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Comprehensive Financial Analysis: Income Statement and Balance Sheet Trends

This session focuses on historical financial planning through a detailed analysis of the Income Statement and Balance Sheet. We will express all balances as a percentage of sales (POS) and examine trends over time. Comparisons with competitors and industry averages will highlight our company's performance. Technological advances and control measures will be considered in determining feasible POS targets. We will create pro forma statements, ensuring accuracy with formulas, and complete necessary balance adjustments. Additionally, we will compute crucial financial ratios for comprehensive analysis.

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Comprehensive Financial Analysis: Income Statement and Balance Sheet Trends

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  1. Session 2 Financial Planning

  2. Historical Analysis of IncomeStatement and Balance Sheet • Express all balances as a % of sales (POS). • For each item examine trends in the POS over time. • Compare POS with similar analysis of competitors and industry averages. • Consider technological advances and ability of your company to control POS. • Decide on a target/feasible POS for each item for your company.

  3. Reebok Pro Forma Example

  4. Specify Items that Will Not Fluctuate with Sales • Interest • Taxes • Selling, General & Admin Expenses • Depreciation • Dividends • Net Property Plant Equipment

  5. Specify Items that Will Not Fluctuate with Sales (Cont’d) • Long-term Debt • Shareholder equity • Cash • Short-term Debt • All Other Items

  6. Balancing the Pro Formas • Use the percentages previously developed to complete the initial income statement and balance sheet. • NEVER insert an actual number. • ALWAYS use a formula (POS x Sales; % of TI x TI; etc.) • Never use a POS for an item that can be computed by adding and subtracting other items. • For example, compute Gross Profit as SALES-COS, not as GP% x Sales. • The balance sheet will almost certainly not balance.

  7. Balancing the Pro Formas • If Liabilities & Equity > Assets: • Use excess cash as plug • If Assets > Liabilities & Equity: • Use ST debt as plug

  8. Checking the Model • Once the pro formas are complete, compute all important ratios (e.g. ROE, ROA, NPM, Inv. T/O, Debt Ratio, etc.) • Examine carefully and contrast with historic ratios for the company. • Be sure to investigate all ratios that are very different from the historic analyses.

  9. Sustainable Growth Rate • Internal Growth Rate = (R/Inc) • Assets • = (R/Inc) x Net Income x Equity • Net Income Equity Assets • = Plowback x Return on x (1 – Debt Ratio) • Ratio Equity • = b x ROE x (1-D/E)

  10. Sustainable Growth Rate • If capital structure is not changed, we get: • Sustainable Growth Rate = Plowback ratio x ROE

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