Evaluating a Firm s Financial Performance

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1 Modul ke: Manajemen Keuangan Evaluating a Firm s Financial Performance Fakultas EKONOMI & BISNIS Hidayat Wiweko,S.E.,M.Si. Program Studi Manajemen

2 MODUL 3 : Financial Statement Analysis Are our decisions maximizing shareholder wealth?

3 We will want to answer questions about the firm s Liquidity Efficient use of Assets Leverage (financing) Profitability

4 We will want to answer questions about the firm s Liquidity Efficient use of Assets Leverage (financing) Profitability

We can compare a company compare a company s financial ratios with

5 Financial Ratios Tools that help us determine the financial health of a company. We can compare a company compare a company s financial ratios with its ratios in previous years (trend analysis). We can compare a company s p financial ratios with those of its industry.

6 Example: CyberDragon Corporation

CyberDragon s Balance Sheet ($000) Assets: Liabilities & Equity: Cash $2,540 Accounts payable 9,721 Marketable securities 1,800 Notes payable 8,500 Accounts

liabilitiesliabilities 25,523 Plant and equipment 43,100 Long term debt (bonds) 22,000 less accum deprec. 11,400 Total liabilities 47,523 Nt Net plant & equip.

7 CyberDragon s Balance Sheet ($000) Assets: Liabilities & Equity: Cash $2,540 Accounts payable 9,721 Marketable securities 1,800 Notes payable 8,500 Accounts receivable 18,320 Accrued taxes payable 3,200 Inventories 27,530 Other current liabilities 4,102 Total current assets assets 50,190 Totalcurrent Total current liabilitiesliabilities 25,523 Plant and equipment 43,100 Long term debt (bonds) 22,000 less accum deprec. 11,400 Total liabilities 47,523 Nt Net plant & equip. t& 31,700 Common stock ($10 par) 13,000 Total assets 81,890 Paid in capital 10,000 Retained earnings 11,367 Total stockholders' equity 34,367 Total liabilities & equity 81,890

8 CyberDragon s Income Statement

9 CyberDragon Other Information

10 1. Liquidity Ratios Do we have enough liquid assets to meet approaching obligations?

11 What is CyberDragon CyberDragon s Current Ratio?

12 What is CyberDragon CyberDragon s Current Ratio? 50,190 25,523 = 1.97

13 What is CyberDragon CyberDragon s Current Ratio? 50,190 25, =197 = 1.97 If the average current ratio for the industry is 2.4, is this good or not? i 24 i thi d t?

14 What is the firm the firm s Acid Test Ratio?

15 What is the firm the firm s Acid Test Ratio? 50,190 27,530 25,523 =.89

16 What is the firm the firm s Acid Test Ratio? 50,190 27,530 25,523 =.89 Suppose the industry average is.92. What does this tell us?

17 What is the firm s Average Collection Period?

18 What is the firm s Average Collection Period? 18, ,760/365 = 59.3 days

19 What is the firm s Average Collection Period? 18, ,760/365 = 59.3 days If the industry average is 47 days, t i d what does this tell us?

20 2. Operating Efficiency Ratios Measure how efficiently the firm efficiently the firm s assets generate operating profits.

21 What is the firm s Operating Income Return on Investment (OIROI)?

22 What is the firm s Operating Income Return on Investment (OIROI)? 11,520 81,890 = 14.07%

23 What is the firm s Operating Income Return on Investment (OIROI)? 11,520 81,890 = 14.07% Slightly below the industry average of 15%.

24 What is the firm s Operating Income Return on Investment (OIROI)? 11,520 81,890 = 14.07% Slightly below the industry average of 15%. The OIROI reflects product pricing and the firm s ability to keep costs down.

25 What is their Operating Profit Margin? their

26 What is their Operating Profit Margin? their 11, ,760 = 10.22%

27 What is their Operating Profit Margin? their 11, ,760 = 10.22% This is below the industry average of 12%.

28 What is their Total Asset Turnover? their Turnover?

29 What is their Total Asset Turnover? their Turnover? 112,760 81,890 = 1.38 times

30 What is their Total Asset Turnover? their Turnover? 112,760 81,890 = 1.38 times The industry average is 1.82 times. The firm needs to figure out how to squeeze more sales dollars out of its assets.

31 What is the firm s Accounts Receivable Turnover?

32 What is the firm s Accounts Receivable Turnover? 112,760 18,320 = 6.16 times

33 What is the firm s Accounts Receivable Turnover? 112,760 18,320 = 6.16 times CyberDragon turns their A/R over 6.16 times per year. The industry average is 8.2 times. Is this efficient?

34 What is the firm the firm s Inventory Turnover?

35 What is the firm the firm s Inventory Turnover? 85,300 27,530 = 3.10 times

36 What is the firm the firm s Inventory Turnover? 85,300 27,530 = 3.10 times CyberDragon turns their inventory over 3.1 times per year. The industry average is 3.9 times. Is this efficient?

37 Low inventory turnover: The firm may have too much may have much inventory, which is expensive because: Inventory takes up costly t tl warehouse space. Some items may become spoiled or obsolete.

38 What is the firm s Fixed Asset Turnover?

39 What is the firm s Fixed Asset Turnover? 112,760 31,700 = 3.56 times

40 What is the firm s Fixed Asset Turnover? 112,760 31,700 = 3.56 times If the industry average is 4.6 times, what does this tell us about CyberDragon?

41 3. Leverage Ratios (financing decisions) Measure the impact of using debt capital to finance assets. Firms use debt to lever (increase) returns on common equity. equity.

42 How does Leverage work? Suppose we have an all equity financed firm worth $100,000. Its earnings this year total $15,000. total ROE = (ignore taxes for this example)

43 How does Leverage work? Suppose we have an all equity financed firm worth $100,000. Its earnings this year total $15,000. total 15,000 ROE = = 15% = 100,000

44 How does Leverage work? Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds). Earnings are still are still $15,000. ROE =

45 How does Leverage work? Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds). Earnings are still are still $15, ,000 4,000 ROE = = 50,000

46 How does Leverage work? Suppose the same $100,000 firm is financed with half equity, and half 8% debt (bonds). Earnings are still are still $15, ,000 4,000 ROE = = 22% 50,000

47 What is CyberDragon CyberDragon s Debt Ratio?

48 What is CyberDragon CyberDragon s Debt Ratio? 47,523 81,890 = 58%

49 What is CyberDragon CyberDragon s Debt Ratio? 47,523 81,890 = 58% If the industry average is 47% what If the industry average is 47%, what does this tell us?

50 What is CyberDragon CyberDragon s Debt Ratio? 47,523 81,890 = 58% If the industry average is 47%, is what does this tell us? Can leverage make the firm more profitable? Can leverage make the firm riskier?

51 What is the firm s Times Interest Earned Ratio?

52 What is the firm s Times Interest Earned Ratio? 11,520 3,160 = 3.65 times

53 What is the firm s Times Interest Earned Ratio? 11,520 3,160 = 3.65 times The industry average is 6.7 times. This is further evidence that the firm uses evidence that firm uses more debt financing than average.

54 4. Return on Equity How well are the firm s managers maximizing shareholder wealth?

55 What is CyberDragon s Return on Equity (ROE)?

56 What is CyberDragon s Return on Equity (ROE)? 5,016 34,367 = 14.6%

57 What is CyberDragon s Return on Equity (ROE)? 5,016 34,367 = 14.6% The industry average is 17.54%.

58 What is CyberDragon s Return on Equity (ROE)? 5,016 34,367 = 14.6% The industry average is 17.54%. Is this what we would expect, given the firm s leverage?

59 Conclusion: Even though CyberDragon has higher leverage than the industry g average, they are much less efficient, and therefore, less therefore profitable.

60 The DuPont Model Brings together: Profitability Efficiency Leverage

61 The DuPont Model Net Profit Total Asset Debt Margin Turnover Ratio ROE = x / (1 /( )

62 The DuPont Model Net Profit Total Asset Debt Margin Turnover Ratio ROE = x / (1 /( ) = x /(1 Net Income Sales Total Debt) Sales Total Assets Total Assets

63 The DuPont Model Net Profit Total Asset Debt Margin Turnover Ratio ROE = x / (1 /( ) = x /(1 Net Income Sales Total Debt) Sales Total Assets Total Assets 5, ,760 47, ,760 81,890 81,890 = x / (1 /(1 )

64 The DuPont Model Net Profit Total Asset Debt Margin Turnover Ratio ROE = x / (1 /( ) = x /(1 Net Income Sales Total Debt) Sales Total Assets Total Assets 5, ,760 47, ,760 81,890 81,890 = x / (1 /(1 ) = 14.6%

65 Terima Kasih Hidayat Wiweko,S.E.,M.Si.

Pengertian Laporan Keuangan, Pajak dan Arus Kas

Modul ke: Manajemen Keuangan Pengertian Laporan Keuangan, Pajak dan Arus Kas Fakultas EKONOMI & BISNIS Hidayat Wiweko,S.E.,M.Si. Program Studi Manajemen MODUL 2: Pengertian Laporan Keuangan, Pajak dan