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1、Ratio analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors,CHAPTER 3 Analysis of Financial Statements,Balance Sheet: Assets,2001E,2000,Cash,85,632,7,282,AR,878,000,632,160,Inventories,1,716,480,1,287,360,Total CA,2,680,112,1,926,802,Gross FA,1,197,160
2、,1,202,950,Less: Deprec.,380,120,263,160,Net FA,817,040,939,790,Total assets,3,497,152,2,866,592,Liabilities and Equity,2001E,2000,Accounts payable,436,800,524,160,Notes payable,600,000,720,000,Accruals,408,000,489,600,Total CL,1,444,800,1,733,760,Long-term debt,500,000,1,000,000,Common stock,1,680,
3、936,460,000,Retained earnings,(128,584),(327,168),Total equity,1,552,352,132,832,Total L & E,3,497,152,2,866,592,Income Statement,Sales,7,035,600,5,834,400,COGS,5,728,000,5,728,000,Other expenses,680,000,680,000,EBITDA,627,600,(573,600),Depreciation,116,960,116,960,EBIT,510,640,(690,560),Interest ex
4、p.,88,000,176,000,EBT,422,640,(866,560),Taxes (40%),169,056,(346,624),Net income,253,584,(519,936),2001E,2000,Other Data,2001E,2000,Shares out.,250,000,100,000,EPS,$1.014,($5.199),DPS,$0.220,$0.110,Stock price,$12.17,$2.25,Lease pmts,$40,000,$40,000,Standardize numbers; facilitate comparisons Used t
5、o highlight weaknesses and strengths,Why are ratios useful?,Liquidity: Can we make required payments? Asset management: Right amount of assets vs. sales?,What are the five major categories of ratios, and what questions do they answer?,Debt management: Right mix of debt and equity? Profitability: Do
6、sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? Market value: Do investors like what they see as reflected in P/E and M/B ratios?,Calculate DLeons forecasted current and quick ratios for 2001.,CR01 = = = 1.85x.,QR01 =,= = 0.67x.,CA CL,$2,680 $1,445,$2,680
7、$1,716 $1,445,CA - Inv. CL,Expected to improve but still below the industry average. Liquidity position is weak.,Comments on CR and QR,2001 2000 1999 Ind. CR 1.85x 1.1x 2.3x 2.7x QR 0.67x 0.4x 0.8x 1.0x,What is the inventory turnover ratio vs. the industry average?,Inventory turnover is below indust
8、ry average. DLeon might have old inventory, or its control might be poor. No improvement is currently forecasted.,Comments on Inventory Turnover,Receivables Average sales per day,DSO = = = = 44.9.,DSO is the average number of days after making a sale before receiving cash.,Receivables Sales/360,$878
9、 $7,036/360,Appraisal of DSO,DLeon collects too slowly, and is getting worse. DLeon has a poor credit policy.,2001 2000 1999 Ind. DSO 44.9 39.0 36.8 32.0,F.A. and T.A. turnover vs. industry average,FA turnover projected to exceed industry average. Good. TA turnover not up to industry average. Caused
10、 by excessive current assets (A/R and Inv.),2001 2000 1999 Ind. FA TO 8.6x 6.2x 10.0x 7.0x TA TO 2.0x 2.0x 2.3x 2.6x,Calculate the debt ratio, TIE, and EBITDA coverage ratios.,Total debt Total assets,Debt ratio = = = 55.6%.,$1,445 + $500 $3,497,EBIT Int. expense,TIE = = = 5.8x.,$510.6 $88,EBITDA cov
11、erage =,= = 5.2x.,EBITDA + Lease payments (in cash) Interest Lease Loan expense pmt. repayments,+ +,$510.6 + $117.0 + $40 $88 + $40 + $0,Too much debt, but projected to improve.,How do the debt management ratios compare with industry averages?,2001 2000 1999 Ind. D/A 55.6% 95.4% 54.8% 50.0% TIE 5.8x
12、 -3.9x 3.3x 6.2x EBITDA coverage 5.2x -3.3x 3.6x 8.0x,Very bad in 2000, but projected to exceed industry average in 2001. Looking good.,Profit margin vs. industry average?,2001 2000 1999 Ind. P.M. 3.6% -8.9% 2.6% 3.5%,BEP = = = 14.6%.,BEP vs. Industry Average?,EBIT Total assets,$510.6 $3,497,BEP rem
13、oves effect of taxes and financial leverage. Useful for comparison. Projected to be below average. Room for improvement.,2001 2000 1999 Ind. BEP 14.6% -24.1% 14.2% 19.1%,Return on Assets,ROA = = = 7.3%.,Net income Total assets,$253.6 $3,497,ROE = = = 16.3%.,Net income Common equity,$253.6 $1,552,200
14、1 2000 1999 Ind. ROA 7.3% -18.1% 6.0% 9.1% ROE 16.3% -391.4% 13.3% 18.2%,Both below average but improving.,ROA is lowered by debt-interest lowers NI, which also lowers ROA = NI/Assets. But use of debt lowers equity, hence could raise ROE = NI/Equity.,Effects of Debt on ROA and ROE,Calculate and appr
15、aise the P/E, P/CF, and M/B ratios.,Industry P/E ratio Banking 17.15 Computer Software Services 33.01 Drug 41.81 Electric Utilities (Eastern U.S.) 19.40 Internet Services* 290.35 Semiconductors 78.41 Steel 12.71 Tobacco 11.59 Water Utilities 21.84,Typical industry average P/E ratios,* Because many i
16、nternet companies have negative earnings and no P/E, there was only a small sample of internet companies.,NI + Depr. Shares out.,CF per share = = = $1.48.,$253.6 + $117.0 250,Price per share Cash flow per share,P/CF = = = 8.21x.,$12.17 $1.48,Com. equity Shares out.,BVPS = = = $6.21.,$1,552 250,Mkt.
17、price per share Book value per share,M/B = = = 1.96x.,$12.17 $6.21,P/E: How much investors will pay for $1 of earnings. High is good. P/CF: How much investors will pay for $1 of cash flow. High is good. M/B: How much paid for $1 of BV. Higher is better. P/E and M/B are high if ROE is high, risk is l
18、ow.,2001 2000 1999 Ind. P/E 12.0x -0.4x 9.7x 14.2x P/CF 8.21x -0.6x 8.0x 11.0x M/B 1.96x 1.7x 1.3x 2.4x,( )( )( ) = ROE x x = ROE.,Profit margin,TA turnover,Equity multiplier,NI Sales,Sales TA,TA CE,1999 2.6% x 2.3 x 2.2 = 13.3% 2000 -8.9% x 2.0 x 21.6 = -391.4% 2001 3.6% x 2.0 x 2.3 = 16.3% Ind. 3.
19、5% x 2.6 x 2.0 = 18.2%,The Du Pont system focuses on:,Expense control (P.M.) Asset utilization (TATO) Debt utilization (Eq. Mult.),It shows how these factors combine to determine the ROE.,Simplified DLeon Data,A/R,878,Debt,1,945,Other CA,1,802,Equity,1,552,Net FA,817,Total assets,$3,497,L&E,$3,497,Q
20、. How would reducing DSO to 32 days affect the company?,Sales $7,035,600 day 360,= = $19,543.,Effect of reducing DSO from 44.9 days to 32 days:,Old A/R = 19,543 x 44.9 = 878,000 New A/R = 19,543 x 32.0 = 625,376 Cash freed up: 252,624 Initially shows up as additional cash.,What could be done with th
21、e new cash? Effect on stock price and risk?,New Balance Sheet,Potential use of freed up cash,Repurchase stock. Higher ROE, higher EPS. Expand business. Higher profits. Reduce debt. Better debt ratio; lower interest, hence higher NI. All these actions would improve stock price.,What are some potentia
22、l problems and limitations of financial ratio analysis?,Comparison with industry averages is difficult if the firm operates many different divisions.,“Average” performance not necessarily good. Seasonal factors can distort ratios. “Window dressing” techniques can make statements and ratios look bett
23、er.,Different operating and accounting practices distort comparisons. Sometimes hard to tell if a ratio is “good” or “bad.” Difficult to tell whether company is, on balance, in strong or weak position.,What are some qualitative factors analysts should consider when evaluating a companys likely futur
24、e financial performance?,Are the companys revenues tied to 1 key customer? To what extent are the companys revenues tied to 1 key product? To what extent does the company rely on a single supplier?,(More),What percentage of the companys business is generated overseas? Competition Future prospects Legal and regulatory environment,