Solutions Manual CHAPTER 12
ANAL YSI SOFFI NANCI ALSTATEMENTS
EVIEW QUESTIONS AND PROBLEMS SUGGESTED ANSWERS TO THE R EVIEW
I.
Questions
1. The empha emphasis sis of the the various various types types of analys analysts ts is by no means means uniform uniform nor should it be. Management is interested in in all types of ratios for two reas reason ons. s. Firs First, t, the the rati ratios os poin pointt out out weak weakne ness sses es that that shou should ld be strengthened; second, management recognizes that the other parties are interested in all the ratios and that financial appearances must be kept up if the firm is to be regarded highly by creditors and euity investors. !uity investors "stockholders# are interested primarily in profitability, but they e$amine the other ratios to get information on the riskiness of euity euity commitments. commitments. %redit %redit analysts analysts are more interested interested in the debt, T&!, and !'&T() coverage ratios, as well as the profitability ratios. *hort+term creditors emphasize liuidity and look most carefully at the current ratio. . The invent inventory ory turno turnover ver ratio ratio is importa important nt to a grocer grocery y store becaus becausee of the much larger inventory reuired and because some of that inventory is perishable. )n insurance company would have no inventory to speak of since its line of business is selling insurance policies or other similar financial products-contracts written on paper and entered into between the company company and the the insure insured. d. This This uestion uestion demonst demonstrat rates es that that the student should not take a routine approach to financial analysis but rather should e$amine the business that he or she is analyzing. . (iffe (ifferen rences ces in the amount amountss of assets assets necess necessary ary to genera generate te a dolla dollarr of sales cause asset turnover turnover ratios to vary vary among industries. industries. For e$ample, a steel company needs a greater number of dollars in assets to produce a dollar in sales than than does a grocery store store chain. )lso, profit profit margins and turnover ratios may vary due to differences in the amount of e$penses incurred incurred to produce produce sales. sales. For e$ample, e$ample, one would e$pect e$pect a grocery grocery store chain to spend more per dollar of sales than does a steel company. /ften, a large turnover will be associated with a low profit margin, and vice versa. 12-1
Chat!" #$
Analysis of Financial Statements
0. /! /! is calcu calcula late ted d as the return return on asse assets ts multi multipl plie ied d by the euit euity y multiplie multiplier. r. The euity multipl multiplier, ier, defined defined as total assets divided divided by common euity, is a measure of debt utilization; the more debt a firm uses, uses, the lower lower its euity euity,, and the higher higher the euity euity multiplier multiplier.. Thus, Thus, using more debt will increase the euity multiplier, resulting in a higher /!. 2. Return on investment relates to income earned on the capital invested in the business firm. 3nsatisfactory /& could possibly lead to withdrawal of capital provided by investors which could result to the demise of the business. 4. efer efer to to page pagess 05, 05, 06 and 2. 2. 5. !$amp !$ample7 le7 &f a compan company y defers defers or postpo postpones nes a regular regular mainte maintenan nance ce and repair activity with a view of reducing current year8s e$penses. *uch act may in the long+run bring about unfavorable outcomes such as delays in production, poor product product uality, uality, etc. 6. Liquidity is the firm8s ability to meet cash needs as they arise such as payment of accounts payable, bank loans and operating e$penses. 9iuidity is crucial to the firm8s survival because if the company is unable to fulfill its obligations, operations could be disrupted that could result to its closure. :. Short-ter Short-term m lenders lenders liuidity because their concern is with the firm8s ability to pay short+term obligations as they come due. Long-term lenders leverage because they are concerned with the relationship of debt to total assets. They also will e$amine profitability to insure that interest payments can be made. Stoc Stockh khol olde ders rs profitability because they are concerned with the secondary secondary consideration consideration given to debt utilizati utilization, on, liuidity liuidity and other ratios. *ince stockholders are the ultimate owners of the firm, they are primarily concerned with with profits or the return on on their investment. 1<. 1<. &f the the acco accoun unts ts rece receiv ivab able le turn turnov over er rati ratio o is decr decrea easi sing ng,, acco accoun unts ts receivable will be on the books for a longer period of time. This means the average collection period will be increasing. 12-2
Analysis of Financial Statements
Chat!" #$
11. The fi$ed charge coverage ratio measures the firm8s ability to meet all fi$ed obligations rather that interest payments alone, on the assumption that failure to meet any financial obligation will endanger the position of the firm. 1. =o rule+of+thumb ratio is valid for all corporations. There is simply too much difference between industries or time periods in which ratios are computed. =evertheless, rules+of+thumb ratios do offer some initial insight into the operations of the firm, and when used with caution by the analyst can provide information. 1. a.
eturn on investment > =et income?Total assets &nflation may cause net income to be overstated and total assets to be understated. Too high a ratio could be reported.
b. &nventory turnover > *ales?&nventory &nflation may cause sales to be overstated. &f the firm uses F&F/ accounting, inventory will also reflect @inflation+influencedA pesos and the net effect will be nil. &f the firm uses 9&F/ accounting, inventory will be stated in old pesos and too high a ratio could be reported. c.
Fi$ed asset turnover > *ales?Fi$ed assets Fi$ed assets will be understated relative to sales and too high a ratio could be reported.
d. (ebt to total assets > Total debt?Total assets *ince both are based on historical costs, no maBor inflationary impact will take place in the ratio. 10. (isinflation tends to lower reported earnings as inflation+induced income is sueezed out of the firm8s income statement. This is particularly true for firms in highly cyclical industries where prices tend to rise and fall uickly. 12. 'ecause it is possible that prior inflationary pressures will no longer seriously impair the purchasing power of the peso. 9essening inflation also means that the reuired return that investors demand on financial assets will be going down, and with this lower demanded return, future earnings or interest should receive a higher current evaluation. 12-3
Chat!" #$
Analysis of Financial Statements
II. Problems P"o%l!& # 'Da( Sal!s Outstan)in*+
(*/ > 0< days; * > ₱5,<<,<<<; ) > C ) * 42
(*/ >
) 0< > ₱5,<<,<<< 42
0< > )?₱<,<<<
) > " ₱<,<<<# "0<# > ₱6<<,<<<
P"o%l!& $ 'D!%t Ratio+
)?! > .0; (?) > C
A D = 1 − A D
D A
= 1 −
A/E 1 2.4 1
= 0.5833= 58.33%
P"o%l!& , 'Ma"-!tBoo- Ratio+
T) > ₱1<,<<<,<<<,<<<; 9T debt > ₱,<<<,<<<,<<< %9 > ₱1,<<<,<<<,<<<; %! > ₱4,<<<,<<<,<<< *hare outstanding > 6<<,<<<,<<<; *tock price > ₱; M?' > C 'ook Dalue >
M' >
₱.<< ₱5.2<
₱4,<<<,<<<,<<<
6<<,<<<,<<<
> ₱5.2<
> 0.445
12-4
) * 42
Analysis of Financial Statements
Chat!" #$
P"o%l!& / 'P"i0!Ea"nin*s Ratio+
!E* > ₱.<<; 'DE* > ₱<; M?' > 1. ×; E?! > C M?' > 1. E?₱< > 1. E > "₱<# " E > ₱0.<<
1.#
E?! > ₱0.< 1.< × P"o%l!& 1 'DuPont an) ROE+
EM > G; !M > .<; *ales > ₱1<<,<<<,<<<; )ssets > ₱2<,<<<,<<<; /! > C /! > EM x T)T/ x !M > =&?* x *?T) x )?! > G x ₱1<<,<<<,<< 6G P"o%l!& 2 'DuPont an) N!t In0o&!+
*tep 17 %alculate total assets from information given. *ales > ₱4,<<<,<<< . > *ales?T) . > ₱4,<<<,<< ₱4,<<<,<< ₱1,652,<<< *tep 7 %alculate net income. There is 2 ₱1,652,<<< x <.2 > ₱:5,2<<. /! > =&?* x *?T) x T)?! <.1 > =&?₱4,<<<,<<< x . x ₱ 1,652,<< 4.0=&?₱4,<<<,<<< 4.0=& > "₱4<,<<<# "<.1# =& > ₱5<,<< ₱11,2<< 12-5
Chat!" #$
Analysis of Financial Statements
P"o%l!& 3 'Basi0 Ea"nin* Po4!"+
/) > 6G; =& > ₱4<<,<<<; T) > C /) > =&?T) 6G > ₱4<<,<< ₱4<<,<< ₱5,2<<,<<< To calculate '!E, we still need !'&T. To calculate !'&T, construct a partial income statement. !'&T &nterest !'T Ta$es "2G# =&
₱1,106,<55
" ₱2,<<< H ₱:,<55# Iiven " ₱4<<,<<
2,<<< :,<55 ,<55 ₱ 4<<,<<<
'!E > !'&T?T) > ₱1,106,<55? ₱5,2<<,<<< > "<.121# '!E > 12.1G P"o%l!& 5 'Ratio Cal0ulations+
Je are given /) > G and *ales?Total assets > 1.2 × From the (uEont euation7 /) > Erofit margin x Total assets turnover G > Erofit margin "1.2# Erofit margin > G?1.2 Erofit margin > G Je can also calculate the company8s debt+to+assets ratio in a similar manner, given the facts of the problem. Je are given /) "=&?)# and /! "=&?!#; if we use the reciprocal of /! we have the following euation7
12-6
Analysis of Financial Statements
E A E A E A D A
=
NI A
×
E
and
NI 1
= 3% ×
D A
=1 −
E A
Chat!" #$
, so
0.05
= 60%. =1 − 0.60= 0.40= 40%.
)lternatively, using the (uEont euation7 /! > /) x !M 2G > G x !M !M > 2G?G > 2? > T)?! Take reciprocal7 !?T) > ?2 > 4 1 <.4< > <.0< or 0 G and its debt+to+assets ratio > 0
T) > ₱1,<<<,<<<,<<<; T > 0 12G; /) > 2G; T&! > C !'&T > <.12 !'&T > ₱1,6<<,<<<,<<< 1,<<<,<<<,<< ₱ < =& > <.<2 =& > ₱4<<,<<<,<<< ₱1,<<<,<<<,<< < =ow use the income statement format to determine interest so you can calculate the firm8s T&! ratio. !'&T &=T !'T Ta$es "0
₱1,6<<,<<<,<<<
*ee above.
&=T > !'&T !'T > ₱1,6<<,<<<,<<< ₱1,<<<,<<<,<<<
6<<,<<<,<<< ₱1,<<<,<<<,<<< !'T > ₱4<<,<<<,<<
T&! > !'&T?&=T > ₱1,6<<,<<<,<<
Chat!" #$
Analysis of Financial Statements
T&! > .2 P"o%l!& #7 'R!tu"n on E8uit(+ /!> Erofit margin x T) turnover x !uity multiplier > =&?*ales x *ales?T) x T)?!uity =ow we need to determine the inputs for the (uEont euation from the data that were given. /n the left we set up an income statement, and we put numbers in it on the right7 *ales "given# %ost !'&T "given# &=T "given# !'T Ta$es "0G# =&
₱1<,<<<,<<<
=?) ₱ 1,<<<,<<< <<,<<< ₱ 5<<,<<< 6,<<< ₱ 04,<<<
=ow we can use some ratios to get some more data7 Total assets turnover > > *?T); T) > *? > ₱1<,<<<,<< ₱2,<<<,<<< (?) > 4 0 T)?! > 1? "!?)# > 1?<.0 > .2 =ow we can complete the (uEont euation to determine /!7 /! > ₱04,<< <.1 > .1G P"o%l!& ## 'Cu""!nt Ratio+ ₱1,1,2<<
Eresent current ratio >
Minimum current ratio >
₱1,1,2<<
₱22,<<<
₱1,1,2<<
> .2
H =E ₱22,<<< H =E
H =E > ₱1,<2<,<<< H =E =E > ₱4,2<<
12-8
> .<
Analysis of Financial Statements
Chat!" #$
*hort+term debt can increase by a ma$imum of ₱4,2<< without violating a to 1 current ratio, assuming that the entire increase in notes payable is used to increase current assets. *ince we assumed that the additional funds would be used to increase inventory, the inventory account will increase to ₱45,2<< and current assets will total ₱1,252,<<<, and current liabilities will total ₱565,2<<. P"o%l!& #$ 'DSO an) A00ounts R!0!i9a%l!+
*tep 17 *olve for current annual sales using the (*/ euation7 22 > ₱52<,<< ₱5,52<,<<< *ales > ₱5,52<,<< ₱0,:55,5.5 *tep 7 &f sales fall by 12G, the new sales level will be ₱0,:55,5.5 "<.62# > ₱0,<,461.6. )gain, using the (*/ euation, solve for the new accounts receivable figure as f ollows7 2 > )? "₱0,<,461.6?42# 2 > )?₱11,2:<.:1 )> "₱11,2:<.:1# "2# )> ₱0<2,461.6 ≈ ₱0<2,46 P"o%l!& #, 'Balan0! Sh!!t Anal(sis+
1. Total debt > "<.2<# "Total assets# > "<.2<# " ₱<<,<<<# > ₱ 12<,<<< . )ccounts payable > Total debt 9ong+term debt > ₱12<,<<< ₱4<,<<< )ccounts payable > ₱ :<,<<< . %ommon stock > Total liabilities and euity (ebt etained earnings %ommon stock > ₱<<,<<< ₱12<,<<< ₱:5,2<< > ₱ 2,2<< 0. *ales > "1.2# "Total assets# > "1.2# " ₱<<,<<<# > ₱ 02<,<<< 2. &nventories > *ales?2 > ₱02<,<< ₱ :<,<<< 4. )ccounts receivable > "*ales?42# "(*/# > "₱02<,<< ₱ 02,<<< 12-9
Chat!" #$
Analysis of Financial Statements
5. %ash H )ccounts receivable H &nventories > "1.6# ")ccounts payable# %ash H ₱02,<<< H ₱:<,<<< > "1.6# " ₱:<,<<<# %ash H ₱12,<<< > ₱14,<<< %ash > ₱5,<<< 6. Fi$ed assets > Total assets "%ash H )ccounts receivable H &nventories# Fi$ed assets > ₱<<,<<< "₱5,<<< H ₱02,<<< H ₱:<,<<<# > ₱ 16,<<< :. %ost of goods sold > "*ales# "1 <.2# > " ₱02<,<<<# "<.52# > ₱ 5,2<< P"o%l!& #/ 'Ratio Anal(sis+
a. )mounts in thousands Firm %urrent ratio
>
%urrent assets %urrent liabilities
>
Kuick ratio
>
%urrent assets L &nventories %urrent liabilities
>
₱422,<<< ₱<,<<<
&ndustry average
>
1.:6×
.<×
>
1.2×
1.×
>
54. days
2 days
>
4.44×
4.5×
>
1.5<×
.<×
>
1.5G
1.G
>
.:G
.4G
>
5.4G
:.
>
41.:G
4<.
₱422,<<< L ₱01,2<< ₱<,<<<
(*/
>
)ccounts receivable *ales?42
>
&nventory turnover
>
*ales &nventories
>
T.). turnover
>
*ales Total assets
>
Erofit margin
>
=et income *ales
>
/)
>
=et income Total assets
>
/!
>
=et income %ommon euity
>
(ebt ratio
>
Total debt Total assets
>
12-10
₱4,<<< ₱0,0<0.11 ₱1,4<5,2<< ₱01,2<< ₱1,4<5,2<< ₱:05,2<< ₱5,<< ₱1,4<5,2<< ₱5,<< ₱:05,2<< ₱5,<< ₱41,<<< ₱264,2<< ₱:05,2<<
Analysis of Financial Statements
Chat!" #$
b. For the firm; /! > EM $ T) turnover $ !M > 1.5G $ 1.5 $
₱:05,2<<
> 5.4G
₱41,<<<
For the industry, /! > 1.G $ $ .2 > :G =ote7 To find the industry ratio of assets to common euity, recognize that 1 "Total debt?Total assets# > %ommon euity?Total assets. *o, %ommon euity?Total assets > 0 .2 > Total assets?%ommon euity. c.
The firm8s days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased or both. Jhile the company8s profit margin is higher than the industry average, its other profitability ratios are low compared to the industry net income should be higher given the amount of euity and assets. owever, the company seems to be in average liuidity position and financial leverage is similar to others in the industry.
d. &f <11 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Eotential investors who look only at <11 ratios will be misled, and a return to normal conditions in <1 could hurt the firm8s stock price. P"o%l!& #1 'Ratio Anal(sis+ Ratio Analysis Liquidity %urrent ratio Asset Management
2011
2010
Industry Average
.
.11
.5
&nventory turnover
0.50
0.05
5.<
5.5:
.:0
Fi$ed assets turnover
:.60
5.6:
1.<
Total assets turnover Profitability eturn on assets eturn on euity Erofit margin
.1
.16
.4
1.<
2.54G 11.05G .40G
:.1G 16.G .2G
(ays sales outstanding
12-11
Chat!" #$
Analysis of Financial Statements
Debt Management (ebt+to+assets ratio Market Value E?! ratio Erice?cash flow ratio a.
20.61G
0:.61G
2<.
12.0 1.4<
2.42 .14
4.< .2
Mango8s liuidity position has improved from <1< to <11; however, its current ratio is still below the industry average of .5.
b. Mango8s inventory turnover, fi$ed assets turnover, and total assets turnover have improved from <1< to <11; however, they are still below industry averages. The firmNs days sales outstanding ratio has increased from <1< to <11-which is bad. &n <1<, its (*/ was close to the industry average. &n <11, its (*/ is somewhat higher. &f the firmNs credit policy has not changed, it needs to look at its receivables and determine whether it has any uncollectibles. &f it does have uncollectible receivables, this will make its current ratio look worse than what was calculated above. c.
Mango8s debt ratio has increased from <1< to <11, which is bad. &n <1<, its debt ratio was right at the industry average, but in <11 it is higher than the industry average. Iiven its weak current and asset management ratios, the firm should strengthen its balance sheet by paying down liabilities.
d. Mango8s profitability ratios have declined substantially from <1< to <11, and they are substantially below the industry averages. Mango needs to reduce its costs, increase sales, or both. e.
Mango8s E?! ratio has increased from <1< to <11, but only because its net income has declined significantly from the prior year. &ts E?%F ratio has declined from the prior year and is well below the industry average. These ratios reflect the same information as %orriganNs profitability ratios. %orrigan needs to reduce costs to increase profit, lower its debt ratio, increase sales, and improve its asset management.
f. <11 <1< &ndustry )vg.
/! > .G 11.05G 16.
EM T) Turnover !uity Multiplier <.0G .1 .1 .40G .16 1.:: .2
12-12
Analysis of Financial Statements
Chat!" #$
9ooking at the (uEont euation, MangoNs profit margin is significantly lower than the industry average and it has declined substantially from <1< to <11. The firmNs total assets turnover has improved slightly from <1< to <11, but itNs still below the industry average. The firmNs euity multiplier has increased from <1< to <11 and is higher than the industry average. This indicates that the firmNs debt ratio is increasing and it is higher than the industry average. Mango should increase its net income by reducing costs, lower its debt ratio, and improve its asset management by either using less assets for the same amount of sales or increase sales. g. &f Mango initiated cost+cutting measures, this would increase its net income. This would improve its profitability ratios and market value ratios. &f Mango also reduced its levels of inventory, this would improve its current ratio-as this would reduce liabilities as well. This would also improve its inventory turnover and total assets turnover ratio. educing costs and lowering inventory would also improve its debt ratio.
P"o%l!& #2 'P"o:ita%ilit( Ratios+ Esth!" Co&an(
)ssets
>
*ales Total asset turnover
>
=et income
>
*ales Erofit margin
>
=et income Total assets
>
/)"invest+ > ment#
₱:4<,<<<
.0 ₱:4<,<<<
<.<5 ₱
45,<< ₱0<<,<<<
>
₱0<<,<<<
>
₱45,<<
>
14.6
P"o%l!& #3 'O9!"all Ratio Anal(sis+ B"(an Co"o"ation
a. %urrent ratio
>
%urrent assets %urrent liabilities
12-13
>
₱25<,<<< ₱<<,<<<
>
1.:<
Chat!" #$
Analysis of Financial Statements
b. Kuick ratio
>
"%urrent assets L &nventory# Erofit margin
>
>
Total debt Total assets
>
d. )sset turnover
>
*ales Total assets
>
>
)ccounts receivable )verage daily credit sales
>
₱
6<,<<< ₱4, per day
>
>
1.1<
>
00G
>
.<
₱<<,<<<
c. (ebt to total assets
e. )verage collection period
₱<,<<<
₱
016,<<< ₱:2<,<<<
₱
,<0<,<<< ₱ :2<,<<< ₱
>
6<,<<< "₱,<0<,<<< x <.52# 4< days
00.1 days
P"o%l!& #5 'P"o:ita%ilit( Ratios+ Alha In)ust"i!s
a. Total asset turnover 1.0 Erofit margin b.
1
=
Erofit margin C 6.0G?1.0
> > >
eturn on total assets 6.0G 4.
x
5G
>
6.0G
x x
&t did not change at all because the increase in profit margin made up for the decrease in the asset turnover. P"o%l!& #6 'DuPont S(st!& o: Anal(sis+ ;in* Co&an(
a. eturn on euity
>
>
eturn on assets "investment# "1 (ebt ?)ssets# 1G <.4< 12-14
>
1G "1 <.0<#
>
Analysis of Financial Statements
Chat!" #$
b. The same as return on assets "1G#. P"o%l!& $7 'A9!"a*! Coll!0tion P!"io)+
)verage collection period
>
>
)ccounts receivable )verage daily credit sales ₱
16<,<<< ₱,<<< per day
₱
16<,<<< "₱1,<<,<<< x <.:<# 4< days
>
>
4< days
P"o%l!& $# 'A9!"a*! Dail( Sal!s+ Cha"li! Co"o"ation
)verage daily credit sales
>
%redit sales 4<
To determine credit sales, multiply accounts receivable by accounts receivable turnover. ₱:<,<<<
)verage daily credit sales
>
x
1 > ₱1,<6<,<<<
₱1,<6<,<<<
₱,<<<
>
4<
P"o%l!& $$ 'DuPont S(st!& o: Anal(sis+
a. =et income
> > >
*tockholders8 euity Total assets Total assets
> > >
*ales ₱0,<<<,<<< ₱10<,<<< >
x x
Total assets
Erofit margin .2G
L
Total liabilities
*ales ?Total asset turnover ₱0,<<<,<<
12-15
Chat!" #$
Analysis of Financial Statements
Total liabilities
> %urrent liabilities H 9ong+term liabilities > ₱1<<,<<< H ₱<<,<<< > ₱0<<,<<<
Total liabilities
*tockholders8 euity
eturn on stockholders8 euity
>
₱1,4<<,<<<
> >
₱0<<,<<<
L
₱1,<<,<<<
=et income *tockholders8 euity
>
₱
10<,<<< ₱1,<<,<<<
>
11.45G
>
10G
b. The value for sales will be7 *ales *ales
> > >
Total assets ₱1,4<<,<<< ₱0,6<<,<<<
=et income
=et income eturn on stockholders8 euity
> >
x x
*ales ₱0,6<<,<< < ₱146,<<<
>
>
Total asset turnover
x x
Erofit margin .2G
=et income *tockholders8 euity
>
₱
146,<<< ₱1,<<,<<<
P"o%l!& $, 'Anal(sis %( Di9isions+ Glo%al Co"o"ation
a. =et income? sales
Medical sulies
!eavy machinery
4.
"lectronics
.6G
6.
The heavy machinery division has the lowest return on sales. b. =et income? Total assets
Medical sulies
!eavy machinery
12.
.52G
12-16
"lectronics 1<.45G
Analysis of Financial Statements
Chat!" #$
The medical supplies division has the highest return on assets. c. %orporate net income %orporate total assets
>
> eturn on assets
>
₱1,<<,<<< H ₱1:<,<<< H ₱<,<<< ₱6,<<<,<<<
H ₱6,<<<,<<< H ₱,<<<,<<<
₱ 1,51<,<<< ₱1:,<<<,<<<
:.
d. eturn on redeployed assets in heavy machinery. 12G x ₱6,<<<,<<< > ₱1,<<,<<< %orporate net income %orporate total assets
>
> eturn on assets
>
₱1,<<,<<< H ₱1,<<,<<<
H ₱<,<<<
₱1:,<<<,<<< ₱ ,5<,<<< ₱1:,<<<,<<<
10.G
P"o%l!& $/ 'Usin* Ratios to Const"u0t =inan0ial Stat!&!nts+
&nventory
> >
%urrent assets
₱0<,<<
> >
₱
> >
₱6<,<<<
₱14<,<<<
)ccounts receivable
%ash
x
> >
₱14<,<<<
" ₱0<,<<
x
4
L ₱4<,<<< L ₱0,<<<
₱26,<<<
%urrent assets %ash
₱
26,<<< ₱
)ccounts receivable
0,<<< 12-17
Chat!" #$
Analysis of Financial Statements ₱
&nventory
4<,<<< ₱14<,<< <
Total current assets
P"o%l!& $1 'Usin* Ratios to Const"u0t =inan0ial Stat!&!nts+ Shannon Co"o"ation
*ales?Total assets Total assets
> .2 times > ₱52<,<< ₱<<,<<<
%ash %ash
> G of total assets > G x ₱<<,<<< > ₱4,<<<
*ales?)ccounts receivable )ccounts receivable
> 1< times > ₱52<,<< ₱52,<<<
*ales?&nventory &nventory
> 12 times > ₱52<,<< ₱2<,<<<
Fi$ed assets Total current asset Fi$ed assets
> Total assets L %urrent assets > ₱4,<<< H ₱52,<<< H ₱2<,<<< ₱11,<<< > ₱<<,<<< L ₱11,<<< > ₱14:,<<<
%urrent assets?current debt %urrent debt
> > %urrent assets? > ₱11,<< ₱42,2<<
Total debt?total assets Total debt
> 02G > .02 x ₱<<,<<< > ₱12,<<<
9ong+term debt 9ong+term debt
> Total debt L %urrent debt > ₱12,<<< L ₱42,2<< > ₱4:,2<<
=et worth =et worth
> Total assets L Total debt > ₱<<,<<< L ₱12,<<< > ₱142,<<< *hannon %orporation 'alance *heet as of (ecember 1, <11
12-18
>
Analysis of Financial Statements
Chat!" #$
%ash ₱ 4,<<< %urrent debt )ccounts receivable 52,<<< 9ong+term debt &nventory 2<,<<< Total debt Total current assets 11,<<< =et worth Fi$ed assets 14:,<<< Total debt and Total assets ₱<<,<<< *tockholders8 euity P"o%l!& $2 'Usin* Ratios to D!t!"&in! A00ount Balan0!s+
₱42,2<<
4:,2<< 12,<<< 142,<<< ₱<<,<<<
Cath( Co"o"ation
a. )ccounts receivable
> *ales?eceivables turnover > ₱,<<<,<< ₱2<<,<<<
b. Marketable securities
> %urrent assets L "%ash H )ccounts receivable H &nventory#
%urrent assets
> %urrent ratio x %urrent liabilities > .2 x ₱5<<,<<< > ₱1,52<,<<<
Marketable securities
> ₱1,52<,<<< L " ₱12<,<<< H ₱2<<,<<< H ₱62<,<<<# > ₱1,52<,<<< L ₱1,2<<,<<< > ₱2<,<<<
Marketable securities c. Fi$ed assets
> Total assets L %urrent assets
Total assets
> *ales?)sset turnover > ₱,<<<,<< ₱,2<<,<<<
Fi$ed assets
> ₱,2<<,<<< L ₱1,52<,<<< > ₱52<,<<<
d. 9ong+term debt
> Total debt L %urrent liabilities
Total debt
> (ebt to assets x Total assets > 0 ₱1,<<<,<<
9ong+term debt
> ₱1,<<<,<<< L ₱5<<,<<< > ₱<<,<<<
P"o%l!& $3 'Usin* Ratios to Const"u0t =inan0ial Stat!&!nts+ Ru%( In0.
12-19
Chat!" #$
Analysis of Financial Statements
*ales?Total assets Total assets
> > ₱<,<<<,<< ₱1<,<<<,<<<
Total debt?Total assets Total debt
> ₱1<,<<<,<<<
*ales?&nventory &nventory
> 2.<$ > ₱<,<<<,<< ₱0,<<<,<<<
)verage daily sales
> ₱<,<<<,<< ₱22,224 per day
)ccounts receivable
> 16 days $ ₱22,224 > ₱1,<<<,<<< "or# > "₱<,<<<,<<<#?"4 ₱1,<<<,<<<
Fi$ed assets
> ₱<,<<<,<< ₱0,<<<,<<<
%urrent assets
> Total assets L Fi$ed assets > ₱1<,<<<,<<< L ₱0,<<<,<<< > ₱4,<<<,<<<
%ash
%ash
> %urrent assets L )ccounts receivable L &nventory > ₱4,<<<,<<< L ₱1,<<<,<<< L ₱0,<<<,<<< > ₱1,<<<,<<<
%urrent liabilities %urrent liabilities
> %urrent assets?$ > ₱4,<<<,<< ₱,<<<,<<<
9ong+term debt 9ong+term debt
> Total debt L %urrent debt > ₱,<<<,<<< L ₱,<<<,<<< > ₱1,<<<,<<<
!uity !uity
> Total assets L Total debt > ₱1<,<<<,<<< L ₱,<<<,<<< > ₱5,<<<,<<<
x
. > ₱,<<<,<<<
uby &nc. %ash )ccounts receivable &nventory Total current assets
₱
%urrent debt
1,<<<,<<< 1,<<<,<<< 9ong+term debt 0,<<<,<<< Total debt 4,<<<,<<< 12-20
₱
,<<<,<<< 1,<<<,<<< ,<<<,<<<
Analysis of Financial Statements
Fi$ed assets Total assets
0,<<<,<<< ₱1<,<<<,<< <
!uity Total debt and euity
Chat!" #$
5,<<<,<<< ₱1<,<<<,<<<
P"o%l!& $5 'Ratio Co&utation an) Anal(sis+
/ne way of analyzing the situation for each company is to compare the respective ratios for each one, e$amining those ratios which would be most important to a supplier or short+term lender and a stockholder.
Erofit margin eturn on assets eturn on euity eceivable turnover )verage collection period &nventory turnover Fi$ed asset turnover Total asset turnover %urrent ratio Kuick ratio (ebt to total assets Times interest earned Fi$ed charge coverage Fi$ed charge coverage calculation a.
Bla0- Co"o"ation 5.0G 16.2G 6.:G 12.4$ .<0 days 2$ .25$ .2$ 1.2$ 1.<$ 4G 0.1$ 1.$
Whit! Co"o"ation 2.2G 1.<
"<
"1?6#
*ince suppliers and short+term lenders are more concerned with liuidity ratios, Jhite %orporation would get the nod as having the best ratios in this category. /ne could argue, however, that Jhite had benefited from having its debt primarily long term rather than short term. =evertheless, it appears to have better liuidity ratios.
b. *tockholders are most concerned with profitability. &n this category, 'lack %orporation has much better ratios than Jhite %orporation. Jhite does have a higher return on euity than 'lack, but this is due to its much 12-21
Chat!" #$
Analysis of Financial Statements
larger use of debt. &ts return on euity is higher than 'lacks8 because it has taken more financial risk. &n terms of other ratios, 'lack has its interest and fi$ed charges well covered and in general its long+term ratios and outlook are better than Jhite. 'lack has asset utilization ratios eual to or better than Jhite and its lower liuidity ratios could reflect better short+term asset management, and that point was covered in part "a#. =ote7 emember that to make actual financial decisions, more than one year8s comparative data is usually reuired. &ndustry comparisons should also be made.
12-22
