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## Chapter 3 Working with Financial Statements

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**Chapter 3Working with Financial Statements**Common Size Statements Ratios Issues with Ratios Chapter 3: Working with Financial Statements**Clicker Test Question**Describe your feeling/opinion? A. financial wealth is very important to happiness B. financial wealth is only one factor to happiness C. wealth has nothing to do with happiness D. wealth usually detracts from happiness E. really couldn’t say Chapter 3: Working with Financial Statements**Clicker Question**Company ABC Earnings: • What is your conclusion? • 2009 clearly better than 2008 • 2008 clearly better than 2009 • Depends Chapter 3: Working with Financial Statements**Common Size Statements**• Income Statement • State all items as percent of sales • Balance Sheet • State all items as a percent of total assets Ball Corporation Chapter 3: Working with Financial Statements**Ratios**• Categories of Ratios • Short Term Solvency/Liquidity • Long Term Solvency/Leverage/Debt/Coverage • Asset Management/Turnover • Profitability Chapter 3: Working with Financial Statements**Ratios**• Categories of Ratios (con’t) • Market based • Dupont Framework • Growth Ratios • Note: See text table 3.5 page 63 for ratio summary Chapter 3: Working with Financial Statements**Ratios**• Short Term Solvency Ratios • Current ratio • Quick ratio Chapter 3: Working with Financial Statements**Ratios**• Long Term Solvency (Leverage, Debt, Coverage Ratios) • Total Debt Ratio • Debt Equity Ratio • Equity Multiplier • Times Interest Earned (TIE) • Cash Coverage Chapter 3: Working with Financial Statements**Ratios**• Long Term Solvency • Total Debt Ratio • Debt Equity Ratio Chapter 3: Working with Financial Statements**Ratios**• Long Term Solvency • Equity Multiplier Chapter 3: Working with Financial Statements**Clicker Question**If a company’s debt ratio (total debt/assets) = .6, what is the company’s debt-equity ratio (debt/equity)? A. .5 B. .6 C. 1.0 D. 1.5 E. 2.5 Chapter 3: Working with Financial Statements**Clicker Question**If a company’s debt-equity ratio (debt/equity) is 1.5, what is the equity multiplier (total assets/equity)? A. .5 B. .6 C. 1.0 D. 1.5 E. 2.5 Chapter 3: Working with Financial Statements**Ratios**• Long Term Solvency • Times Interest Earned (TIE) • Cash Coverage Chapter 3: Working with Financial Statements**Ratios**• Asset Management Ratios (Turnover) • Inventory Turnover • Days Sales in Inventory • Receivables Turnover • Days Sales in Receivables (aka DSO) • Total Asset Turnover Chapter 3: Working with Financial Statements**Ratios**• Asset Management Ratios (Turnover) • Inventory Turnover • Days Sales in Inventory Chapter 3: Working with Financial Statements**Ratios**• Asset Management Ratios (Turnover) • Receivables Turnover • Days Sales in Receivables (aka DSO) Chapter 3: Working with Financial Statements**Clicker Question**Calculate DSO: A/R = $57,000; A/R Turnover = 12; Total assets = $356,000; A/P = $78,000 A. $800 B. 12 times C. 30 days D. 60 days E. 12 days Chapter 3: Working with Financial Statements**Ratios**• Asset Management Ratios (Turnover) • Total Asset Turnover Chapter 3: Working with Financial Statements**Ratios**• Profitability Ratios • Profit Margin • Return on Assets (ROA) Chapter 3: Working with Financial Statements**Ratios**• Profitability Ratios • Return on Equity (ROE) Chapter 3: Working with Financial Statements**Ratios**• Market Ratios • Price-Earnings Multiple Chapter 3: Working with Financial Statements**Ratios**• Market Ratios • Market to Book Ratio Chapter 3: Working with Financial Statements**Ratios**• Dupont Identity ROE = Profit Margin x Total Asset Turnover x Equity Multiplier Chapter 3: Working with Financial Statements**Ratios**• Dupont Identity ROE = Profit Margin x Total Asset Turnover x Equity Multiplier Chapter 3: Working with Financial Statements**Clicker Question**Given the DuPont framework, the more debt a company has and if ROA is negative, then …. A. the more positive ROE is B. the more negative ROE is C. ROE will remain the same D. ROE depends on equity, not debt E. ROE has no relation to ROA at all Chapter 3: Working with Financial Statements**Clicker Question**What’s return on assets (ROA) if profit margin is 10% and total asset turnover is 2? A. 2% B. 5% C. 10% D. 15% E. 20% Chapter 3: Working with Financial Statements**Ratios**• Growth Ratios • Dividend Ratios • Dividend payout ratio • Retention ratio Chapter 3: Working with Financial Statements**Ratios**• Growth Ratios • Internal Growth Rate Chapter 3: Working with Financial Statements**Ratios**• Growth Ratios • Sustainable Growth Rate Chapter 3: Working with Financial Statements**Ratios**• What affects growth? Chapter 3: Working with Financial Statements**Clicker Question**Which ratio below is an “Asset Management” ratio? (also know as asset efficiency or turnover ratios) A. current assets / current liabilities B. net income / sales C. sales / fixed assets D. total debt / total assets E. EBIT / interest Chapter 3: Working with Financial Statements**Clicker Question**Analysts following Gentech Corporation report the company’s dividend yield (dividends paid per share divided by stock price) has doubled from 5% to 10%. Is this: A. Clearly good news B. Clearly bad news C. It really depends Chapter 3: Working with Financial Statements**Issues with Ratios**• Uses • Analysis • Problems • Comparative Analysis of Ball Corp Chapter 3: Working with Financial Statements**Clicker Question**Based on the ratios seen, how would you rank Ball Corp? A. Buy B. Hold C. Sell Chapter 3: Working with Financial Statements**Chapter-end Homework Problems**• Chapter 3 • Problems 1, 3, 5, 7, 9, 13, 17, 19 Chapter 3: Working with Financial Statements