Alcatraz Corp.

Balance Sheets
($ in millions)
2011
Assets
Cash
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Notes payable
Total current liabilities
Long-term debt
total liabiliteis
Owners' equity
Common stock and APIC
Retained earnings
Total equity
Total liabilities and owners' equity

2010

2011

98
188
422
708
2,880
3,588

84
165
393
642
2,731
3,373

344
196
540
457
997

312
231
543
531
1,074

550
2,041
2,591
3,588

500
1,799
2,299
3,373

Notes:
An average of 33 million shares were outstanding during 2011.
The stock price at December 31st was $88.

3%
5%
12%
20%
80%

54%
46%

Alcatraz Corp.
Income Statements
($ in millions)

Sales
Cost of goods sold
Depreciation
Earnings before interest and taxes (EBIT)
Interest expense
Taxable income
Taxes (35%)
Net income
Dividends paid

2011
2,500
1,500
400
600
300
300
105
195

2010
2,000
1,200
250
550
120
430
151
280

2009
1,900
1,000
200
700
100
600
210
390

50

80

200

Alcatraz Corp.
2011 and 2010 Balance Sheet
(Horizontal Analysis)
2011
Assets
Cash
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Notes payable
Total current liabilities
Long-term debt
Owners' equity
Common stock and APIC
Retained earnings
Total equity
Total liabilities and owners' equity

2010

$ Chg.

% Chg.

98
188
422
708
2,880
3,588

84
165
393
642
2,731
3,373

14
23
29
66
149
215

16.7%
13.9%
7.4%
10.3%
5.5%
6.4%

344
196
540
457

312
231
543
531

32
(35)
(3)
(74)

10.3%
-15.2%
-0.6%
-13.9%

550
2,041
2,591
3,588

500
1,799
2,299
3,373

50
242
292
215

10.0%
13.5%
12.7%
6.4%

Notes:
An average of 33 million shares were outstanding during 2011.
The stock price at December 31st was $88.

Alcatraz Corp.
Income Statements
(Horizontal Analysis)

Sales
Cost of goods sold
Depreciation
Earnings before interest and taxes (EBIT)
Interest expense
Taxable income
Taxes (35%)
Net income
Dividends paid

2011
2,500
1,500
400
600
300
300
105
195

2010
2,000
1,200
250
550
120
430
151
280

$ Chg.
500
300
150
50
180
(130)
(46)
(85)

% Chg.
25.0%
25.0%
60.0%
9.1%
150.0%
-30.2%
-30.2%
-30.2%

50

80

(30)

-37.5%

Alcatraz Corp.
2011 and 2010 Balance Sheet
(Common Size)
2011
Assets
Cash
Accounts receivable
Inventory
Total current assets
Property, plant, and equipment
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Notes payable
Total current liabilities
Long-term debt
Owners' equity
Common stock and APIC
Retained earnings
Total equity
Total liabilities and owners' equity

2010

Change

2.7%
5.2%
11.8%
19.7%
80.3%
100.0%

2.5%
4.9%
11.7%
19.0%
81.0%
100.0%

0.2%
0.3%
0.1%
0.7%
-0.7%
0.0%

9.6%
5.5%
15.1%
12.7%

9.2%
6.8%
16.1%
15.7%

0.3%
-1.4%
-1.0%
-3.0%

15.3%
56.9%
72.2%
100.0%

14.8%
53.3%
68.2%
100.0%

0.5%
3.5%
4.1%
0.0%

Significant changes:
1) Notes payble declined.
2) Long-term debt declined.
3) Retained earnings increased.
The company is obtaining more of its capital from equity rather than debt.

Alcatraz Corp.
Income Statements
(Common Size)

Sales
Cost of goods sold
Depreciation
Earnings before interest and taxes (EBIT)
Interest expense
Taxable income
Taxes (34%)
Net income

2011
100.0%
60.0%
16.0%
24.0%
12.0%
12.0%
4.2%
7.8%

2010
100.0%
60.0%
12.5%
27.5%
6.0%
21.5%
7.5%
14.0%

2009
100.0%
52.6%
10.5%
36.8%
5.3%
31.6%
11.1%
20.5%

Significant changes:
1) Profit margin is dropping significantly. Bad newswhy is it dropping?
2) Cost of goods sold has gone up since 2009.
3) Depreciation continues to increase.
4) Interest expense continues to go up.
The company's income statement is getting significantly weaker year over year.

Financial Ratios Cheat Sheet

Short-term liquidity measures
Current ratio

Quick ratio

Current assets
Current liabilities
Current assets - inventory
Current liabilities

Long-term solvency measures

Total debt ratio

Total liabilities
Total assets

Debt to equity ratio

Total liabilities
Total equity

Times interest earned

EBITDA
Interest expense

Asset management/turnover measures

Inventory turnover

Days sales in inventory

A/R turnover

Average collection period

Profitability measures
Profit margin

COGS
Avg. inventory
365 days
Inventory turnover
Sales
Avg. A/R
365 days
A/R turnover

Net income
Sales

Return on Assets (ROA)

Net income
Avg. total assets

Return on Equity (ROE)

Net income
Avg. total equity

Market value measures

Earnings per share (EPS)

Price-Earnings (PE) ratio

Market-to-book ratio

Net income
Avg shares outstanding
Price per share
Earnings per share
Market value per share
Book value per share

Explanation of Key Financial Ratios

Current ratio

Current assets
Current liabilities

1.31 = (708/540)

The current ratio gives us an indication of our ability to pay short-term debts.
Reminder: Current assets are cash and other assets that are converted to cash in one year or less.
Current liabilities are those debts which have a due date of one year or less.
In this example, for every one dollar of current liabilities, Alcatraz has $1.31 in current assets.
A good current ratio is 2 (sometimes expressed as "2 to 1"). It's not necessarily true that higher is better though.
If a company has a current ratio of 10, that means it has a significant number of current assets which could
probably be invested long-term (new facilities, etc.) and have a higher return than would current assets.

Quick ratio

Current assets - inventory

Current liabilities

0.53 = (98+188)/540

For some firms, inventory may be difficult to sell. Quick ratio excludes inventory from current assets
and looks at only the most liquid assets (cash, receivables, marketable securities, etc.).
A quick ratio of 1 is good and gives a company flexibility to pay its short-term debt.
If Alcatraz cant sell its inventory, it may have trouble paying current liabilities as they come due.

Total debt ratio

Total liabilities
Total assets

27.8% = (540+457)/3,588

The total debt ratio gives us a measure of how much financing is provided by debt as opposed to equity.
The basic accounting equation is Assets = Liabilities + Owner's Equity.
Alcatraz has total assets of $3,588.
Those assets are financed part by liabilities ($997) and part through owner's equity ($2,591).
In this example, the total debt ratio is 27.8%, meaning that for every $100 of assets, $27.80 is financed through debt.
The other portion (72.2%) is financed through equity.
Companies can choose to be more debt financed or equity financed; there are advantages and disadvantages of each.
Therefore, although total debt ratio explains a company's capital structure,
there's not a hard and fast rule as to what a good total debt ratio is.

Debt to equity ratio

Total liabilities
Total equity

38.5% = (540+457)/2,591

Debt to equity ratio is a similar metric as total debt ratio but just slices it differently. Now we're looking at the relationship
between debt financing and equity financing. If the debt to equity ratio is greater than 1, a company is financed more through debt.
If the debt to equity ratio is less than 1, the company is financed more through equity.
You can see the connection between the total debt ratio and debt to equity ratio:
In the Alcatraz example, the total debt ratio was 27.8% meaning that debt financing accounts for 27.8% and equity financing
is the other 72.2%. If you divided 27.8 by 72.2 you get 38.5%, which is the debt to equity ratio.

Times interest earned

EBITDA
Interest expense

3.3 = (600+400)/300

Times interest earned is how well our operating profit (EBITDA) covers our interest obligations. In this case, Alcatraz
has $300 of interest expense but has an EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)
of $1,000. So they're able to "cover" their interest 3.3 times. Bigger is better here.

Inventory turnover

COGS
Avg. inventory

3.68 = 1,500/((422+393)/2)

Inventory turnover is a frequently used measure informing a business of how quickly it is moving its inventory.
A good inventory turnover depends on industry (custom homes would turn slower than milk at a grocery store).
In the Alcatraz case, the company turns its inventory 3.68 times per year. This means that, on average, new
inventory is being purchased and old inventory is being sold 3.68 times per year. Inventory turnover could be
increased by selling product at discount prices, but profit might suffer.
Therefore, this metric should be kept in balance with others.

Days sales in inventory

365 days
Inventory turnover

99 days = 365/3.68

Inventory turnover is sometimes difficult to grasp so a more user friendly way to say the same thing is
Days sales in inventory. If you divided 365 by the Inventory turnover, you figure out how long it took to sell
the inventory. In this case, on average, inventory sat on the shelves for 99 days before being sold.

A/R turnover

Sales
Avg. A/R

14.16 = 2,500/((188+165)/2)

How long do we give our customers to pay? That's what A/R turnover and Average collection period tell us.
A low A/R turnover tells us that customers are taking a very long time to pay off their accounts and therefore,
the company is without the cash that it probably needs for other operations. In this case, Alcatraz makes a
sale and then collects from the customer on average 14 times a year.

Average collection period

365 days
A/R turnover

26 days = 365/14.16

Just like we did with Inventory turnover, we can convert A/R turnover to a more user friendly metric.
We divide 365 by the A/R turnover from above and get Average collection period.
In this case we came up with 26 days telling us that Alcatraz collects a sale on account on average
26 days from the time of the sale.

Profit margin

Net income
Sales

7.8% = 195/2,500

How much of every $1 sold makes it down to the bottom line? That's what profit margin tells us.
For Alcatraz, for every $100 sold, they make $7.80 in profit, or 7.8%. This number should look familiar
it's the same number we found when we did vertical analysis (common-size financials) on the income statement.

Return on Assets (ROA)

Net income
Avg. total assets

5.6% = 195/((3,588+3,373)/2)

How well did we use the assets invested into the business? We'd expect a company with a large amount of
assets invested to return a significantly higher profit than a business with a small amount of assets invested.
ROA gives a measure of this by adjusting for the scale or size of the company.
In the Alcatraz case, for every $100 of assets invested, the company made $5.60 in profit, or 5.6%.

Return on Equity (ROE)

Net income
Avg. total equity

8.1% = 195/((2,591+2,229)/2)

How well did we use the owner's capital invested into the business? We'd expect a company with a large amount of
capital investment to return a significantly higher profit than a business with a small amount of capital invested.
ROE gives a measure of this by adjusting for the scale or size of the company.
In the Alcatraz case, for every $100 invested capital, the company made $8.10 in profit, or 8.1%.

Earnings per share (EPS)

Net income
Avg shares outstanding

$ 5.91 = 195/33

EPS is one of the most frequently cited measures of profitability. How much (in terms of net income)
did each share make in the prior period? For Alcatraz, each share was responsible for $5.91 of profit in the prior period.

Price-Earnings (PE) ratio

Price per share

Earnings per share

14.9 = $88/$5.91

How expensive is a stock in relation to its earning? PE ratio gives an indication of that. Typically, company earnings drive
stock prices. If other considerations are normal, the more profit a company makes the higher the stock price goes.
So there should be some relationship between earnings and price. That's PE ratio.
PE ratio answers the question: "How many more times than last year's earnings per share is the stock currently selling for?"
A normal range is 15-20. A stock with a very high PE ratio could be a) overpriced or b) the market could expect significant
growth in profitability (EPS) in future years and therefore, investors are willing to pay the premium until EPS catches up.
Alcatraz has a relatively normal PE ratio of 14.9.

Market-to-book ratio

Market value per share

Book value per share

1.12 = $88/(2,591/33)

Another way to measure the how "expensive" a stock is would be to use market-to-book ratio.
The market price is simply what the stock is currently trading for on the stock market. This fluctuates minute to minute.
The book value per share is the total owner's equity of the firm divided by the number of shares outstanding.
The book value is a historical measure (looking back to the last reporting date).
Book value per share asks "How much is a share of stock worth on the Balance Sheet?"
In this case, the market price of a share of stock exceeds its value on the books by 12%.
Just we discussed for PE ratio, if a company has a high market-to-book-ratio, they could be
a) overpriced or b) have significant growth potential.

Balance She

year
2012

Assets
Date

Notes

Cash
Dr. (+)

1/4

25/05

30/06
30/06
30/06
30/06 + 1yr
31/07
31/08

investment funds
Legal expense
cash for P.P.E
Renovation expense
Metal Detector
software license
advertising cost
cash borrowed at 10%
notes receivable
NET30 payment
dividend paid

Cr. (-)

$250,000.00
$3,900.00
$31,000.00
$33,000.00

25/05

$120,000.00
$2,100.00

30/06

$8,000.00
$5,000.00

30/06

$5,000.00
$2,000.00
$2,500.00

Total

$42,500.00

Total Assets

Liabiliti
Date

Notes

Current
Dr. (-)

30/06 + 2m
31/07
31/08

acct. payable NET30 Inv.

dividend payable
acct. payable NET30 Inv.
dividend paid

Total
Total Liabilities

Cr. (+)
$2,000.00
$2,500.00

$2,000.00
$2,500.00

$0.00

25-05

Equity
Date

Notes

Stockholders
Dr. (-)

1/4

Cr. (+)

Common Stock
Additional Paid in Cap. (APIC)

$25,000.00
$225,000.00

Total

Date

$250,000.00

Notes

Expenses
Dr. (+)

Legal expense

Total
Total Equity

Cr. (-)

$3,900.00

$3,900.00

30/06

Balance Sheet
Assets
Notes

Non Cash
Dr. (+)

Tot. Assets
Cr. (-)
Tot. Liabilities

Land
Building
Building renovation
Metal detector
Inventory
software(Asset)
advertising

$103,000.00

Tot. Equity

$52,000.00
$33,000.00

Balance

$120,000.00
$2,000.00
$2,100.00
$8,000.00

Total

$320,100.00

$362,600.00

Liabilities
Notes

Non Current
Dr. (-)

Mortgage payable

Total

Cr. (+)
$124,000.00

$124,000.00

$124,000.00

Equity
Notes
Dividend

retainded earning
Dr. (-)
Cr. (+)
$2,500.00

Total

-$2,500.00

Notes

Revenue
Dr. (-)

Total

Cr. (+)

$0.00

Tot. Assets

$362,600.00

Tot. Liabilities

$124,000.00

Tot. Equity
Balance

$0.00

$238,600.00