Beruflich Dokumente
Kultur Dokumente
Chapter 18
Objective 1
Perform a Horizontal Analysis of Financial Statements.
Horizontal Analysis
Increase/(Decrease) 2004 Amount Percent $37,850 $3,650 9.6% 36,900 3,100 8.4% 950 550 57.9%
Horizontal Analysis
2005 $41,500 2004 Difference $37,850 $3,650
Sales
Trend Percentages...
are computed by selecting a base year whose amounts are set equal to 100%. The amounts of each following year are expressed as a percentage of the base amount.
Trend % = Any year $ Base year $
Trend Percentages
Year 2005 Revenues $27,611 Cost of sales 15,318 Gross profit $12,293 2003 is the base year. 2004 $24,215 14,709 $ 9,506 2003 $21,718 13,049 $ 8,669
Trend Percentages
Year Revenues Cost of sales Gross profit 2005 127% 117% 142% 2004 111% 113% 110% 2003 100% 100% 100%
These percentages were calculated by dividing each item by the base year.
Objective 2
Perform a Vertical Analysis of Financial Statements.
Vertical Analysis...
compares each item in a financial statement to a base number set to 100%. Every item on the financial statement is then reported as a percentage of that base.
Vertical Analysis
Revenues Cost of sales Gross profit Total operating expenses Operating income Other income Income before taxes Income taxes Net income 2005 $38,303 19,688 $18,615 13,209 $ 5,406 2,187 $ 7,593 2,827 $ 4,766 % 100.0 51.4 48.6 34.5 14.1 5.7 19.8 7.4 12.4
Vertical Analysis
Assets Current assets: Cash Receivables net Inventories Prepaid expenses Total current assets Plant and equipment, net Other assets Total assets 2005 $ 1,816 10,438 6,151 3,526 $21,931 6,847 9,997 $38,775 % 4.7 26.9 15.9 9.1 56.6 17.7 25.7 100.0
Common-size Statements
On the income statement, each item is expressed as a percentage of net sales. On the balance sheet, the common size is the total on each side of the accounting equation. Common-size statements are used to compare one company to other companies, and to the industry average.
Benchmarking
Percent of Net Sales Lucent Technologies 12.4%
7.4% 8.0% 43.0% 51.4% 28.8% 38.2%
MCI
10.8%
Objective 4
Using Ratios
Ratio Classification
1 Measuring ability to pay current liabilities 2 Measuring ability to sell inventory and collect receivables 3 Measuring ability to pay short-term and long-term debt 4 Measuring profitability 5 Analyzing stock as an investment
20x4
$ 27,000 68,000 31,000 $126,000 198,000 $324,000
Measuring Profitability
Rate of return on net sales shows the percentage of each sales dollar earned as net income. Rate of return on net sales = Net income Net sales
Measuring Profitability
Palisades rate of return on sales: 20x4: $26,000 $803,000 = 0.032 20x5: $48,000 $858,000 = 0.056 The industry average is 0.008. The increase is significant in itself and also because it is much better than the industry average.
Measuring Profitability
Rate of return on total assets measures how profitably a company uses its assets. Rate of return on total assets = (Net income + interest expense) Average total assets
Measuring Profitability
Palisades rate of return on total assets for 20x5: ($48,000 + $24,000) $715,500 = 0.101 The industry average is 0.078. How does Palisades compare to the industry? Very favorably.
Measuring Profitability
Common equity includes additional paid-in capital on common stock and retained earnings. Rate of return on common stockholders equity = (Net income preferred dividends) Average common stockholders equity
Measuring Profitability
Palisades rate of return on common stockholders equity for 20x5: ($48,000 $0) $338,000 = 0.142 The industry average is 0.121. Why is this ratio larger than the return on total assets (.101)? Because Palisades uses leverage.
Measuring Profitability
Earnings per share of common stock = (Net income Preferred dividends) Number of shares of common stock outstanding
Measuring Profitability
Palisades earnings per share: 20x4: ($26,000 $0) 10,000 = $2.60 20x5: ($48,000 $0) 10,000 = $4.80 This large increase in EPS is considered very unusual.
Objective 5
Other Evaluation Tools
End of Chapter 18