Income Statements Sales$4,053 Cost of Goods Sold 2,780 Depreciation 550 EBIT 723 Interest 502 EBT 221 Taxes 75 Net Income $146 Dividends 47 Additions to Retained Earnings 99
Balance Sheets 1997 1998Change Cash $210 $215 Accounts Receivable 355 310 Inventory 507 328 Total Current Assets$1,072 $853 Net Fixed Assets$6,085 $6,527 Total Assets$7,157 $7,380 Accounts Payable $207 $298 Notes Payable 1,715 1,427 Total Current Liabilities $1,922 $1,725 Long-Term Debt $1,987 $2,308 Common Stock $1,000 $1,000 Retained Earnings $2,248 $2,347 Total Liabilities and Owners’ Equity $7,157 $7,380
Statement of Cash Flows Operating Cash Flows Net Income Depreciation Change in Accounts Receivable Change in Inventory Change in Accounts Payable Total Operating Cash Flows Investment Cash Flows Change in Gross Fixed Assets Total Investment Cash Flows Financing Cash Flows Change in Notes Payable Change in Long-term Debt Change in Common Stock Dividends Total Financing Cash Flows Change in Cash =
Statement of Changes in Cash Flows Balance Sheet : Total Assets = Total Liabilities & Owners’ Equity Cash + AR+ Inv + NFA = AP + NP + L- t Debt + CS + RE Note: NFA = FA - Acc Dep. RE = NI - Div Cash = (AP - AR - Inv) + NP + L- t Debt + CS + NI - Div - FA + Acc Dep Cash = Net Income + Acc Dep - ( AR + Inv - AP) - FA + NP + L- t Debt + CS - Div
Statement of Changes in Cash Flows Questions Statements of Cash Flow Can Help Us Address: –Are sources internally or externally generated? And, if funds are externally generated, are sources spontaneous or negotiated? Internal Sources = NI + Depreciation - Dividends Spontaneous Sources = A/P and other liabilities that increase automatically with sales –Is the duration of the new assets matched with the duration of the funding used to support the new asset? Are fixed assets being financed with long-term sources (e.g., NI, L-t Debt, CS) Are permanent increases in current assets being financed with permanent sources? –What has happened to liquidity? Has cash increased? Have other current assets increased more than current liabilities? What is the composition of current assets?
Financial Ratios What constitutes a good ratio? Which of the following three numbers is best? 1, 5, or 2? Why?
Types of Ratios Liquidity Ratios: How liquid are our assets relative to …..? Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Current Assets-Inventories)/Current Liabilities? Cash Ratio = Cash/Current Liabilities etc. Turnover Ratios: How effectively are we using our assets? How much of a given type of assets do we require to support sales? Inventory Turnover = COGS/Inventory ACP = AR/Sales per day Fixed Asset Turnover = Sales/FA
Types of Ratios - Continued Financial Leverage Ratios: How much debt or other fixed-claim securities do we use to support the assets we have in place? Total Debt Ratio = Total Debt/Total Assets Long-Term Debt Ratio = Long-Term Debt/(Long-term Debt + Equity) Times Interest Earned = EBIT/Interest Cash Coverage Ratio = (EBIT + Depreciation)/(Interest + (Dividends)/(1-T)) Profitability Ratios: How much profit are the assets of the firm generating for those who paid for the assets? Basic Earning Power Ratio = EBIT*(1-T)/Total Assets ROA = Net Income/Total Assets ROE = Net Income/Total Equity = (Net Income/Sales)*(Sales/Total Assets)*(Total Assets/Total Equity)
Types of Ratios - Continued Market Value Ratios –How is performance of the firm affecting its stock price relative to accounting earnings and/or book value? Price Earnings Ratio = Price/Earnings per Share Market-to-Book Ratio = Price/Book Value per Share