1. Chapter 3 Working with Financial Statements
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Chapter 3 Working with Financial Statements
Common Size Statements
Ratios
Issues with Ratios
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

2. Chapter 3: Working with Financial Statements
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Clicker Test Question
Describe your feeling/opinion?
A. financial wealth is very important to happiness
B. financial wealth is only one factor to happiness
C. wealth has nothing to do with happiness
D. wealth usually detracts from happiness
E. really couldn’t say
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

3. Chapter 3: Working with Financial Statements
Clicker Question
Company ABC Earnings:
ABC Co.
2008
2009
Net Income
$1.0 million
$1.2 million
What is your conclusion?
2009 clearly better than 2008
2008 clearly better than 2009
Depends
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Chapter 3: Working with Financial Statements

4. Common Size Statements
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Common Size Statements
Income Statement
State all items as percent of sales
Balance Sheet
State all items as a percent of total assets
Ball Corporation
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

5. Chapter 3: Working with Financial Statements
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Ratios
Categories of Ratios
Short Term Solvency/Liquidity
Long Term Solvency/Leverage/Debt/Coverage
Asset Management/Turnover
Profitability
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

6. Chapter 3: Working with Financial Statements
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Ratios
Categories of Ratios (con’t)
Market based
Dupont Framework
Growth Ratios
Note: See text table 3.5 page 63 for ratio summary
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

7. Chapter 3: Working with Financial Statements
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Ratios
Short Term Solvency Ratios
Current ratio
Quick ratio
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

8. Chapter 3: Working with Financial Statements
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Ratios
Long Term Solvency
(Leverage, Debt, Coverage Ratios)
Total Debt Ratio
Debt Equity Ratio
Equity Multiplier
Times Interest Earned (TIE)
Cash Coverage
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

9. Chapter 3: Working with Financial Statements
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Ratios
Long Term Solvency
Total Debt Ratio
Debt Equity Ratio
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

10. Chapter 3: Working with Financial Statements
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Ratios
Long Term Solvency
Equity Multiplier
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

11. Chapter 3: Working with Financial Statements
Clicker Question
If a company’s debt ratio (total debt/assets) = .6, what is the company’s debt-equity ratio (debt/equity)? A B
C. 1.0
D. 1.5 E
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Chapter 3: Working with Financial Statements

12. Chapter 3: Working with Financial Statements
Clicker Question
If a company’s debt-equity ratio (debt/equity) is 1.5, what is the equity multiplier (total assets/equity)? A B
C. 1.0
D. 1.5 E
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Chapter 3: Working with Financial Statements

13. Chapter 3: Working with Financial Statements
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Ratios
Long Term Solvency
Times Interest Earned (TIE)
Cash Coverage
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

14. Chapter 3: Working with Financial Statements
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Ratios
Asset Management Ratios (Turnover)
Inventory Turnover
Days Sales in Inventory
Receivables Turnover
Days Sales in Receivables (aka DSO)
Total Asset Turnover
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

15. Chapter 3: Working with Financial Statements
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Ratios
Asset Management Ratios (Turnover)
Inventory Turnover
Days Sales in Inventory
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

16. Chapter 3: Working with Financial Statements
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Ratios
Asset Management Ratios (Turnover)
Receivables Turnover
Days Sales in Receivables (aka DSO)
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

17. Chapter 3: Working with Financial Statements
Clicker Question
Calculate DSO:
A/R = $57,000; A/R Turnover = 12;
Total assets = $356,000; A/P = $78,000
A. $800
B times
C days
D days
E days
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Chapter 3: Working with Financial Statements

18. Chapter 3: Working with Financial Statements
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Ratios
Asset Management Ratios (Turnover)
Total Asset Turnover
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

19. Chapter 3: Working with Financial Statements
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Ratios
Profitability Ratios
Profit Margin
Return on Assets (ROA)
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

20. Chapter 3: Working with Financial Statements
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Ratios
Profitability Ratios
Return on Equity (ROE)
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

21. Chapter 3: Working with Financial Statements
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Ratios
Market Ratios
Price-Earnings Multiple
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

22. Chapter 3: Working with Financial Statements
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Ratios
Market Ratios
Market to Book Ratio
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

23. Chapter 3: Working with Financial Statements
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Ratios
Dupont Identity
ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

24. Chapter 3: Working with Financial Statements
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Ratios
Dupont Identity
ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

25. Chapter 3: Working with Financial Statements
Clicker Question
Given the DuPont framework, the more debt a company has and if ROA is negative, then ….
A. the more positive ROE is
B. the more negative ROE is
C. ROE will remain the same
D. ROE depends on equity, not debt
E. ROE has no relation to ROA at all
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Chapter 3: Working with Financial Statements

26. Chapter 3: Working with Financial Statements
Clicker Question
What’s return on assets (ROA) if profit margin is 10% and total asset turnover is 2?
A. 2%
B. 5%
C. 10%
D. 15%
E. 20%
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Chapter 3: Working with Financial Statements

27. Chapter 3: Working with Financial Statements
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Ratios
Growth Ratios
Dividend Ratios
Dividend payout ratio
Retention ratio
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

28. Chapter 3: Working with Financial Statements
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Ratios
Growth Ratios
Internal Growth Rate
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

29. Chapter 3: Working with Financial Statements
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Ratios
Growth Ratios
Sustainable Growth Rate
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

30. Chapter 3: Working with Financial Statements
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Ratios
What affects growth?
Item
Change
Growth
Profits Retained
External Funds (debt or equity)
Assets Used (especially LT assets)
Dividends Paid
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

31. Chapter 3: Working with Financial Statements
Clicker Question
Which ratio below is an “Asset Management” ratio? (also know as asset efficiency or turnover ratios)
A. current assets / current liabilities
B. net income / sales
C. sales / fixed assets
D. total debt / total assets
E. EBIT / interest
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Chapter 3: Working with Financial Statements

32. Chapter 3: Working with Financial Statements
Clicker Question
Analysts following Gentech Corporation report the company’s dividend yield (dividends paid per share divided by stock price) has doubled from 5% to 10%. Is this:
A. Clearly good news
B. Clearly bad news
C. It really depends
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Chapter 3: Working with Financial Statements

33. Chapter 3: Working with Financial Statements
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Issues with Ratios
Uses
Analysis
Problems
Comparative Analysis of Ball Corp
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements

34. Chapter 3: Working with Financial Statements
Clicker Question
Based on the ratios seen, how would you rank Ball Corp?
A. Buy
B. Hold
C. Sell
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Chapter 3: Working with Financial Statements

35. Chapter-end Homework Problems
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Chapter-end Homework Problems
Chapter 3
Problems 1, 3, 5, 7, 9, 13, 17, 19
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Chapter 3: Working with Financial Statements
Chapter 3: Working with Financial Statements