mre clarificatin.

6 Assets- smetimes defined as resurces r things f value that are wned by a cmpany. Sme examples f assets which are bvius and will be reprted n a cmpany's balance sheet include: cash, accunts receivable, inventry, investments, land, buildings, and equipment Current Assets- any asset which can reasnably be expected t be sld, cnsumed, r exhausted thrugh the nrmal peratins f a business within the current fiscal year r perating cycle (whichever perid is lnger) Nn-Current Assets- an asset that is nt likely t turn t unrestricted cash within ne year f the balance sheet date. (This assumes that the cmpany has an perating cycle f less than ne year.) A nncurrent asset is als referred t as a lng-term asset Liabilities- a cmpany's financial debt r bligatins that arise during the curse f its business peratins. Liabilities are settled ver time thrugh the transfer f ecnmic benefits including mney, gds r services Current Liabilities- a cmpany's debts r bligatins that are due within ne year, appearing n the cmpany's balance sheet and include shrt term debt, accunts payable, accrued liabilities and ther debts. Essentially, these are bills that are due t creditrs and suppliers within a shrt perid f time Nn-Current Liabilities- lng-term financial bligatins listed n a cmpany's balance sheet that are nt due within the present accunting year, such as lng-term brrwing, bnds payable and lng-term lease bligatins Stckhlder s Equity (Owner s Equity) - wner's wnership (equity) in the business, r the amunt f the business assets wned by the business wners. Anther way t lk at this cncept is t say that wner's equity in a business is the amunt the wner has invested in the business minus any mney the wner has taken ut f the business in the frm f a draw (nt as salary) Paid-in-Capital- the amunt f capital "paid in" by investrs during cmmn r preferred stck issuances, including the par value f the shares (stake) themselves

7 Retained Earnings- the percentage f net earnings nt paid ut as dividends, but retained by the cmpany t be reinvested in its cre business, r t pay debt. It is recrded under sharehlders' equity n the balance sheet. The frmula calculates retained earnings by adding net incme t, r subtracting any net lsses frm, beginning retained earnings, and subtracting any dividends paid t sharehlders Accumulated ther Cmprehensive Incme- a general ledger accunt that is classified within the equity sectin f the balance sheet. It is used t accumulate unrealized gains and unrealized lsses n thse line items in the incme statement that are classified within the ther cmprehensive incme categry

8 Cash Flw Statement American Je's Breath f Life- Cash Flw Statement Fiscal year ends in December TTM Cash Flws Frm Operating Activities Net incme Depreciatin & amrtizatin Amrtizatin f debt discunt/premium and issuance csts Investment/asset impairment charges Deferred incme taxes (Gain) Lss frm discntinued peratins Extrardinary items Accunts receivable Inventry Accunts payable Accrued liabilities Incme taxes payable Other wrking capital Other nn-cash items Net cash prvided by perating activities Cash Flws Frm Investing Activities Investments in prperty, plant, and equipment Prperty, plant, and equipment reductins Acquisitins, net Other investing activities Net cash used fr investing activities Cash Flws Frm Financing Activities Debt issued Debt repayment Other financing activities Net cash prvided by (used fr) financing activities Cash at beginning f perid Net change in cash Cash at end f perid Free Cash Flw Operating cash flw Capital expenditure Free cash flw This balance sheet prvides past years infrmatin, current infrmatin, and prjected infrmatin t allw a business t be able t see hw they have perfrmed ver the years. Since yu d nt have all the accunts that publically listed cmpanies include int their financial statements, yur financials will lk much cleaner and easier t use. If yu are nt quite clear n what the accunts are that are used in a financial statement then hpefully we can give that a little mre clarificatin Operating Activities- these are the cmpany's cre business activities, such as manufacturing, distributing, marketing and selling a prduct r service. Operating activities shuld generally prvide the majrity f a cmpany's cash flw and largely determine whether a cmpany is prfitable Investing Activities- the secnd main categry f net cash activities listed n the statement f cash flws and cnsist f buying and selling lng-term assets and ther investments. In ther wrds, this is the net amunt f cash

9 received and paid during an accunting perid fr lng-term assets and investments Financing Activities- transactins with creditrs r investrs used t fund either cmpany peratins r expansins. These transactins are the third set f cash activities displayed n the statement f cash flws Purpse f a Rati Analysis A rati analysis is used t evaluate varius aspects f a cmpany's perating and financial perfrmance such as its efficiency, liquidity, prfitability and slvency. The trend f these ratis ver time is studied t check whether they are imprving r deterirating. Rati analysis is a useful management tl that will imprve yur understanding f financial results and trends ver time, and prvide key indicatrs f rganizatinal perfrmance. Managers will use rati analysis t pinpint strengths and weaknesses frm which strategies and initiatives can be frmed. Typically, financial analysis is used t analyze whether an entity is stable, slvent, liquid r prfitable enugh t warrant a mnetary investment. When lking at a specific cmpany, a financial analyst cnducts analysis by fcusing n the incme statement, balance sheet and cash flw statement Types f Ratis/ Analyzing yur Business with Financial Ratis Liquidity Ratis Current Rati = Current Assets/Current Liabilities The current rati helps investrs and creditrs understand the liquidity f a cmpany and hw easily that cmpany will be able t pay ff its current liabilities. This rati expresses a firm's current debt in terms f current assets. S a current

10 rati f 4 wuld mean that the cmpany has 4 times mre current assets than current liabilities. Quick Rati/Acid Test Rati = (Current Assets-Inventry)/Current Liabilities The acid test rati measures the liquidity f a cmpany by shwing its ability t pay ff its current liabilities with quick assets. If a firm has enugh quick assets t cver its ttal current liabilities, the firm will be able t pay ff its bligatins withut having t sell ff any lng-term r capital assets Net Wrking Capital/T Ttal Asset Rati Net Wrking Capital (NWC)= Current Assets-Current Liabilities NWC-t-Ttal Assets= (NWC/Ttal Assets)x100 This makes the number a percentage relating hw much f yur NWC makes up yur amunt f Ttal Assets Time Interest Earned Rati =EBIT (Earnings Befre Interest and Taxes)/Interest Expense The times interest rati is stated in numbers as ppsed t a percentage. The rati indicates hw many times a cmpany culd pay the interest with its befre tax incme, s bviusly the larger ratis are cnsidered mre favrable than smaller ratis Slvency/Financial Leverage Ratis Debt-t-Equity Rati =Ttal Liabilities/Ttal Equity Each industry has different debt t equity rati benchmarks, as sme industries tend t use mre debt financing than thers. A debt rati f.5 means that there are half as many liabilities as there is equity. In ther wrds, the assets f the cmpany are funded 2-t-1 by investrs t creditrs. This means that investrs wn 66.6 cents f every dllar f cmpany assets while creditrs nly wn 33.3 cents n the dllar.

11 A debt t equity rati f 1 wuld mean that investrs and creditrs have an equal stake in the business assets Equity Rati =Ttal Equity/Ttal Assets In general, higher equity ratis are typically favrable fr cmpanies. This is usually the case fr several reasns. Higher investment levels by sharehlders shws ptential sharehlders that the cmpany is wrth investing in since s many investrs are willing t finance the cmpany. A higher rati als shws ptential creditrs that the cmpany is mre sustainable and less risky t lend future lans Equity financing in general is much cheaper than debt financing because f the interest expenses related t debt financing. Cmpanies with higher equity ratis shuld have less financing and debt service csts than cmpanies with lwer ratis Debt Rati Efficiency Ratis =Ttal Liabilities/Ttal Assets The debt rati is shwn in decimal frmat because it calculates ttal liabilities as a percentage f ttal assets. As with many slvency ratis, a lwer ratis is mre favrable than a higher rati. A lwer debt rati usually implies a mre stable business with the ptential f lngevity because a cmpany with lwer rati als has lwer verall debt. Each industry has its wn benchmarks fr debt, but.5 is reasnable rati. The debt rati is a fundamental slvency rati because creditrs are always cncerned abut being repaid. When cmpanies brrw mre mney, their rati increases creditrs will n lnger lan them mney. Cmpanies with higher debt ratis are better ff lking t equity financing t grw their peratins Accunts Receivable Turnver

12 =Sales/Average Accunts Receivables Since the receivables turnver rati measures a business' ability t efficiently cllect its receivables, it nly makes sense that a higher rati wuld be mre favrable. Higher ratis mean that cmpanies are cllecting their receivables mre frequently thrughut the year. Fr instance, a rati f 2 means that the cmpany cllected its average receivables twice during the year. In ther wrds, this cmpany is cllecting is mney frm custmers every six mnths. Higher efficiency is favrable frm a cash flw standpint as well. If a cmpany can cllect cash frm custmers sner, it will be able t use that cash t pay bills and ther bligatins sner. Accunts receivable turnver als is an indicatin f the quality f credit sales and receivables. A cmpany with a higher rati shws that credit sales are mre likely t be cllected than a cmpany with a lwer rati. Since accunts receivable are ften psted as cllateral fr lans, quality f receivables is imprtant. Wrking Capital Rati =Current Assets/Current Liabilities Since the wrking capital rati measures current assets as a percentage f current liabilities, it wuld nly make sense that a higher rati is mre favrable. A WCR f 1 indicates the current assets equal current liabilities. A rati f 1 is usually cnsidered the middle grund. It's nt risky, but it is als nt very safe. This means that the firm wuld have t sell all f its current assets in rder t pay ff its current liabilities. Asset Turnver Rati =Net Sales/Average Ttal Assets This rati measures hw efficiently a firm uses its assets t generate sales, s a higher rati is always mre favrable. Higher turnver ratis mean the cmpany is using its assets mre efficiently. Lwer ratis mean that the cmpany isn't

13 using its assets efficiently and mst likely have management r prductin prblems. Fr instance, a rati f 1 means that the net sales f a cmpany equals the average ttal assets fr the year. In ther wrds, the cmpany is generating 1 dllar f sales fr every dllar invested in assets. Inventry Rati =Cst f Gds Sld/Average Inventry Inventry turnver is a measure f hw efficiently a cmpany can cntrl its merchandise, s it is imprtant t have a high turn. This shws the cmpany des nt verspend by buying t much inventry and wastes resurces by string nnsalable inventry. It als shws that the cmpany can effectively sell the inventry it buys. This measurement als shws investrs hw liquid a cmpany's inventry is. Think abut it. Inventry is ne f the biggest assets a retailer reprts n its balance sheet. If this inventry can't be sld, it is wrthless t the cmpany. This measurement shws hw easily a cmpany can turn its inventry int cash Days sales in Inventry Prfitability Ratis =365/Inventry Turnver The days sales in inventry is a key cmpnent in a cmpany's inventry management. Inventry is expensive fr a cmpany t keep, maintain, and stre. Cmpanies als have t be wrried abut prtecting inventry frm theft and bslescence. Management wants t make sure its inventry mves as fast as pssible t minimize these csts and t increase cash flws. Remember the lnger the inventry sits n the shelves, the lnger the cmpany's cash can't be used fr ther peratins. Grss Margin Rati

14 =Grss Margin/Net Sales Grss margin rati is a prfitability rati that measures hw prfitable a cmpany can sell its inventry. It nly makes sense that higher ratis are mre favrable. Higher ratis mean the cmpany is selling their inventry at a higher prfit percentage. High ratis can typically be achieved by tw ways. One way is t buy inventry very cheap. If retailers can get a big purchase discunt when they buy their inventry frm the manufacturer r whlesaler, their grss margin will be higher because their csts are dwn Prfit Margin =Net Incme/Net Sales The prfit margin rati directly measures what percentage f sales is made up f net incme. In ther wrds, it measures hw much prfits are prduced at a certain level f sales. This rati als indirectly measures hw well a cmpany manages its expenses relative t its net sales. That is why cmpanies strive t achieve higher ratis. They can d this by either generating mre revenues why keeping expenses cnstant r keep revenues cnstant and lwer expenses Return n Assets (ROA) =Net Incme/Ttal Assets The return n assets rati measures hw effectively a cmpany can earn a return n its investment in assets. In ther wrds, ROA shws hw efficiently a cmpany can cnvert the mney used t purchase assets int net incme r prfits. Since all assets are either funded by equity r debt, sme investrs try t disregard the csts f acquiring the assets in the return calculatin by adding back interest expense in the frmula. Return n Equity (ROE) =Net Incme/Ttal Equity

15 Return n equity measures hw efficiently a firm can use the mney frm sharehlders t generate prfits and grw the cmpany. Unlike ther return n investment ratis, ROE is a prfitability rati frm the investr's pint f view nt the cmpany. In ther wrds, this rati calculates hw much mney is made based n the investrs' investment in the cmpany, nt the cmpany's investment in assets r smething else. That being said, investrs want t see a high return n equity rati because this indicates that the cmpany is using its investrs' funds effectively. Higher ratis are almst always better than lwer ratis, but have t be cmpared t ther cmpanies' ratis in the industry. Since every industry has different levels f investrs and incme, ROE can't be used t cmpare cmpanies utside f their industries very effectively.

16 Understanding the Rati Analysis Rati Analysis Stck Ticker: Cmpany Name: Industry/Sectr: Date f Analysis: - American Je's Breath f Life - 5/25/2017 Measure Avg 3-yr Avg 5-yr Liquidity Ratis Current Rati Quick Rati Efficiency Ratis Inventry Turnver Accts Rec. Turnver Average Cllectin Perid Fixed Asset Turnver NA NA NA NA NA NA NA Ttal Asset Turnver NA NA NA NA NA NA NA Leverage Ratis Ttal Liabilities t Assets 194.2% 194.2% -87.3% -31.3% -19.6% -46.1% 50.0% Lng-term Debt Rati 97.1% 97.1% -77.8% -29.7% -18.6% -42.0% 13.6% Ttal Debt t Equity NA NA -46.6% -23.8% -16.4% -28.9% NA LTD t Equity NA NA -41.5% -22.6% -15.6% -26.6% NA Equity Multiplier NA NA NA Cverage Ratis Times Interest Earned Cash Cverage Rati Prfitability Ratis Grss Prfit Margin 100.0% 100.0% 42.4% 84.1% 84.1% 70.2% 82.1% Operating Prfit Margin 100.0% 100.0% % % % % -96.4% Net Prfit Margin -50.0% -50.0% % % % % % Return n Assets -48.5% -48.5% 140.0% 59.7% 37.4% 79.0% 28.0% Return n Equity #DIV/0! #DIV/0! 74.7% 45.5% 31.3% 50.5% #DIV/0! Yu can design t make yur Rati Analysis hwever yu like/prefer, but t give yu a better understanding were ging t explain the ne that is prvided in ur rati analysis. Since yur cmpany is smaller than publically listed cmpanies, yu will nt have t wrry abut the Ticker Symbl r the Industry/Sectr As yu can see in this Rati Analysis, sme f the calculatins are represented as number r percentages. Typically when there is just a number, it means it is ###x. Or fr a better sense f what it is, let s take a lk at the Current Rati fr the year f This number is 1.03, r 1.03x, meaning that if yu were t multiply the ttal amunt f current liabilities by 1.03 yu wuld get the amunt f current assets fr that year. By lking at the equatins fr yur ratis, yu can better understand hw that thinking applies t the ther number displayed in the rati analysis.

17 If yu see things like NA r #DIV/0, that means that yu d nt have any numbers listed fr the accunt it uses, r yu are trying t divide a number by 0 (which desn t wrk) T fix that, lk back at yur financial statements and fill in the missing numbers if yu frgt, r if there are n numbers t input then dn t wrry abut that rati! Understanding the Graphs Incme Statement Results revenue is prfit. This graph shws yu hw yur revenue, net incme, and prfit margin have changed ver the years depicted in yur rati analysis. This style f graph is a bar graph with the year n the X- Axis (hrizntal) and the dllar value and percentage n the Y- Axis (vertical). This als shws yu yur prfit margin (the red line), t indicate what percentage f Frm this graph yu can see that the revenue has increased steadily year-veryear but when we lk at the net incme and see it fluctuating, this culd mean ur expenses are fluctuating. Yu culd then lk at yur expenses and try t find what has changed ver the years.

18 Balance Sheet Results This graph shws the results f the balance sheet by shwing yu the amunt f Ttal Assets (Green), the amunt f Ttal Liabilities (Yellw), and yur Ttal Liabilities t Assets. This graph s axis are similar t the previus ne. This helps yu visualize the amunt f assets and liabilities yur business has s yu can see if they are increasing r decreasing year-ver-year. The red line indicates what percentage yur ttal liabilities are cmpared t the amunt f ttal assets. Here yu can see in the first year that there were mre liabilities than assets, shw visibly by the graph and by the Ttal Liabilities t Assets line. Margins Yur margins graph is a little different frm the first tw. Here a line graph is used instead f a bar t depict hw the percentages have changed yearver-year. T re-cap what each f these margins mean; Grss PM= Grss Prfit/Revenue Net PM= Net Prfit/Revenue Operating PM= Operating Incme/Revenue

19 This graph helps yu see what percentage f yur revenue each f the different prfits are. This will help visually see yur prfit margins year-veryear. As yu can see in the graph abve, the GPM is fairly steady and slwly increasing ver the years. But when we lk at the NPM and OPM we can see that dissnance started in 2016 as the spread became much larger. T understand why, yu wuld have t lk at yur financial statements t see what was taking away frm prfits. With the idea f hw t use and interpret these graphs in mind, yu shuld be able t understand ther graphs by piecing tgether what cmpnents they were cmpsed f. We hpe that this handut will help yu better understand yur financials, hw t read, and interpret them.