Download 2-4 Financial Analysis-

CUBIC 2012
Section 2
Fundamentals of Finance
Bob Donchez
Question
(2.0)
After completing the CUBIC accounting
module, describe your opinion regarding
knowledge of financial statements:
A. I am very comfortable with them
B. I have a general understanding but lack details
C. I saw much, but retained little
Question
(2.1)
“A statement of assets, liabilities, and net
worth at a point in time” best describes
what?
A.
B.
C.
D.
The income statement
The balance sheet
The statement of cash flows
The reconciled balance position
2-0 Financial Statements and Analysis
Topics
2-1
2-2
2-3
2-4
2-5
Balance Sheet
Income Statement
Cash Flows
Financial Analysis—Ratios
Case #1: Financial Analysis: Chipotle Mexican
Grill, Inc.
Financial Statements and Analysis
2-1 Balance Sheet
What is owned, what is owed, and the difference (equity) at
a specific point in time
• Assets
– Current Assets
– Long Term (Fixed) Assets
• Liabilities
– Current Liabilities
– Long Term Liabilities
• Equity/Net Worth
Balance Sheet Identity:
Total Assets = Total Liabilities + Shareholder Equity
Financial Statements and Analysis
2-1 Balance Sheet
Chipotle Mexican Grill, Inc.
Balance Sheet
as of December 31, 2010 ($000)
Assets
Cash
Accounts Receivable
Inventory & Other CA
Current Assets
Fixed Assets
Total Assets
Liabilities & Stockholders’ Equity
$ 224 Accts Payable & Accruals
$ 123
6 Notes Payable
0
176
Current Liabilities
123
406
Long-term liabilities
188
716
Common Stock
Retained Earnings
Treasury Stock
Total Equity
$ 1,122 Total Liabilities & SH Equity
595
457
- 241
811
$1,122
Financial Statements and Analysis
2-2 Income Statement
Money made, expenses incurred, and the difference (profit)
over a specified period of time
• Accrual versus Cash Accounting
• Revenue
• Expenses
• Variable, direct, COGS
• Fixed, overhead, SGA
• Depreciation
•
•
•
•
Earning before interest and tax (EBIT)
Interest
Taxes
Net Income
Financial Statements and Analysis
2-2 Income Statement
Chipotle Mexican Grill, Inc.
Income Statement
January 1, 2010 to December 31, 2010
Sales
$ 1,836
-Cost of sales
1,347
-General and admin expenses
132
-Depreciation
69
-Total operating expenses
1,548
=Earnings before interest and taxes (EBIT)
$288
-Interest paid (earned)
-1
=Taxable income (earnings before tax—EBT)
-Taxes
=Net income
$289
110
$179
Dividends
Addition to retained earnings
$0
$179
Financial Statements and Analysis
2-3 Cash Flows
Operating Cash Flow
• OCF = EBIT + Depreciation – Tax
Financial Statements and Analysis
2-3 Cash Flows
Other Cash Flow Measures:
Capital Spending
• CAPX = Fixed Assets(1) – Fixed Assets(0) +
Depreciation
Change in Net Working Capital
• CNWC = NWC(1) – NWC(0)
(NWC = current assets – current liabilities)
Putting it Together: Free Cash Flow (CF from Assets)
• OCF - CAPX - CNWC
Financial Statements and Analysis
2-3 Cash Flows
On-line resource on financial statements:
http://www.baruch.cuny.edu/tutorials/statements
Question
(2.4.1)
Company ABC made $1.0 million profit in
2010 and $1.2 million in 2011. The 2011
result is:
A. Clearly good relative to 2010
B. Clearly bad relative to 2010
C. Really depends….
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
Ratio Analysis
• Introduction to Ratios
• Categories of Ratios
– Common sized statements
– Short term Solvency/Liquidity
– Long term Solvency/Leverage
• Debt
• Coverage
– Profitability
– Market
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
Putting it all together:
• Trend and Comparison Analysis
• The DuPont Framework
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Common Size Statements
– Income Statement
• State all items as percent of sales
– Balance Sheet
• State all items as a percent of total assets
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Common Size Statements—Balance Sheet: Chipotle 2010
Current Assets
Cash & ST Invest
2010
%
350 31.2%
Current Liabilities
Accounts Payable
Notes Payable
Accounts rec.
6 0.5%
Inventory
7 0.6%
Long-term liabilities
Other CA
44 3.9%
Long term debt
Total current assets
407 36.3%
Fixed assets
Total current liabilities
Other LT liabilities
Total LT liabilities
Total Liabilities
2010
%
123 11.0%
0 0.0%
123 11.0%
0 0.0%
188 16.8%
188 16.8%
311 27.7%
Net PP&E
677 60.3%
Shareholder Equity
Goodwill
22 2.0%
Common stock
595 53.0%
Other assets
16 1.4%
Retained earnings
457 40.7%
Total fixed assets
Total Assets
715 63.7%
1,122 100.0%
Treasury stock
-241 -21.5%
Total Equity
811 72.3%
Total L&E
1,122 100.0%
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Common Size Statements—Income Statement 2010
Chipotle Mexican Grill
Sales
Operating costs
2010
$
%
1,836
1,346
73.3%
133
7.2%
69
3.8%
288
15.7%
(1)
-0.1%
Taxable income
289
15.7%
Taxes (40%)
110
6.0%
Net income
179
9.7%
General and admin
Depreciation
EBIT
Interest
Question
(2.4.2)
Company ABC has total assets of $10 million,
revenue of $12 million, and current assets of $2
million. What is the common size percentage of
current assets?
A.
B.
C.
D.
E.
14.0%
16.7%
20.0%
24.0%
36.0%
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Short Term Solvency Ratios: firm’s ability to meet short
term obligations with short term assets.
– Current Ratio
– Quick Ratio
 Current Assets
Current Liabilities
 Current Assets  Inventory
Current Liabilities
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Long Term Solvency/Debt Ratios: how much debt the firm
has relative to size.
– Total Debt Ratio
 Total Liabilities
Total Assets
– Debt to Equity Ratio
 Total Debt
Total Equity
– Equity Multiplier (Leverage Factor)
 Total Assets
Total Equity
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Long Term Solvency/Coverage Ratios: how well the
firm’s profit “covers” its debt obligations.
EBIT
– Times Interest Earned  Interest
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Asset Management/Efficiency Ratios: how well the firm’s
assets generate sales.
– Total Asset Turnover

Sales
Total Assets
– Inventory Turnover

Sales
Inventory
– Accounts Receivable Turnover

Sales
Accounts Receivable
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Profitability: how much profit the firm has relative to size.
– Profit Margin
 Net Income
Sales
– Return on Assets
– Return on Equity
 Net Income
Total Assets
 Net Income
Total Equity
Question (2.4.3)
Calculate equity multiplier, given the following
information:
Total debt = $35,000
Equity = $15,000
A.
B.
C.
D.
E.
Net income = $10,000
Revenue = $55,000
.18
.27
2.33
3.33
Can’t be calculated with info provided
Question (2.4.4)
Calculate return on assets, given the following
information:
Total debt = $35,000
Net income = $10,000
Equity = $15,000
Revenue = $55,000
A.
B.
C.
D.
E.
18%
20%
25%
67%
Can’t be calculated with info provided
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
• Market Value Measures: ratios utilizing market prices.
Price per share
– Price Earnings (PE) Ratio  Earnings
per share
– Example: Dell Computer
• Earnings per share = $ 1.88
• Price per share = $ 16.85
• PE Ratio = 16.85 / 1.88 = 8.96x
Question (2.4.5)
Compute the 2011 PE multiple for Chipotle.
Net income = $215 M
Shares outstanding = 31.2 M shares
End of 2011 stock price = $338
A.
B.
C.
D.
E.
4.8
6.9
11.9
49.1
Can’t be calculated with info provided
Question (2.4.6)
What ratio category do you think lenders
would be most interested in?
A.
B.
C.
D.
E.
Short term liquidity
Long term solvency (debt and coverage)
Asset management/efficiency
Profit
Market
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
Ratio Analysis
• The DuPont Framework
Sales
ROE  Net Income 
 Total Assets
Total Assets Total Equity
Sales
ROE  Profit Margin  Total Asset Turnover  Equity Multiplier
Financial Statements and Analysis
2-4 Financial Analysis--Ratios
Ratio Analysis
• The DuPont Framework
Sales
ROE  Net Income 
 Total Assets
Total Assets Total Equity
Sales
ROE  Profit Margin  Total Asset Turnover  Equity Multiplier
Financial Statements and Analysis
2-4 Financial Analysis—Ratios
Ratio Analysis
• Issues/Drawback in Ratio Analysis
–
–
–
–
Book values (past) versus market values (present)
How close are comparisons
Only as good as reported
Must look “behind” the numbers
On-line resources for financial statements and ratios :
http://finance.yahoo.com
http://moneycentral.msn.com
Financial Statements and Analysis
2-5 Financial Analysis Case:
Chopotle Mexican Grill, Inc
Tasks for Case Preparation
• Case Review
• case information
• case spreadsheet
• case questions
• Teams prepare and discuss case numbers
• Teams address case questions
• Class discussion
Link to Case Information
Link to Case Spreadsheet