3-1 3-1
CHAPTER3
AnalysisofFinancialStatements
RatioAnalysis
DuPontsystem
Effectsofimprovingratios
Limitationsofratioanalysis
Qualitativefactors
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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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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.