Beruflich Dokumente
Kultur Dokumente
Financial Statements
Balance Sheet
A balance sheet mirrors the financial position of a firm on a particular date in terms of the structure of assets, liabilities and owners equity, and so on. on.
Balance Sheet
Liabilities & Owners Equity LongLong-Term Liabilities
Long term Debt (Term Loans) Debentures
Owners Equity
Equity Capital Reserves & Surplus
Current Assets
Cash Marketable Securities Accounts Receivable/ Debtors Inventories
Current Liabilities
Accounts Payable/ Creditors Accrued Salaries Outstanding expenses
The profit and loss account or the income statement shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. year.
Income Statement
GROSS PROFIT Less: Operating Expenses NET OPERATING INCOME (NOI ) or EARNINGS BEFORE INTEREST & TAXES (EBIT) Less: Interest Expense Earnings Before Tax Less: Income Taxes Earnings After Tax or Net Income or Net Profit or Profit After Tax (PAT) (Appropriations) Less: Dividends on Preference Shares Earnings Available to Common Shareholders (EACS) Less: Dividends on Equity Shares RETAINED EARNINGS (Transferred to Reserves & Surplus)
analysis of financial statements is a process of evaluating the relationships between component parts of financial statements to obtain a better understanding of the firms position and performance.
Financial Ratios
Tools
that help us determine the financial health of a company. We can compare a companys financial ratios with its ratios in previous years (trend analysis). We can compare a companys financial ratios with those of its industry.
Liquidity: Liquidity: ratios designed to measure the ability of the firm to meet its short-term liabilities as they come due. shortdue. Operating efficiency: measures of the efficiency with efficiency: which corporate resources are employed to earn a profit. profit. Capital structure (leverage): measures of the extent to (leverage): which debt financing is employed by the company. company. Profitability: "bottomProfitability: "bottom-line" ratios designed to measure the earning power and profitability record of the company. company.
Assets:
2,540 1,800 18,320 27,530 50,190 43,100 11,400 31,700 81,890
11,520
Dividends paid on common stock Earnings retained in the firm Shares outstanding (000) Market price per share Book value per share Earnings per share Dividends per share
1. Liquidity Ratios
Do
Liquidity
Measure the firms ability to meet recurring financial obligations Net Working capital: Current assets - Current liabilities company A Rs. 1,80,000 1,20,000 60,000 company B 30,000 10,000 20,000
Current ratio :A higher current ratio indicates greater liquidity (2 : 1 considered satisfactory) Current assets / Current liabilities
Company A Rs. 1,80,000 1,20,000 1.5 : 1 Company B 30,000 10,000 3:1
What is CyberDragons Current Ratio? Ratio? 50,190 = 1.97 25,523 If the average current ratio for the industry is 2.4, is this good or not? 2.4,
AcidAcid-Test (Quick) ratio: Quick Assets / Current Liabilities Quick assets = Current assets inventories Quick ratio determines firms ability to pay off current liabilities without relying on the sale of inventories.
What is the firms Acid Test Ratio? Ratio? 50,190 - 27,530 = .89 25,523
What is the firms Acid Test Ratio? Ratio? 50,190 - 27,530 = .89 25,523 Suppose the industry average is .92. .92. What does this tell us?
*If opening Inventory is not known we use closing inventory instead of average inventory for calculations These ratios provide information on how well the firm manages its inventory. It indicates the number of times inventory is replaced during a year/ how quickly the inventory is sold
*If opening receivable is not known we use closing receivable instead of average receivables for calculations These ratios measures how rapidly debts are collected from debtors.
*If opening creditors is not known we use closing creditors instead of average creditors for calculations
These ratios provide information on the extent to which trade creditors are willing to wait for payment.
Capital Turnover = Cost of Goods Sold/ Capital Employed (Capital employed = Owners equity + R&S + Long-term liabilities) Fixed Assets Turnover = Cost of goods sold/ Fixed Assets
Measures the efficiency of a firm in managing and utilizing its assets. Higher is the ratio more efficient is the utilization, whereas a low ratio indicates underutilization of available resources and presence of idle capacity.
What is the firms Accounts Receivable Turnover? Turnover? 112,760 18,320 = 6.16 times
What is the firms Accounts Receivable Turnover? 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?
What is the firms Average Collection Period? Period? 18,320 112,760 / 365 = 59.3 days
What is the firms Average Collection Period? Period? 18,320 112,760 / 365 = 59.3 days
If the industry average is 47 days, what days, does this tell us?
What is the firms Inventory Turnover? Turnover? 85,300 27,530 = 3.10 times
What is the firms Inventory Turnover? 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?
space.
Some
What is the firms Fixed Asset Turnover? Turnover? 85,300 31,700 = 2.69 times
What is the firms Fixed Asset Turnover? Turnover? 85,300 31,700 = 2.69 times
If the industry average is 3.7 times, what does this tell us about CyberDragon?
= 1.04 times
= 1.04 times
The industry average is 2.1 times. times. The firm needs to figure out how to squeeze more sales dollars out of its assets.
Exercise
Cash & Marketable Securities Fixed Assets Sales Net Income (100% Retained earnings) Common Equity Quick Ratio Current Ratio Average Collection Period
100.00 283.50 1000.00 50.00 366.667 2.0 times 3.0 times 40 days
Prepare the Balance Sheet of the Company. Assume 360 days in a year. The company has no preferred stock only common equity, current liabilities and longlong-term debt.
Solution
Average Collection Period = 360/ Accounts Receivable Turnover (ART) ART = 360/40 = 9 Accounts receivables = Credit Sales/ ART = 1000/9 = 111.11 million Quick Ratio = Quick Assets/ CL = (100 + 111.11)/CL 2 = 211.11/CL CL = 105.55 millions Current Ratio = Current Assets/ CL CA = 3*105.55 = 316.665 millions Inventory = CA QA = 316.665-211.11 = 105.55 millions 316.665Total Assets = FA + CA = 283.50 +316.665 = 600.165 millions Long Term Debt = 600.165 common Equity Retained Earnings CL = 600.165 366.667 50 105.55 = 77.943 millions
we have an all equityequityfinanced firm worth $100,000. Its earnings this year total $15,000.
ROE =
we have an all equityequityfinanced firm worth $100,000. Its earnings this year total $15,000. 15,000 ROE = 100,000
= 15%
the same $100,000 firm is financed with half equity and half 8% debt (bonds). Earnings are still $15,000.
ROE =
the same $100,000 firm is financed with half equity and half 8% debt (bonds). Earnings are still $15,000. 15,000 - 4,000 =
ROE =
50,000
the same $100,000 firm is financed with half equity and half 8% debt (bonds). Earnings are still $15,000. 15,000 - 4,000 = 22%
ROE =
50,000
Financial Leverage
Debt / equity ratio:
Total Liabilities / Total Owners Equity LongLong-term Debt/ Total Owners Equity
Financial Leverage
Measure the extent to which a firm relies on debt financing . Debt ratio:
Debt / Total Assets OR Total liabilities / Total liabilities and owners equity
Interest coverage ratio is directly connected to the firms ability to pay interest. This ratio is also called Times Interest Earned Ratio
If the industry average is 47%, what 47%, does this tell us?
The industry average is 6.7 times. This is further evidence that the firm uses more debt financing than average.
Profitability
Profitability
Return on assets:
Net income / average investment (total assets)
Return on equity:
Net income / average owners equity
(PAT Pref. Dividend)/ Net Worth
It measures the overall efficiency of production, administration, selling, financing, pricing and tax management.
P/E ratio shows how much investors are willing to pay for $1 of Earnings Per Share. It also reflects investors views of the growth potential of different sectors.
The industry average is 17.54%. 17.54%. Is this what we would expect, given the firms leverage?
Conclusion:
Even
though Cyber-Dragon has Cyberhigher leverage than the industry average, they are much less efficient, and therefore, less profitable.
Example
From the following details, prepare the balance sheet of ABC Ltd: Capital turnover ratio 2 Fixed assets turnover ratio 4 Gross profit 20% Debt collection period 2 months Creditors payment period 73 days Stock Turnover 6 The gross profit was Rs 60,000. closing stock was Rs.5,000 in excess of the opening stock.
Gross Profit Ratio = Gross Profit/ Sales *100 20 = 60000/Sales *100 Sales = 3,00,000 Cost of goods Sold = Sales Gross profit = 2,40,000 Stock Turnover = Cost of goods Sold/ Average Stock 6 = 2,40,000/Average Stock Average Stock = 40,000 (Closing Stock + Opening Stock)/2 = 40,000 Given, Closing Stock Opening Stock = 5,000 Solving, Opening Stock = 37,500 Closing Stock = 42,500
Capital Turnover ratio = Cost of goods sold/ Capital 2 = 2,40,000/ Capital Capital = 1,20,000 Fixed Assets Turnover = Cost of goods Sold/ Fixed Assets 4 = 2,40,000/Fixed Assets Fixed Assets = 60,000 Debtors Turnover = 12/Debt collection Period = 6 Debtors Turnover = Credit Sales/ Average Debtors Debtors = 3,00,000/ 6 = 50,000 Creditors Turnover = 365/ Creditors Payment Period = 5
Cost of Goods Sold = Opening Stock + Purchases Closing Stock Purchases = 2,45,000 Creditors Turnover = Credit Purchase/ Creditors 5 = 2,45,000/Creditors Creditors = 49,000
Liabilities Assets Closing Stock Debtors Fixed Assets Cash (balancing Figure) 1,69,000 42,500 50,000 60,000 16,500 1,69,000
Capital Creditors
1,20,000 49,000