1. 4 CHAPTER Foundations of Ratio and Financial Analysis

2. 1. Introduction Financial statements users Equity investor Creditor Long term earning power short term creditor long term creditor liquiditysolvency

3. Purpose and use of ratio analysis:  Can be used to compare the risk and return relationships of firms of different sizes;  Can provide a profile of a firm:  economic characteristics and competitive strategies  unique operating, financial and investment characteristics.

4. Categories of ratios: Activity analysisLiquidity analysissolvency analysisProfitability analysis evaluates revenue and output generated by the firm’s assets. measures the adequacy of a firm’s cash resources to meet its near-term cash obligation. ability of the firm to satisfy its longer-term debt and investment obligations measures the income of the firm relative to its revenues and invested capital. Four categories:

5. Cautionary Notes Economic assumptions Benchmarks Timing and window dressing Negative Numbers Accounting methods Manipulation of ratios

6. Ratio Management (window dressing) Examples are: Press the collection of receivables at year-end Call in advances to officers for temporary repayment Reduce inventory below normal levels Delay normal purchases Proceeds from these activities are then used to pay off current liabilities

7. Negative Numbers Return on equity=income/equity incomeequityROE Company A1000010000010% Company B(10000)(100000)10% Dividend payout ratio=dividend/income dividendincomePayout ratio A100005000020% B100003000033% C10000(50000)20%

8. 2. Common-size statements Purpose :  Evaluation of internal makeup of financial statements  Evaluation of financial statement accounts across companies Output:  Proportionate size of assets, liabilities, equity, revenues, & expenses

9. PfizerTakedaRoche Cash and cash equivalents 42423 Short-term investments and loans 19173 Accounts receivable 19179 Inventory 889 Prepaid expenses and taxes 534 Current assets 54%69%49% Long-term investments 893 Net property land and equipment 261720 Net goodwill and other intangibles 4022 Total assets 100% Common size balance sheet P 115

10. Short-term debt2418 Accounts and notes payable593 Income taxes payable431 Other current liabilities1199 Current liabilities45%21% Long-term debt3123 Other non current liabilities888 Deferred income taxes106 Total liabilities57%29%57% Minority interests-24 Common stock and APIC2790 Retained earnings655938 Accumulated other comprehensive income (2)00 Reserves and trusts(14)10 Treasury stock(33)00 Total equity43%71%43% Total liabilities and equities100%

11. PfizerTakedaRoche Sales 100% COGS165232 Gross profit84%48%68% SG&A392237 R&D Expenses17914 Other operating expenses(1)00 Income from operations29%17% Other income0515 Income before interest and taxes292232 Interest expenses104 Income before taxes27%22%27% Provisions for taxes8117 Income from continuing operations20%11%20% Common size income statement

12. ABC Common-Size Income Statements 20012000 Sales100.0% Cost of goods sold 65.5 59.9 Gross profit 0.6% Selling, general and administrative expenses21.019.0 Research and development costs5.95.6 Restructuring Costs5.0(0.3) Earnings from operations Interest expense and other costs (credits) 1.8 0.6 Earnings before income taxes Provision for income taxes0.25.2 Net earnings 34.5% 0.8% 2.6% 15.8% 40.1% 15.2% 10.0% Example:

13. 3. Discussion of Ratios by Category I.Activity analysis: Activity ratios describe the relationship between the firm’s level of operations (usually defined as sales) and the assets needed to sustain operating activities. The higher the ratio, the more efficient the firm’s operations. Trends in these ratios over time and in comparison to other firms in the same industry can indicate potential deficiencies or opportunities. Activity ratio can also be used to forecast a firm’s capital requirements(both operating and long-term).

14. activity ratios Short-term (operating) activity ratios Long-term (investment) activity ratios inventory receivables payables Working capital Fixed assets Total assets

15.  Short-term( operating) activity ratios: (1) Inventory Turnover:  Measure the efficiency of the firm’s inventory management.  This ratio is affected by the choice of accounting method.

16. 部分行业存货周转率

17. Average No. Days of Inventory in Stock= Selected financial information from Macon Resources, Inc., for the end of Year 8 is reproduced below: Sales $1,800,000 Cost of goods sold 1,200,000 Beginning inventory 200,000 Ending inventory 400,000 Example: Calculate : Inventory Turnover Average No. Days of Inventory in Stock 360

18. 部分行业存货周转天数

19. 【思考题（ Questions ）】 1. 假设你是咨询师。假设你在 King 娱乐公司做管理 咨询。你的一项任务是使存货成本更加合理。在考察了前期 业绩和存货报告之后，你建议通过加强存货管理以减少存货。 你预期现有的存货周转率将从 20 提高到 25 。节省下来的资 金用于偿还流动负债 —— 持有流动负债的年成本为 10% 。假 设预期销售收入为 1.5 亿美元，预期销货成本为 1 亿美元，你 预计会节约多少成本？

20. (2) Receivable Turnover: Sales Average trade receivables Average No. Days receivables outstanding = 365 Receivable Turnover  Measure the effectiveness of the firm’s credit policies;  Indicate the level of investment in receivables needed to maintain the firm’s sales level. Accounts Receivable Turnover 360

24. 各行业应收账款周转率

25. 各行业应收账款收款期

26. Amazon 和 Wal-mart 公司收款期比较 AmazonWal-mart 应收账款收款期 0.04.0

27. Purchases Average amounts payable Cost of good sold plus change in inventory Average No. Days Payables outstanding = 365 Payables Turnover (3) Payables turnover

28. (4) Working Capital Turnover: Sales Average Working Capital Only operating assets and liabilities are included Working capital is  defined as the excess of current assets over current liabilities  Widely used measure of short-term liquidity  Deficient when current liabilities exceed current assets  In surplus when current assets exceed current liabilities  A margin of safety for creditors  A liquid reserve to meet contingencies and uncertainties  A constraint for technical default in many debt agreements Working capital is  defined as the excess of current assets over current liabilities  Widely used measure of short-term liquidity  Deficient when current liabilities exceed current assets  In surplus when current assets exceed current liabilities  A margin of safety for creditors  A liquid reserve to meet contingencies and uncertainties  A constraint for technical default in many debt agreements

29.  long-term (investment) activity ratios: (1) Fixed assets turnover = Sales Average fixed assets (2) Total assets turnover = Sales Average Total assets

30. II.Liquidity analysis: Company Liquidity refers to the ability to meet short-term obligations Liquidity is the ability to convert assets into cash or toobtain cash Short term is the longer of one-year or the company operating cycle Company Liquidity refers to the ability to meet short-term obligations Liquidity is the ability to convert assets into cash or toobtain cash Short term is the longer of one-year or the company operating cycle

31. Liquidity is a matter of degree Lack of liquidity can limit Advantages of favorable discounts Profitable opportunities Management actions Coverage of current obligations Liquidity is a matter of degree Lack of liquidity can limit Advantages of favorable discounts Profitable opportunities Management actions Coverage of current obligations

32. Length of cash cycle Operating cycle Cash cycle 存货周转天数应收账款周转天数 营业周期 应付账款周转天数现金周期 采购付款收款销售

35. Rule of Thumb Analysis (2:1) > 2:1  superior coverage of current liabilities (but not too high, suggesting inefficient use of resources and reduced returns) < 2:1  deficient coverage of current liabilities

36. 各行业流动比率

37. Current Ratio — Limitations: If liquidity is the ability to meet cash outflows with adequate cash inflows, then does the current ratio:  Measure and predict the pattern of future cash inflows and outflows?  Measure the adequacy of future cash inflows to outflows? Answer is generally no to both these questions Current ratio  Is a static measure  Does not have a causal relation to future cash inflows

38. Current Ratio — Limitations in Numerator Adjustments often needed to counter various limitations such as  Failure to reflect open lines of credit  Adjust securities’ valuation since the balance sheet date  Reflect revolving nature of accounts receivable  Recognize profit margin in inventory  Adjust inventory values to market  Remove deferred charges of dubious liquidity from prepaid expenses

39. Three important qualifications 1. Liquidity depends to a large extent on prospective cash flows 2.No direct relation between working capital account balances and patterns of future cash flows 3. Managerial policies are directed primarily at efficient and profitable asset utilization and secondly at liquidity 4.Cash flow forecasts and pro forma financial statements are preferred over the current ratio for liquidity and solvency analysis 5. Current ratio is a static measure of the ability of current assets to satisfy current liabilities

40. Two important elements are integral to use of the current ratio 1.Quality of both current assets and current liabilities 2.Turnover rate of both current assets and current liabilities

41. Acid-Test (Quick) Ratio

42. Cash ratio = Cash flow from operations ratio = Cash flow from operations Current liabilities Measures liquidity by comparing actual cash flows with current liabilities.

43. Defensive Interval = 365× estimated outflows Indicating the days a firm could maintain the current level of operations with is present cash resources but without considering any additional revenues.

44. 案例分析  某企业 2007 年、 2008 年末的比较资产负债 表中有关数据（单位：万元）如下表所示 。  要求：根据上表资料对资产和权益的变动 情况进行分析，并分析公司短期偿债能力 的变动情况。

45. 项目 2007 年末 2008 年末 2008 年比 2007 年增减 差额百分比 流动资产： 速动资产 30002800-200-6.67 存货 50006200120024 流动资产合计 80009000100012.5 固定资产净额 1400016000200014.29 资产总计 2200025000300013.64 负债： 流动负债 4000460060015 长期负债 2000250050025 股东权益 股本 13000 -- 公积金 1800270090050 未分配利润 12002200100083.33 股东权益合计 1600017900190011.88 负债和权益合计 2200025000300013.64

46. 思考题  假设两家公司流动资产与流动负债金额相当，且流动资 产和流动负债的构成相同，是否意味着两家公司具有相 同的短期偿债能力？为什么？  假设某公司对存货的计价方法有先进先出法改为加权平 均法，导致期末存货增加，进而增加公司流动资产。试 问这种存货计价方法的改变是否影响到该公司的短期偿 债能力？为什么？  某分析师指出， “ 流动比率越大公司的短期偿债能力越强 ，因此公司报告越高的流动资产越好。 ” 你同意这一说法 吗？试阐述理由。

47. III.Long-term Debt and Solvency analysis: Debt ratios: Debt to Total capital= Total debt Debt + Equity Debt to Equity = Total debt Total Equity

48. 不同行业的资产负债率

49. 不同行业的产权比率

50. Interest Coverage ratios: Times Interest Earned= EBIT Interest Expense

51. Interest coverage ratio Default rate （ % ） Committed return （ % ） Realized return （ % ） Loss （ % ） >3.02.14.04.9-0.9 2.0~2.94.0%4.35.1-0.8 1.5~1.917.94.75.0-0.3 1.0~1.434.16.86.40.4 <1.035.06.26.00.2 Interest coverage ratio Default rate

52. 思考题  有两家公司具有相同的资产和负债规模，资产和负债的构 成以及盈利情况也相同，且两家公司出于同一行业，能够 得出两家公司长期偿债能力相同的结论？为什么？  试讨论公司以抵押借款购买建筑物对本章所介绍的偿债能 力评价指标具有什么样的影响？为什么？  成长型的公司可以通过债务融资来避免盈利稀释，试讨论 这句话基本原理。  如果一家公司大量采用经营租赁租入资产，则可能会导致 分析过程中高估其长期偿债能力，试讨论导致这种结果的 原因。

53. Capital expenditure ratio: = Cash from operations (CFO) Capital expenditures  Measures the relationship between the firm’s cash-generating ability and its investment expenditures.  To the extent the ratio exceeds 1, in indicates the firm has cash left for debt repayment or dividends after capital expenditures.

55. IV.Profitability Analysis: Return on salesReturn on investment Gross margin Operating margin Margin before interest and tax Pretax margin Profit margin Contribution margin P132-134 Return on assets (ROA) Return on total capital Return on equity Return on common equity P134-135

56. Return on Sales: Gross Margin= Gross Profit Sales Operating Margin= Operating Income Sales Profit Margin= Net Income Sales Margin before interest and tax= Operating Income Sales

57. 不同行业毛利率水平

58. Return on Investment: Return on assets (ROA)= EBIT Average total assets ROA:  measures operating efficiency/ performance  reflects return from all financing  does not distinguish return by financing sources Disaggregation of ROA sales Average Total assets EBIT Sales ×

60. ROE= Net income Average stockholder’s equity ROE= Net income Sales sales Assets Equity × × Disaggregation :

61. Operating and Financial Leverage: Operating Leverage: General AssumptionsCompany VCompany F Fixed assets$0$40 Variable costs/sales80%40% Assets$200 Example:

62. A: Assuming 0% Financing, Debt $0, Equity $200 Scenario No LeverageOperating Leverage Company VCompany F ABCABC Sales (+50%)$50$100$150$50$100$150 Variable cost4080120204060 contribution102030 6090 Fixed cost00040 Operating income102030-102050 Return on sales20% -20%20%33% on assets5%10%15%-5%10%25% on equity5%10%15%-5%10%25%

63. Contribution Margin Ratio = contribution sales =1- Variable costs sales Operating leverage effect (OLE): OLE= Contribution Margin Ratio Return on Sales contribution Operating Income = % Change in income = OLE×% Change in Sales Company F: OLE=60%/20%= 3

64. B: Assuming 50% Financing, Debt $100, Equity $100,Interest Rate 5% Scenario Financial LeverageTotal Leverage Company VCompany F ABCABC Operating income102030-102050 Interest555555 Net income51525-151545 Return on assets5%10%15%-5%10%25% on equity5%15%25%-15%15%45% Financial Leverage:

65. Scenario No Leverage Company V ABC Sales (+50%)$50$100$150 Variable cost4080120 contribution102030 Fixed cost000 Operating income102030 Return on assets5%10%15% on equity5%10%15% Scenario Financial Leverage Company V ABC Operating income102030 Interest555 Net income51525 Return on assets5%10%15% on equity5%15%25%

66. Financial leverage effect (FLE) : FLE= Operating Income Net Income Total leverage effect (TLE) : TLE=OLE×FLE contribution Net Income = Company V: FLE=1.333 Company F: TLE=3×1.333=4 % Change in income = FLE×% Change in Sales % Change in income = TLE×% Change in Sales

67. 思考题  2006 年铜价大涨，某上市铜企盈利大增， 在年度分红时实施了高送转。你如何看待 这种由于价格上涨所带来的上市公司盈利 的增加？

68. Other Ratios: Earnings Per Share (EPS) : EPS= Net income – Preferred Dividends Weighted Average Common Shares Outstanding Simple Capital Structure EPS = Net income less preferred dividends Weighted average Common shares - EPS impact of dilutive options & warrants EPS impact of dilutive convertibles - Basic EPS Diluted EPS Complex Capital Structure:

69. Sources of Potential Dilution Debt Preferreed stock Options Warrants

70. Computations Capital structure Options, warrants, or convertible securities outstanding? Simple capital structure Basic EPS Net Income – Preferred dividends Weighted average common shares Complex capital structure Diluted EPS Net income to common shares adjusted for Interest (net of tax) and preferred dividends on dilutive securities Weighted average common shares including dilutive Securities Example: P152, Exhibit 4-15.

71. Dividend Payout Ratio: Dividend Payout= Dividends Net income  Generally, growth firms have low dividend payout ratios as they retain most of their income to finance expansion.  More established, mature firms tend to have higher payout ratios.

72.  案例：江西纸业（ 600053 ）是一家造纸及纸制品业上市 公司，其 2000~2002 年利润表如下（单位：千元）：

73.  2001 年，江西纸业巨亏，原因部分在于变更了坏 帐计提政策，由原按应收款项余额 3% 计提改为帐 龄分析法。更为重要的一个变更是，由于往来正 常、规范，故对母公司的内部往来不计提坏帐准 备，现变更为对母公司的应收款项也按账龄分析 法计提准备。变更的结果就是对与大股东往来计 提坏帐 23371 万元，直接计入当年损益，致使当 年巨亏 2.99 亿。 2000 年公司刚刚完成了配股。  另外，公司对应收大股东款项由 2000 年末的 686 万元增长为 2001 年末的 93859 万元。公司对期初 报表进行了更正，其他应收款中增加应收大股东 的欠款 70766 万元，应收账款由大股东原欠 483 万 元增至 5798 万元。具体大股东欠款如下：

74. 年份项目余额帐龄坏帐准备 2001 年 应收账款 5799 2-3 年 1740 其他应收 93279 1-4 年 21632 小计 9907823372 2002 年 应收账款 5799 3 年以上 2899 其他应收 94522 1-5 年 33085 小计 10032035985 2003 年 应收账款 5799 3 年以上 2899 其他应收 93555 1-6 年 56968 小计 9935459868

75.  2001 年、 2002 年注册会计师审计意见为保留意见，保留 事项均包括：公司应收大股东款项非常巨大，虽按账龄 分析法计提了坏帐准备，但未能获取充分适当的证据对 上述款项的可收回性做出判断。  要求：  （ 1 ）评价公司 2000 年的盈利质量；  （ 2 ）评价会计政策变更对公司盈利的影响，分析变 更的合理性。

76. Exercises: P 154: 2. P 155: 4 P 159: 18 P 162:27, a,b

77. Solutions: