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Analysis of financial statements
Exercise 4
BASIC TOOLS AND TECHNIQUES OF
FINANCIAL STATEMENT ANALYSIS
Basic tools and techniques of
financial statement analysis



HORISONTAL ANALYSIS (__________ financial
statements)
VERTICAL ANALYSIS( __________ financial
statements)
RATIO ANALYSIS (_______ ratio, ratio ________,
__________ of ratios and s_________ ratio)
2
PRINCIPAL TOOLS AND TECHNIQUES OF
FINANCIAL STATEMENT ANALYSIS
COMPARATIVE
FINANCIAL STATEMENTS
HORISONTAL
ANALYSIS
STRUCTURAL
FINANCIAL STATEMENTS
VERTICAL
ANALYSIS
RATIO ANALYSIS
SINGLE RATIO
RATIO BLOCKS
SYSTEM OF RATIOS
SINTETIC RATIOS
3
4

VERTICAL ANALYSIS( structural financial statements –
common-size financial statements)




balance sheet (items as a % total assets)
income statement (items as a % of total income – net sales)
Cash flow statements (items as a % of total inflows)
Comparison with similar companies - financial results are often
affected by industry and economy wide factors
THE STRUCTURE OF ASSETS
5
20x1.
39%
61%
Noncurrent assets
Current assets
20x2.
43%
57%
Noncurrent assets
Current assets
THE STRUCTURE OF SOURCES OF
ASSETS
6
20X1.
39%
40%
Equity and reserves
Long term debt
21%
Current liabilities
20X2.
34%
41%
Equity and reserves
Long term debt
25%
Current liabilities
THE STRUCTURE OF INCOME
/EXPENSES
7
20X2.
20X1
0%
1%
0%
2%
Operating revenues
Operating revenues
Financial revenues
Financial revenues
Extraordinary revenues
98%
Extraordinary revenues
99%
20X1.
20X2.
6% 0%
7% 1%
Operating expenses
94%
Financial expenses
Operating expenses
Extraordinary expenses
Financial expenses
92%
Extraordinary expenses
8
HORISONTAL ANALYSIS (comparative
financial statements)



Information on a single company is compared over time
For example, key measure of performance is the change in sales
volume each year….
FINANCIAL RATIO ANALYSIS
9

Single ratio

Ratio blocks

System of ratio

Synthetic ratios
SINGLE RATIO
10




Express an mathematical relationship between one quantity and
another
For example (current assets/ current liabilities)
Ratio must have be significant and measure a business position
or/and performance
For example, liquidity, profitability etc.
RATIO BLOCKS
11
_______ ratios
_______ ratios
 _______ ratios
 _______ ratios
 ________ ratios
 _________ ratios

RATIO BLOCKS
12
Liquidity ratios
Solvency ratios
 Activity ratios
 Economy ratios
 Profitability ratios
 Investment ratios

FINANCIAL
__________
(“SAFTEY” OF BUSINESS)
FINANCIAL
____________
RATIO BLOCKS
13
Liquidity ratios
Solvency ratios
 Activity ratios
 Economy ratios
 Profitability ratios
 Investment ratios

FINANCIAL
POSITION (“SAFTEY” OF
BUSINESS)
FINANCIAL
PERFORMANCE
LIQUIDTY RATIOS
14
CASH TO CURRENT LIABILITIES RATIO=
CASH
CURRENT LIABILITIES
CASH + CASH EQUIVALENTS + ACCOUNTS RECEIVABLES
ACID –TEST RATIO (QUICK RATIS) =
CURRENT RATIO =
FINANCIAL STABILITY RATIO =
CURRENT LIABILITIES
CURRENT ASSETS
CURRENT LIABILITIES
NONCURRENT ASSETS
EQUITY + NONCURRENT LIABILITIES
LIQUDITY RATIOS
EQUITY
NONCURRENT
NONCURRENT
ASSETS
ASSETS
FINANCIAL STABILITY
RATIO
<1
NONCURRENT
NONCURRENT
LIABILITIES
LIABILITIES
CURRENT
CURRENT
ASSETS
ASSETS
CURRENT
CURRENT
LIABILITIES
LIABILITIES
15
CURRENT RATIO
>2
WORKING CAPITAL
WORKING CAPITAL = CA- CL

E
NCA
“Golden rules of financing”
NCL
WORKING CAPITAL
CA
CL
16
Golden rules of financing
17
1.
Long-term assets → long term sources
2.
Short-term assets → short-term sources
3.
One part of short-term assets → long-term sources
(working capital)
Assess the liquidity of the following
companies?
18
COMPANY “A”
COMPANY “B”
Current assets
400.000
900.000
Current liabilities
200.000
700.000
200.000
200.000
Working
capital
Assess the liquidity of the following
companies?
19
COMPANY “A”
COMPANY “B”
Current assets
400.000
900.000
Current liabilities
200.000
700.000
Working capital
200.000
200.000
2,00
1,28
CURRENT
RATIO
Assess the liquidity of the following
company
LIQUIDITY RATIOS
Cash to current liabilities ratio
Current ratio
Financial stability ratio
Working capital
Does the company currently
have the resources to pay short
term debt?
20x1.
20x2.
20x3.
2,20
1,69
2,24
3,30
2,87
3,29
0,65
0,69
0,67
4.387.000 3.637.000 3.782.000
Analysing the impact of selected
transactions on the current ratio

For each of the following event, state whether the
 current ratio and
 working capital will increase or decrease.
Assume the following transactions
were completed
22

Declared but not pay dividendds of 50,000 euro.

(CR decrease, WC decrease)

Money borrowed from a bank (long term debt) in the amount od
11,000 euro.

(CR increase , WC increase)

Reclassified 30,000 euro of long term debt as short term liability.

(CR decrease, WC decrease)
CURRENT RATIO
23
CURRENT
RATIO
1,08
2,56
This financial information pertains to the following companies:
a) Manufacturing company
b) Merchandising company (retail, wholesale)
Task: Match each company with its financial information
CURRENT RATIO
24
CURRENT RATIO
MERCHANDISING
COMPANY
MANUFACTORING
COMPANY
1,08
2,05
This financial information belongs to the following companies:
a) Manufacturing company
b) Merchandising company
Task: Match each company with its financial information
25



Before calculating the current ratio, the accounts receivable
turnover and total assets turnover should be computed (calculated).
The higher the total assets turnover ratio and accounts receivable
turnover ratio the company requires less working capital and lower
current ratio.
The longer the operating cycle company requires the higer the
working capital level and current ratio.
FEATURES THAT INFLUENCE
LIQUIDITY RATIO




_____________ TYPE ( bread manufacturing, ship manufacturing,
technical equipment)
THE ________ OF _________ (structure of current and the
structure of total assets)
THE STRUCTURE OF __________ (the structure of current and
total liabilities)
__________ RATIOS AND ___________ PERIOD( total assets
turnover and accounts receivable turnover – days to collect
receivables)
26
FEATURES THAT INFLUENCE
LIQUIDITY RATIO




INDUSTRY TYPE ( bread manufacturing, ship manufacturing,
technical equipment)
THE STRUCTURE OF ASSETS (structure of current and the
structure of total assets)
THE STRUCTURE OF LIABILITIES (the structure of current and
total liabilities)
TURNOVER RATIOS AND CONVERSION PERIOD( total assets
turnover and accounts receivable turnover – days to collect
receivables)
27
SOLVENCY (LEVERAGE) RATIOS
LIABILITIES (DEBT) TO ASSETS RATIO
EQUITY TO ASSETS RATIO
=
TIMES INTEREST EARNED =
DEBT FACTOR =
28COVERAGE
LEVEL II=
=
TOTAL LAIBILITIES (DEBT)
TOTAL ASSETS
EQUITY
TOTAL ASSETS
INCOME BEFORE TAX+ INTEREST
INTEREST
TOTAL LIABILITIES
RETAINED EARNINGS + DEPRECIATION
EQUITY+ NONCURRENT LIABILITIES
NONCURRENT ASSETS
Solvency (leverage) ratios
29



Balance sheet (indebtedness from balance sheet)
 _______________________
 _______________________
Profit and loss account (indebtedness from profit and loss account)
 _______________________
 _______________________
Coverage level II– liquidity vs solvency
Solvency (leverage) ratios
30



Balance sheet (indebtedness from balance sheet)
 Liabilities (debt) to assets ratio
 Equity to assets ratio
Profit and loss account (indebtedness from profit and loss account)
 Times interest earned
 Debt factor
Coverage level II– liquidity vs solvency
Solvency (leverage) ratios
31





Companies can finance their assets with equity and debt
The higher the proportion of assets financed by debt the higher is
debt/assets ratio
The higher the proportion of assets financed by equity the lower
the ratio
An increasing ratio over time signals reliance on debt financing and
more risk
Debt financing is riskier then financing with equity because interest
payments on debt must be made every period (they are legal
obligation, whereas dividends on stock can be postponed)
Give the implications and limitations of each financial
ratio separately and then evaluate the collective
influence that could be drawn from them about longterm debt position of this company.
FINANCIAL
RATIO
Times
interest
earned
Debt to
assets ratio
Equity to
assets ratio
32
20x1.
20x2.
20x3.
5.5
6.0
8.2
40%
39%
40%
?
?
?
Give the implications and limitations of each financial
ratio separately and then evaluate the collective
influence that could be drawn from them about longterm debt position of this company.
FINANCIAL
RATIO
Times
interest
earned
Debt to
assets ratio
Equity to
assets ratio
33
20x1.
20x2.
20x3.
5.5.
6.0
8.2
40%
39%
40%
60%
61%
60%
Times interest earned
34



A high time interested earned is viewed more favorably the a low
one.
This ratio shows the amount of profits generated for each unit of
interest expense
Analyst are interested in a company’s ability to meet its required
interest payments because failure to do so can result in bankruptcy
Assess the indebtedness of the
company
35
FINANCIAL
RATIO
Times
interest
earned
Debt to
assets ratio
Equity to
assets ratio
20x1.
20x2.
20x3.
2.3
1.5
1.2
70%
71%
60%
Assess the indebtedness of the
company
36
FINANCIAL
RATIO
Times
interest
earned
Debt to
assets ratio
Equity to
assets ratio
20x1.
20x2.
20x3.
2.3
1.5
1.2
30%
29%
40%
70%
71%
60%
37


The company is financing its assets mostly through the
debt.
Times interest earned decreased materially over the
time.
Exercise


Indicate the effect of each of the transactions on the
ratios listed. Use + to indicate and increase, - to indicate
a decrease and 0 to indicate no effect.
Assume an initial times interest earned is more then 1
and debt ratio and debt/ equity ratio less than 1.
Individual transactions have a significant
impact on ratios
RATIO TRANSACTION
1) Declaration of cash dividend
2) Declaration and payment of stock
dividend
3) Increased profits by cutting cost of sales
4)Sale of common stock
5) Conversion of bonds to common stock
TIMES
INTEREST
EARNED
DEBT RATIO
DEBT/ASSETS
Individual transactions have a significant
impact on ratios
RATIO TRANSACTION
1) Declaration of cash dividend
2) Declaration and payment of stock
dividend
3) Increased profits by cutting cost of sales
4)Sale of common stock
5) Conversion of bonds to common stock
TIMES
INTEREST
EARNED
DEBT RATIO
DEBT/ASSETS
No effect
Increase
No effect
No effect
Increase
Decrease
No effect
Decrease
Increase
Decrease
41

“We tend to focus on assets and forget about
debts. Financial security requires facing up to
the big picture: assets minus debts”.
ACTIVITY RATIOS
42
TOTAL ASSETS TURNOVER=
SALES (TOTAL INCOME)
TOTAL ASSETS
CURRENT ASSETS TURNOVER
=
ACCOUNTS RECEIVABLE TURNOVER=
DAYS TO COLLECT RECEIVABLES=
SALES (TOTAL INCOME)
CURRENT ASSETS
SALES
RECEIVABLES
365
ACCOUNTS RECEIVABLE TUROVER
Question
43

What does the total asset turnover ratio measure in
general?
ACTIVITY RATIOS
44




How effective is management in generating sales from
assets?
Total asset turnover ratios measures the sales generated per one
unit of assets (the most important activity ratio)
A high ratio suggests that a company is managing its assets
efficiently – a low asset turnover ration signifies less efficient
management
TOTAL ASSET TURNOVER RATIO (should be at least 1)

Under the seasonal fluctuations

Relaxing credit policies for new customers or

Reducing collection efforts in accounts receivable may decrease these ratios
ACTIVITY RATIOS
45

Accounts receivable turnover – measure how many times
average trade receivables are recorded and collected during the
period

The higher the ratios the faster the collection of receivables

Days to collect receivables – measures the average time it takes
a customer to pay its accounts (depends on the industry)

The lower the ratios the shorter is the collection of receivables,

Can reduce borrowings and reduce interest expense
Calculate and explain the total asset turnover
ratio. How effective is management in generating
sales from assets (resources)?
46
Total assets
Total liabilities
Total stockholders'
equity
Sales revenue
Net income
20X1
41.000
20X2
53.000
20X3
60.000
6.000
11.000
14.000
35.000
42.000
46.000
130.000
147.000
156.000
25.000
40.000
51.000
Calculate total asset turnover ratio. What do these
results suggest to you about this company?
47
FINANCIAL RATIOS
20X1.
20X2.
20X3.
TOTAL ASSETS TURNOVER
3,17
2,77
2,6
48


Per one unit of assets company generated 3,17 units of sales
(income, revenues).
The total assets turnover ratio was very good, although it decrease
material over the time.
TOTAL ASSETS TURNOVER
49
COMPANY 1
TOTAL ASSETS
TURNOVER
1,08
COMPANY 2
2,56
COMPANY 3
0,36
COMPANY 4
1,85
This financial information belongs to the following companies:
a) Air line company (for example, Croatia Airlines, Southwest airlines),
b) Motorcycle company (for, example, Honda, Harley Davidson, etc.)
c) Beer company (for example, Bavaria, Boston Beer etc. ),
d) Pizza company ( Papa John's,Pizza Hut, Taco Bell, KFC, etc.).
Task: Match each company with its financial information
TOTAL ASSETS TURNOVER
50
TOTAL ASSETS
TURNOVER
1,08
2,56
0,36
1,85
ACCOUNTS RECEIVABLE TURNOVER
51
COMPANY 1
ACCOUNTS
RECEIVABLE
TURNOVER
3,042
COMPANY 2
6,083
COMPANY 3
12,16
COMPANY 4
18,25
Calculate days to collect receivables based on the accounts receivable
turnover data.
DAYS TO COLLECT RECEIVABLES
52
COMPANY 1
DAYS TO
COLLECT
RECEIVABLES
cca 120
COMPANY 2
cca 60
COMPANY 3
cca 30
COMPANY 4
cca 20
DAYS TO COLLECT RECEIVABLES
53
COMPANY 1
DAYS TO
COLLECT
RECEIVABLES
120
COMPANY 2
60
COMPANY 3
30
This financial information pertains to the following companies:
a) Airline company
b) Drug company
c) Travel agency
d) Car manufactorer.
Task: Match each company with its financial information
COMPANY 4
20
DAYS TO COLLECT RECEIVABLES
54
COMPANY 1
Drug
company
DAYS TO
COLLECT
RECEIVABLES
120
COMPANY 2
Car
manufacturer
60
COMPANY 3
Travel
agency
COMPANY 4
Airlines
company
30
This financial information belongs to the following companies:
a) Airlines company
b) Drug company
c) Travel agency
d) Car manufactorer.
Task: Match each company with its financial information
20
ECONOMY RATIOS
55
TOTAL ECONOMY RATIS =
TOTAL INCOME
TOTAL EXPENSE
OPERATING ECONOMY RATIO=
FINANCE ECONOMY RATIO
OPERATING INCOME
OPERATING EXPENSE
=
EXTRAORDINARY ECONOMY RATIO =
FINANCIAL INCOME
FINANCE EXPENSES
EXTRAORDINARY INCOME
EXTRAORDINARY EXPENSES
ECONOMY RATIOS
56
Structure of income and expenses in income
statement

57
Economy ratios
58
59
FINANCIAL RATIO
TOTAL ECONOMY RATIO
OPERATING ECONOMY
RATIO
20x6.
60
FINANCIAL RATIO
TOTAL ECONOMY RATIO
OPERATING ECONOMY
RATIO
20x6.
1,17
1,41
61
FINANCIAL
RATIO
TOTAL ECONOMY
RATIO
OPERATING
ECONOMY RATIO
20x1.
20x2.
62
FINANCIAL
RATIO
TOTAL ECONOMY
RATIO
OPERATING
ECONOMY RATIO
20x1.
20x2.
1,39
1,45
1,65
1,68
Pitalica
65

Total assets turnover of the Apple company is
?:
 A)
less then 1
 B) larger then 1
 C) larger then 2
 D) larger then 3
Total revenues 182.795
Cost of goods sold 112.258
Total assets 231.839
Epa 2014 =1,62
Calculate total assets turnover ratio?
Total revenues 182.795
Cost of goods sold 112.258
Total assets 231.839
Epa 2014 =1,62
Calculate total assets turnover ratio?
0,78
68
69

Operating economy ratio 20x1= 1,496
70
“All good things which exist are
the fruits of originality”.
PROFITABILITY RATIOS
NET PROFIT MARGIN =
GROSS PROFIT MARGIN=
NET INCOME+ INTEREST
TOTAL INCOME
GROSS PROFIT + INTEREST
TOTAL INCOME
NET INCOME+ INTEREST
NET RETURN ON TOTAL ASSETS (ROA) =
TOTAL ASSETS
GROSS RETURN ON TOTAL ASSETS =
71RETURN
ON EQUTY (ROE)=
GROSS INCOME + INTERESE
TOTAL ASSETS
NET INCOME
EQUITY
NET PROFIT MARGIN (1)
72




Measured how much of every sales unit generated during the
period is profit
A rising net profit margin signals more efficient management of
sales and expenses
Differences among industries result form the nature of the products
or services and the intensity of competition (example)
Financial analyst expect well-un business to maintain or improve
their net profit margin over time
NET PROFIT MARGIN (2)
73
COMPANY 1
NET PROFIT
MARGIN
3,3%
COMPANY 2
8,3%
COMPANY 3
18,0%
COMPANY 4
30%
This financial information pertains to the following companies:
a) Motorcycle company ( Harley Davidson)
b) Pizza company ( KFC).
c) Retail company (Wal-Mart Stores)
d) Jewelars (Tiffany and Co.)
Task: Match each company with its financial information
NET PROFIT MARGIN (3)
74
Poduzeće 1
NETO PROFIT
MARGIN
3,3%
Poduzeće 2
8,3%
Poduzeće 3
18,0%
Poduzeće 4
30%
This financial information pertains to the following companies:
a) Motorcycle company (for, example, Honda, Harley Davidson,
etc.)
b) Pizza company ( Papa John's, Pizza Hut, Taco Bell, KFC, etc.).
c) Retail company (Wal- Mart Stores)
d) Jewelars (Tiffany and Co.)
Task: Match each company with its financial information
PROFITABILITY RATIOS
75




How well has management used the stockholders‘
investments during the period?
Return on equity (ROE) – measure how much firm earned for each
unit of stockholders investment.
the higher the ROE are expected to have higher stock prices
How well has management used the assets provided by both the
debt holders and stockholders? ROA (return on asstes)
PROFITABILITY RATIOS
76

Financial leverage

Net return on total assets (ROA)

Return on equity (ROE)
Technology
Apple
Google
Microsoft
ROE 20x4.
Task: Match each company with its financial information
a) 30,04%
b) 24,58%
c) 13,82%
Technology
ROE 2014
Apple
Google
Microsoft
30,04 %
13,82%
24,58%
Task: Match each company with its financial information
a) 30,04%
b) 24,58%
c) 13,82%
79

These companies had an outstanding profits in relation
to the industry.
Return on equity (ROE)
Task: Match each company with its financial information
a) 11,98%
b) 15,48%
c) 4,43%
Return on equity (ROE)
11,98% Toyota
15,48% Daimler AG
4,43% Nissan
Task: Match each company with its financial information
a) 11,98%
b) 15,48%
c) 4,43%
The concept of financial leverage
82


Firms can obtain funds from borrowing sources (bank loans) and
invest those funds in assets.
It pays to take out the loan, as long as the interest on the loan is
less then return on assets
ROE >ROA
83
FINANCIAL LEVERAGE
Profitability ratios – VIP –
telecommunication industry
84
PROFITABILITY
RATIOS
NET PROFIT MARGIN
NET RETURN ON
ASSETS
RETURN ON EQUITY
20x1.
20x2.
20x3.
18,02%
15,66%
14,14%
22,84%
17,89%
13,84%
29,98%
27,29%
32,39%
Does the financial leverage works in this case?
Profitability ratios – VIP –
telecommunication industry
85
PROFITABILITY
RATIOS
NET PROFIT MARGIN
NET RETURN ON
ASSETS
RETURN ON EQUITY
20x1.
20x2.
20x3.
18,02%
15,66%
14,14%
22,84%
17,89%
13,84%
29,98%
27,29%
32,39%
Does the financial leverage works in this case?
Yes. The return on equity (ROE) is higher then net return on assets
(ROA)
86

Determine the effect of financial leverage?

Does the financial levarege work?

Financial leverage is successful if the company earns more on the
borrowed fund than it pays to use them.
87

It's far better to buy a wonderful company at
a fair price than a fair company at a wonderful
price.”

Warren Buffet
INVESTMENT RATIOS
NET INCOME
EARNINGS PER SHARE (EPS)=
DIVIDEND PER SHARE (DPS)=
NUMBER OF SHARES
DIVIDENDS PAID TO SHAREHOLDERS
DIVIDEND PAYOUT RATIO (DPR)=
PRICE-EARNINGS RATIO (P/E) =
88
NUMBER OF SHARES
DIVIDEND PER SHARE (DPS)
EARNINGS PER SHARE (EPS)
SHARE MARKET PRICE (PPS)
EARNING PER SHARE (MP)
INVESTMENT RATIOS
EARNINGS YIELD
DIVIDEND YIELD
89
=
=
EARNINGS PER SHARE (EPS)
SHARE MARKET PRICE (MP)
DIVIDENDS PER SHARE (DPS)
SHARE MARKET PRICE (MP)
INVESTMENT RATIOS
90

The number of shares

Market value of shares vs bookkeeping value of shares

Dividend payout – retained earnings

Decreasing earnings yield?
Question

In 20X1. in company “X” the earnings per share
(EPS) is 9,50€ while the share market price is 228 €.
In 20X2. earnings per share (EPS) increased by 13%.
Under the assumption of ceteris paribus what is the
share market price?
Can you calculate the share market price?

Explain.

92

“If a business does well, the stock eventually
follows.”

Warren Buffet
The following information was in the
annual report of Rover Company.
20x1
20x2
20x3
Earnings per share (EPS)
1,27
1,20
1,12
Cash dividends per share
(common) (DPS)
Market price per share (PPS)
0,82
0,85
0,90
16,30
14,00
12,80
Total common dividends
18.360.000
19.500.000
21.700.000
Shares outstanding, end of
year
Total assets
22.500.000
23.100.000
24.280.000
Total liabilities
Nonredeemable preferred
stock
Preferred dividends
1.260.400.000 1.267.200.000 1.280.100.000
799.200.000
808.500.000
800.400.000
15.300.000
15.300.000
15.300.000
910.000
910.000
910.000

Based on these data calculate the following for the 2007.,
2008. and 2009.
 percentage of earnings retained
 price/earnings ratio
 dividend payout
 dividend yield
 book value per share
Discuss your results from the
viewpoint of a potential investor
20x1.
1. percentage of earnings
retained
2. price/earnings ratio
3. dividend payout
4. dividend yield
5. book value per share
20x2.
20x3.
Discuss your results from the viewpoint of
a potential investor
EARNINGS PER SHARE (EPS)=
NET INCOME
NUMBER OF SHARES
NET INCOME= EARNING PER SHARE X NUMBER OF SHARED
FINANCIAL RATIO
20x1.
NET INCOME
28.575.000
20x2.
20x3
27.720.000 27.193.600
Discuss your results from the viewpoint of
a potential investor
FINANCIAL RATIO FORMULA
20X1
20X2
20X3
1. percentage of
earnings retained
0,36
0,30
0,20
12,83
11,67
11,43
0,64
0,70
0,80
0,05
0,061
0,07
2. price/earnings
ratio (P/E)
3. dividend payout
ratio (DPR)
4. dividend yield
retained earnings
net income
share market price (PPS)
earning per share (EPS)
dividend per share (DPS)
earnings per share (EPS)
dividend per share (DPS)
share market price (MP)
5. book value per
share
equity
number of shares
20X1
Total assets
Total liabilities
Total equity
Shares outstanding,
end of year
Book value per share
1.260.400.000
799.200.000
461.200.000
20X2
20X3
1.267.200.000 1.280.100.000
808.500.000
800.400.000
458.700.000 479.700.000
22.500.000
23.100.000
24.280.000
20,50
19,86
19,76
14,00
12,80
Market price per share (PPS)
16,30
Discuss your results from the viewpoint of
a potential investor
FINANCIAL RATIO FORMULA
1. percentage of
earnings retained
2. price/earnings
ratio (P/E)
3. dividend payout
ratio (DPR)
4. dividend yield
retained earnings
net income
share market price (PPS)
earning per share (EPS)
dividend per share (DPS)
earnings per share (EPS)
dividend per share (DPS)
share market price (MP)
5. book value per
share
equity
number of shares
20X1
20X2
20X3
0,36
0,30
0,20
12,83
11,67
11,43
0,64
0,70
0,80
0,05
0,061
0,07
20,50
19,86
19,76
DU PONT ANALYSIS
RETURN ON ASSETS
(EQUITY)
NET PROFIT MARGIN
NET INCOME + INTERESTS
SALE
-
:
INCOME TAX
X
NET SALE
EXPENSE
(WITHOUT INTERESTS)
+
SALLING, GENERAL AND
ADMINISTRATIVE EXPENSE
TOTAL ASSETS
TURNOVER
COST OF GOODS
SOLD
OTHER
NET SALE
:
 NONCURRENT ASSETS
INVESTMENTS
(SECURITIES)
 TOTAL ASSETS
+
 CURRENT ASSETS
+
 CASH
INVESTMENTS
(SECURITIES)
+
 PLANT AND
EQUIPMENT
 RECEIVABLES
 INVENTORIES
PREPAID COSTS
100
DU PONT ANALYSIS
RETURN ON ASSETS
NET INCOME + INTEREST
TOTAL ASSETS
101
=
=
NET PROFIT MARGIN
NET INCOME + INTEREST
TOTAL INCOME
×
×
TOTAL ASSETS
TURNOVER
TOTAL INCOME
TOTAL ASSETS
102
Match each company with its
financial information
103
COMPANY
NET PROFIT
MARGIN
TOTAL
ASSETS
TURNOVER
ARTIO
NET RETURN
ON TOTAL
ASSETS
9,82 %
1,495
14,68%
3,79 %
1,17
4,43%
18,90%
0,57
10,77%
COMPANY
NET PROFIT
MARGIN
TOTAL
ASSETS
TURNOVER
ARTIO
NET RETURN
ON TOTAL
ASSETS
9,82 %
1,495
14,68%
3,79 %
1,17
4,43%
18,90%
0,57
10,77%
Exercise

Whit this case the aim is made between two companies
in different industries using net profit margin, total asset
turnover and return on assets.
JOHNSON&JOHNSON INC.*
INCOME STATEMENT
01. 10. - 30. 09. 2008.
(dollars in millions)
Sales to costumers
Cost of sales
Gross profit
Selling, general and administrative expenses
Research expense
Development expenses
Interest income
Interest expense
Other income (expense) net
Income before income taxes
Income tax expense
Net income
63,747
18,511
45,236
21,490
7,577
181
(361)
435
(1,015)
28,307
16,929
3,980
12,949
From balance sheet (average total assets 82,933)
*Johnson & Johnson and their employees worldwide are engaged in the research and
development, manufacture and sale a broad range of products in the health care field.
BEST BUY CO INC.*
INCOME STATEMENT
01. 10. - 30. 09. 2008.
(dollars in millions)
Sales to costumers
Cost of sales
Gross profit
Selling, general and administrative expenses
Goodwill
Operating income
Other income (expense)
Interest expense
Investment income
Investment impairment
Interest expense
Income before income taxes
Income tax expense
Net income
45,015
34,017
10,998
9,062
66
1,870
35
(111)
(94)
1,700
674
1,026
From balance sheet (average total assets 14,292)
*Best Buy company is specialty retailer of consumer electronics, home
office products, entertainment software, applied and related service.

a) Compute the following ratios for Johnson
&Johnson Inc.




b) Compute the following ratios for Best Buy Co. Inc.




net profit margin
total asset turnover
return on assets
net profit margin
total asset turnover
return on assets
c) Comment on the effect of the industry on these
ratios.
NET PROFIT
MARGIN
JOHNSON&JOHNSON
BEST BUY CO. INC.
TOTAL ASSET
TURNOVER
RETURN ON
ASSETS
NET PROFIT TOTAL ASSET
MARGIN
TURNOVER
JOHNSON&JOHNSON
21,00%
0,77
BEST BUY CO. INC.
2,49%
3,15
RETURN ON
ASSETS
JOHNSON&JOHNSON
BEST BUY CO. INC.
NET PROFIT
MARGIN
21,00%
TOTAL ASSET
TURNOVER
0,77
RETURN ON
ASSETS
2,49%
3,15
7,84%
16,17%
Match each company with its financial
information



1. ““The Company offers a range of personal computing products,
mobile communication devices, and portable digital music and video
players, as well as variety of related software, services, network
solution and various hardware and software products” 10-K
2. “We operate membership warehouse based on the concept on
the concepts that offering our members low prices on a limited
nationally branded and selected private-label products in a wide
range of merchandise categories will produce high sales volumes
and rapid inventory turnover “. -10 K
3. “Our Retail segment includes all of our merchandising operations,
including our large-format general merchandise and food discount
stores. We offers both everyday essential and fashionable,
differentiated merchandise at exceptional prices.” – 10 K
COMPANY
NET PROFIT
MARGIN
TOTAL ASSET
TURNOVER
CURRENT
RATIO
COMPANY “A”
1.52%
3.35
1.11
COMPANY “B”
15.61%
0.78
1.88
COMPANY “C”
3.52%
1.42
1.66
COMPANY
COSTCO
COMPANY A
WHOLESALE
CORPORATION
(2)
APPLE (2009) COMPANY B
(1)
TARGET
COMPANY C
CORPORATION
(3)
NET PROFIT
MARGIN
1.52%
TOTAL ASSET
TURNOVER
3.35
CURRENT
RATIO
1.11
15.61%
0.78
1.88
3.52%
1.42
1.66
KEY WORDS
COSTCO
WHOLESALE
CORPORATION
(2)
APPLE (20x1.)
(1)
•high sales volumes
and
NET PROFIT
MARGIN
1.52%
TOTAL ASSET
TURNOVER
3.35
CURRENT
RATIO
1.11
15.61%
0.78
1.88
3.52%
1.42
1.66
•rapid inventory
turnover
•offers a range of
personal computing
products, mobile
devices
•various hardware and
software products
TARGET
CORPORATION
(3)
•fashionable
•differentiated
merchandise at
exceptional prices
EVALUATING COMPANY‘S
PERFORMANCE

Profit drivers – financial ratios

__________________
 It
can be increased by:




Increasing sales volume
Increasing sales price
Decreasing expenses
___________________
 It
can be increased by:





Increasing sales volume
Decreasing less productive assets
FINANCIAL LEVERAGE
Increasing borrowing
Repurchasing outstanding stock
EVALUATING COMPANY‘S
PERFORMANCE

Profit drivers – financial ratios

Net profit margin
 It
can be increased by:




Increasing sales volume
Increasing sales price
Decreasing expenses
Asset turnover (efficiancy)
 It
can be increased by:





Increasing sales volume
Decreasing less productive assets
FINANCIAL LEVERAGE
Increasing borrowing
Repurchasing outstanding stock
Profit drivers and business strategy



Business strategies – financial perspectives
Product differentiation (high value) strategy
 Research and development – product promotion
 Superiority and distinctiveness of their products
 That allows company higher ________ and higher
________ _________ __________
Low cost strategy
 Relies on efficient management of account receivable,
inventory and productive assets
 To produce high ___________ __________
_______
Profit drivers and business strategy



Business strategies – financial perspectives
Product differentiation (high value) strategy
 Research and development – product promotion
 Superiority and distinctiveness of their products
 That allows company higher prices and higher net
profit margin
Low cost strategy
 Relies on efficient management of account receivable,
inventory and productive assets
 To produce high asset turnover
121
Quiz
Quiz 1
122

A company’s accounts receivable turnover rate
decreased from 7.3 to 4.3 over the last three years.
What is the most likely cause for the decrease?
 a. An increase in the discount offered for early payment.
 b. A more liberal credit policy.
 c. A change in net payment due from 30 to 25 days.
 d. Increased cash sales.
Quiz 1
123

A company’s accounts receivable turnover rate decreased
from 7.3 to 4.3 over the last three years. What is the most
likely cause for the decrease?
 a.
An increase in the discount offered for early payment.
 b.
A more liberal credit policy.
 c.
A change in net payment due from 30 to 25 days.
 d.
Increased cash sales.
Quiz 2
124

An increasing inventory turnover ratio:
 A) indicates a longer time span between the ordering and
receiving of inventory
 B) Indicated a shorter time span between the ordering and
receiving of inventory
 C) Indicates a shorter time span between purchase and sale of
inventory
 D) Indicates a longer time span between the purchase and sale
of inventory.
Quiz 2
125

An increasing inventory turnover ratio:
 A) indicates a longer time span between the ordering and
receiving of inventory
 B) Indicated a shorter time span between the ordering and
receiving of inventory
 C) Indicates a shorter time span between purchase and
sale of inventory
 D) Indicates a longer time span between the purchase and sale
of inventory.
Quiz 3
126

Positive financial leverage indicates:
 A) positive cash flow from financing activities
 B) a debt-to-equty ratio of higher than 1
 C) a rate of return on assets exceeding the interest rate on debt
 D) a profit margin in one year exceeding the previos year’s profit
margin
Quiz 3
127

Positive financial leverage indicates:
 A) positive cash flow from financing activities
 B) a debt-to-equty ratio of higher than 1
 C) a rate of return on assets exceeding the interest rate on debt
 D) a profit margin in one year exceeding the previos year’s profit
margin
Quiz 4
128

In 20x1 in company “X” the earnings per share is 9,50€
while the share market price is 228 €. In 20x2. earnings per
share increased by 13%. Under the assumption of ceteris
paribus the share market price is:
 A)
257,64€
 B) 9,50 €
 C) 228,00 €
 D) can not determine without additional information.
Quiz 4
129

In 20x1 in company “X” the earnings per share is 9,50 €
while the share market price is 228 €. In 20x2. earnings per
share increased by 13%. Under the assumption of ceteris
paribus the share market price is:
 A)
257,64€
 B) 9,50 €
 C) 228,00 €
 D) can not determine without additional information.
Quiz 5

If the company is successful in reducing selling and
administrative costs while maintaining sales volume
and the sales price of its product, what is the effect on
the net profit margin ratio:
 A) the ratio will not change
 B) the ratio will increase
 C) the ratio will decrease

D) either (a) or (c)
Quiz 5

If the company is successful in reducing selling and
administrative costs while maintaining sales volume
and the sales price of its product, what is the effect on
the net profit margin ratio:
 A) the ratio will not change
 B) the ratio will increase
 C) the ratio will decrease
 D) either (a) or (c)
132
WORKSHOP
Find the best ratio (solution) for a
company
133
Current ratio
A) 0,5
B) 1
C) 2
D) 2,5
Financial stability ratio
A) 0,5
B) 0,7
C) 1
D) 1,5
Debt to assets ratio
A) 0,25
B)0,5
C) 0,75
D) 1
Times interest earned
A) 1
B) 5
C) 10
D) 15
C) 5
D) 10
Debt factor
A) 2
B) 3
Accounts receivables turnover ratio
A) 2
B) 3
C) 5
D) 10
Days to collect receivables
A) 10
B) 14
C) 50
D) 90
C) 15%
D) 25%
Return on equity
A) 5%
B) 10%
Find the best ratio (solution) for a
company
134
Current ratio
A) 0,5
B) 1
C) 2
D) 2,5
Financial stability ratio
A) 0,5
B) 0,7
C) 1
D) 1,5
Debt to assets ratio
A) 0,25
B)0,5
C) 0,75
D) 1
Times interest earned
A) 1
B) 5
C) 10
D) 15
C) 5
D) 10
Debt factor
A) 2
B) 3
Accounts receivables turnover ratio
A) 2
B) 3
C) 5
D) 10
Days to collect receivables
A) 10
B) 14
C) 50
D) 90
C) 15%
D) 25%
Return on equity
A) 5%
B) 10%
135
Industry analysis
Exercise 1. Using financial information
to identify mystery companies


This financial information belongs to the following companies:
A) retail fur store,
B) advertising agency,
C) wholesale candy company,
D) car manufacturer.
Required: Match each company with its financial information
COMPANIES
1
2
3
4
Balance sheet data
(component percentage)
Cash
3.5
4.7
8.2
11.7
Accounts receivable
16.9
28.9
16.8
51.9
Inventory
46.8
35.6
57.3
4.8
Property and equipment
18.3
21.7
7.6
8.7
Income statements data
(component percentage)
Gross profit
22.0
22.5
44.8
N/A*
Profit before taxes
2.1
0.7
1.2
3.2
Current ratio
1.3
1.5
1.6
1.2
Inventory turnover ratio
3.6
9.8
1.5
N/A
Debt to equity ratio
2.6
2.6
3.2
3.2
Selected ratios
COMPANIES
1
2
3
4
CAR
MANUFACTURING
WHOLESALE
CANDY
COMPANY
RETAIL FUR
STORE
ADVERTISING
AGENCY
Balance sheet data
(component percentage)
Cash
3.5
4.7
8.2
11.7
Accounts receivable
16.9
28.9
16.8
51.9
Inventory
46.8
35.6
57.3
4.8
Property and equipment
18.3
21.7
7.6
8.7
Income statements data
(component percentage)
Gross profit
22.0
22.5
44.8
N/A*
Profit before taxes
2.1
0.7
1.2
3.2
Current ratio
1.3
1.5
1.6
1.2
Inventory turnover ratio
3.6
9.8
1.5
N/A
Debt to equity ratio
2.6
2.6
3.2
3.2
Selected ratios
Exercise 2. Using financial information
to identify mystery companies


This financial information belongs to the following companies:
 travel agency,
 hotel,
 meat packer,
 drug company.
Required: Match each company with its financial information
COMPANIES
1
2
3
4
7.3
21.6
6.1
11.3
Accounts receivable
28.2
39.7
3.2
22.9
Inventory
21.6
0.6
1.8
27.5
Property and equipment
32.1
18.0
74.6
25.1
Income statements data
(component percentage)
Gross profit
15.3
N/A*
N/A
43.4
Profit before taxes
1.7
3.2
2.4
6.9
Current ratio
1.5
1.2
0.6
1.9
Inventory turnover ratio
27.4
N/A
N/a
3.3
Debt to equity ratio
1.7
2.2
5.7
1.3
Balance sheet data
(component percentage)
Cash
Selected ratios
COMPANIES
1
2
3
4
MEAT
PACKER
TRAVEL
AGENCY
HOTEL
DRUG
COMPANY
7.3
21.6
6.1
11.3
Accounts receivable
28.2
39.7
3.2
22.9
Inventory
21.6
0.6
1.8
27.5
Property and equipment
32.1
18.0
74.6
25.1
Income statements data
(component percentage)
Gross profit
15.3
N/A*
N/A
43.4
Profit before taxes
1.7
3.2
2.4
6.9
1.5
1.2
0.6
1.9
27.4
N/A
N/a
3.3
1.7
2.2
5.7
1.3
Balance sheet data
(component percentage)
Cash
Selected ratios
Current ratio
Inventory turnover ratio
Debt to equity ratio
Exercise 3. Using financial information
to identify mystery companies


This financial information belongs to the following companies:
 TV company,
 grocery store,
 accounting firm,
 retail jewellery store.
Required: Match each company with its financial information
COMPANIES
1
2
3
4
Balance sheet data
(component percentage)
Cash
5.1
8.8
6.3
10.4
Accounts receivable
13.1
41.5
13.8
4.9
Inventory
4.6
3.6
65.1
35.8
Property and equipment
53.1
23.0
8.8
35.7
Income statements data
(component percentage)
Gross profit
N/A*
N/A
45.2
22.5
0.3
16.0
3.9
1.5
Current ratio
0.7
2.2
1.9
1.4
Inventory turnover ratio
N/A
N/A
1.4
15.5
Debt to equity ratio
2.5
0.9
1.7
2.3
Profit before taxes
Selected ratios
COMPANIES
1
2
3
4
TV COMPANY
ACCOUNTIN
G FIRM
RETAIL
JEVERLY
STORE
GROCERY
STORE
Balance sheet data
(component percentage)
Cash
5.1
8.8
6.3
10.4
Accounts receivable
13.1
41.5
13.8
4.9
Inventory
4.6
3.6
65.1
35.8
Property and equipment
53.1
23.0
8.8
35.7
Income statements data
(component percentage)
Gross profit
N/A*
N/A
45.2
22.5
0.3
16.0
3.9
1.5
0.7
2.2
1.9
1.4
N/A
N/A
1.4
15.5
2.5
0.9
1.7
2.3
Profit before taxes
Selected ratios
Current ratio
Inventory turnover ratio
Debt to equity ratio
145

“In terms of marketable securities or new offerings,
we’ve never bought anything that’s been pitched to us
by an investment banker or broker.

We read hundreds and hundreds of annual reports every
year.”
Warren Buffet
146
THANK YOU FOR YOUR ATTENTION!