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Financial Ratio Analysis: Understanding Assets, Liabilities, and Profitability, Slides of Management Fundamentals

An in-depth analysis of financial statements through ratio analysis, including the du pont system. It covers various financial ratios such as current ratio, inventory turnover, debt ratio, profit margin, and return on equity. The document also discusses the importance of ratios, their categories, and how they help in evaluating a company's financial health. It includes examples and industry comparisons.

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2012/2013

Uploaded on 07/26/2013

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AnalysisofFinancialStatements
RatioAnalysis
DuPontsystem
Effectsofimprovingratios
Limitationsofratioanalysis
Qualitativefactors
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3-13-

CHAPTER

Analysis

of

Financial

Statements

Ratio

Analysis

Du

Pont

system

Effects

of

improving

ratios

Limitations

of

ratio

analysis

Qualitative

factors

3-

Balance

Sheet:

Assets

Cash A/R Inventories

Total

CA

Gross

FA

Less:

Dep.

Net

FA

Total

Assets

2002

7,

632, 1,287,3601,926,8021,202,

263,160939, 2,866,

2003E

85, 878, 1,716,4802,680,1121,197,

380,120817, 3,497,

3-

Income

statement

Sales COGS Other

expenses

EBITDA Depr.

&

Amort.

EBIT Interest

Exp.

EBT Taxes Net

income

2002

6,034,0005,528,

519,988(13,988)116, (130,948)

136, (266,960)(106,784)(160,176)

2003E 7,035,6005,875,

550,000609,608116,960492,

70, 422,640169,056253,

3-

Other

data

No.

of

shares

EPS DPS Stock

price

Lease

pmts

2003E

3-

What

are

the

five

major

categories

of

ratios,

and

what

questions

do

they

answer?

Liquidity:

Can

we

make

required

payments?

Asset

management:

right

amount

of

assets

vs.

sales?

Debt

management:

Right

mix

of

debt

and

equity?

Profitability:

Do

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?

3-

Calculate

D’Leon’s

forecasted

current

ratio

for

Current

ratio

=

Current

assets

/

Current

liabilities

=

$2,

/

$1,

=

2.34x

3-

What

is

the

inventory

turnover

vs.

the

industry

average?

2003

2002

2001

Ind.

InventoryTurnover

4.1x

4.70x

4.8x

6.1x

Inv. turnover

= Sales / Inventories= $7,036 / $1,716= 4.10x

3-

Comments

on

Inventory

Turnover

Inventory

turnover

is

below

industry

average.

D’Leon

might

have

old

inventory,

or

its

control

might

be

poor.

No

improvement

is

currently

forecasted.

3-

Appraisal

of

DSO

2003

2002

2001

Ind.

DSO

D’Leon collects on sales too slowly,and is getting worse. 

D’Leon has a poor credit policy.

3-

Fixed

asset

and

total

asset

turnover

ratios

vs.

the

industry

average

FA

turnover

Sales

Net

fixed

assets

8.61x

TA

turnover

Sales

Total

assets

2.01x

3-

Calculate

the

debt

ratio,

TIE,

and

EBITDA

coverage

ratios.

Debt

ratio

Total

debt

Total

assets

TIE

EBIT

Interest

expense

7.0x

3-

Calculate

the

debt

ratio,

TIE,

and

EBITDA

coverage

ratios.

EBITDA

=

(EBITDA+Lease

pmts)

coverage

Int

exp

Lease

pmts

Principal

pmts

=

$609.

$

$

$

$

=

5.9x

3-

Profitability

ratios:

Profit

margin

and

Basic

earning

power

Profit

margin

Net

income

Sales

BEP

EBIT

Total

assets

3-

Appraising

profitability

with

the

profit

margin

and

basic

earning

power

2003

2002

2001

Ind.

PM

3.6%

-2.7%

2.6%

3.5%

BEP

14.1%

-4.6%

13.0%

19.1%

Profit margin was very bad in 2002, but is projected toexceed the industry average in 2003.

Looking good.

BEP removes the effects of taxes and financialleverage, and is useful for comparison. 

BEP projected to improve, yet still below the industryaverage.

There is definitely room for improvement.