Financial Statement Analysis: Changes From Eleventh Edition
Financial Statement Analysis: Changes From Eleventh Edition
Financial Statement Analysis: Changes From Eleventh Edition
Anthony/Hawkins/Merchant
Problems
Problem 13-1
a. Profit Margins
M Net income
54
.05 (5 percent)
M Sales
1,080
N Net income
122
6x
M Investment
180
N Sales
1,215
3x
N Investment
405
M Net income
M-Sales
N Sales
N Investment
Both firms have similar returns on investments. Based on this investment criterion, the investments
are equally attractive.
Problem 13-2
Since the division has no control over the financing of its assets employed in its operation, the most
appropriate measure of return on investment to use to judge its performance is
Net income excluding interest expense
Average total assets
$56,940
$462,500
Problem 13-3
2007 McGraw-Hill/Irwin
Chapter 13
Current Year
Days' cash
$5,479,296
($83,138,408 / 365)
$5,479,296
$227,776
= 24 days
Preceeding Year
Days' cash
$6,123,704
($99,748,943 / 365)
$6,123,704
$273,285
= 22.4 days
The new controller holds more cash relative to the companys cash expenses than did the old
controller. The higher level may be safer (i.e. less chance of not meeting payments when due), but
what is its cost? If the cash balance is excessive, the excess is a low-return use of cash compared to
investing it in higher return assets.
Problem 13-4
Current Year
Accounts receivable days
$1,392,790
($13,035,085 / 365)
$1,392,790
$35,713
= 39 days
Previous Year
Accounts receivable days
$1,207,393
($11,597,327 / 365)
$1,207,3930
$31,774
= 38 days
The new policy has not changed the payment practices of customers in any material way.
Problem 13-5
Average inventory
Anthony/Hawkins/Merchant
($58,160 $62,880)
2
= $60,520
$60,520
($300,000 / 365)
Days' inventory
$60,520
$822
= 74 days
Inventory turnover
$300,000
$60,520
= 5 times
Ms. Whitneys utilization of her investment in inventory is lower than for similar companies.
Problem 13-6
Price/earnings ratio
$82
($20,000,000/2,000,000 shares)
$82
$10
= 8.2 times
Dividend yield
$5.74
82
= .07 (7 percent)
Dividend payout
$11,480,000
$20,000,000
= 57.4 percent
Problem 13-7
2007 McGraw-Hill/Irwin
Chapter 13
$1,750,000,000
$250,000,000
= 7 times
Capital intensity
$1,750,000,000
$525,000,000
= 3.33 times
Equity turnover
$1,750,000,000
$1,500,000,000
= 1.17 times
Cases
Case 13-1 Genmo Corporation
Exhibit A
*
This teaching note was prepared by Robert N. Anthony. Copyright Robert N. Anthony.
Anthony/Hawkins/Merchant
9.
10.
11.
12.
13.
GENMO CORPORATION
Balance Sheet as of December 31, 2002
Assets
Cash and marketable securities..........................................................................................................................................
$ 416
Accounts receivable...........................................................................................................................................................
1,117
Subtotal: quick assets......................................................................................................................................................
1,533
Inventories.........................................................................................................................................................................
872
Prepaid expenses................................................................................................................................................................
273
Total current assets..........................................................................................................................................................
2,678
Noncurrent assets...............................................................................................................................................................
4,524
Total assets...................................................................................................................................................................
$7,202
Liabilities and Equity
Current liabilities...............................................................................................................................................................
$2,285
Noncurrent liabilities..........................................................................................................................................................
$1,885
Shareholders equity...........................................................................................................................................................
3,032
Total invested capital..........................................................................................................................................................
4,917
Total liabilities and shareholders equity......................................................................................................................
$7,202
14.
15.
16.
17.
18.
Line
1.
2.
3.
4.
5.
6.
7.
8.
Notes
Line
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Line 3 - line 2
Revenue (10,281) * days receivables (39.66) / 365
Current liabilities (2,285) * quick ratio (0.671)
Cost of sales (line 15) inventory turnover (10.005)
Line 6 - (line 3 + line 4)
Current liabilities (2,285) * current ratio (1.172)
Line 8 - line 6
Same as line 13
Given
Let debt = X; then X (4,917 - X) = 0.6215 (debt/equity). Solving, X = 1,885. (The 4,917 comes
from line 12.)
11.
Line 12 - line 10
12.
Revenues (10,281) / invested capital turnover (2.091)
13.
Line 9 + line 12
14.
Given
15.
Line 14 - line 16
16.
Revenues (10,281) * gross margin percentage (0.1512)
17.
Line 16- line 18
18.
Revenue (10,281)* profit margin percentage (0.02831)
Case 13-2: Amerbran (B)*
*
This teaching note was prepared by James S. Reece. Copyright James S. Reece.
2007 McGraw-Hill/Irwin
Chapter 13
Anthony/Hawkins/Merchant
important questions are only indirectly related to the ratios. The overriding question is why net income
was down 13 percent from 20x0 to 20xl while revenues (including excise taxes) were up 16 percent: this
is directly reflected in the decreased net income percentage (return on sales) ratio. (I stress that though
this ratio is down only 1.45 percentage points, this is a decrease in the ratio of 25 percent.) This profit
margin question also at least indirectly relates to the downward trend in interest coverage, ROA, and
ROE. In fact, improved asset turnover (as well as equity turnover, which students werent asked to
calculate) helped offset part of the effect on ROA (and ROE) of the lower profit margin. Since the gross
margin percentage actually increased slightly in 20xl, the explanation of the narrowed profit margin must
lie in SG&A expenses, which were 14.8 percent of sales in 20x0 but 17.4 percent in 20xl. The decline in
the current and acid-test ratios may not be a concern, but rather may simply reflect better credit and
inventory management (notice that collection period days receivables is down and inventory turnover
is up). Financial leverage as measured by the debt/capitalization ratio has declined a bit, but even in 20x0
was at a relatively safe level for a firm of this basic stability.
1
.
2
.
3
.
4
.
Definition
20x0
20xl
Return
[Net Income +
[$378,782 +
[$328,773 on Assets..........................................................................................................................................................................................................
Interest
$105,165
$102,791
*(1-Tax Rate)]
*(1-.4394)]
= 0.0987
*(1-.455l)]
= 00797
= 9.87%
= 7.97%
Total Assets
$4,433,448
$4,826,512
Return
Net Income
$378,782
$328,773
on Equity.........................................................................................................................................................................................................
= .1735
= 0.1417
=
=
Shareholders
$2,182,869
$2,320,620
17.35
14.17
Equity
%
%
Gross
Gross Margin
$1,649,780
$1,931,438
Margin
= 0.2508
= 0.2534
Percentage.......................................................................................................................................................................................................
=
=
Net Sales Revenue
$6,577,480
$7,622,677
25.08
25.34
%
%
Return
Net Income
$378,782
$328,773
on Sales...........................................................................................................................................................................................................
= 0.0576
= 0.0431
= 5.76%
= 4.31%
Net Sales Revenue
$6,577,480
$7,622,677
5
.
Asset
Sales Revenue
$6,577,480
$7,622,677
Turnover..........................................................................................................................................................................................................
= 1.48
= 1.58
Times
Times
Total Assets
$4,433,448
$4,826,512
6
.
Days
Cash
$23,952
$28,912
Cash.................................................................................................................................................................................................................
= 1.43
= 1.47
Days
Days
Cash Expenses /
($6,198,698 ($7,293,904 365
$101,198)/365
$115,974/365
7
.
Days
Accounts
$687,325
$756,152
Receivables.....................................................................................................................................................................................................
Receivable
= 38.1
= 36.2
Days
Days
Sales / 365
$6,577,480/365
$7,622,677/365
8
.
Days
Inventory
$1,225,402
$1,244,912
Inventories.......................................................................................................................................................................................................
= 173.8
= 162.1
Days
Days
Cost of sales / 365
$2,573,350/365
$2,803,623/365
2007 McGraw-Hill/Irwin
Chapter 13
9
.
Inventory
Cost of Sales
$2,573,350
$2,803,623
Turnover............................................................................................................................................................................................
= 2.10
= 2.25
Times
Times
Inventory
$1,225,402
$1,244,912
1
0
.
Current
Current Assets
$2,013,846
$2,106,116
Ratio..................................................................................................................................................................................................
= 1.53
= 1.30
Current Liabilities
1
1
.
$1,317,751
$1,625,218
Acid-Test
Monetary Current
$711,277
$785,064
Ratio..................................................................................................................................................................................................
Assets
= 0.54
= 0.48
Current Liabilities
$1,317,751
$1,625,218
1
2
.
Debt/
Noncurrent
$932,828
$880,674
Capitalizatio
Liabilities
= 0.2994
= 0.2751
n
=
=
Ratio..................................................................................................................................................................................................
29.94
27.51
(Noncurrent
$932,828 +
$880,674 +
%
%
Liabilities
$2,182,869
$2,320,620
+ Shareholders
Equity)
1
3
.
Times
Pretax Operating
Interest
Profit
$675,659 + $105,165
$603,331 +
Earned...............................................................................................................................................................................................
+ Interest
= 7.42
$102,791
= 6.87
times
Times
Interest
$105,165
$102,791
This teaching note was prepared by Ray G. Stephens. Copyright Ray G. Stephens.
Anthony/Hawkins/Merchant
had deferred taxes on installment sales which he inferred meant that they were selling fixed assets off. (3)
questioned the accounts receivable as he would think that the company would be primarily a cash
business, (4) wondered what the bad debt write-offs were, (5) wondered whether the company would be
better off factoring accounts receivable, (6) was curious about the purpose of the requested line of credit
because of the nonutilization of bank credit in the past, but felt that it would be a desirable account from
the deposit balances, and (7) wondered to whom the long-term debt was owed. At this point Loan Officer
B felt that he could not make a decision about the extension of credit without further clarification on four
issues: (1) What were the credit terms of Dawson stores, Inc.? (2) Had the company changed stores
recently? (3) Who was the lender on the long-term debt? and (4) What did the company feel was the
purpose of the request for funds and when would the funds be used and repaid?
Loan Officer D
Loan Officer D started with a comment about Mr. Dawson leaving the statements without an opportunity
for the lending officer to discuss his need for funds. In actual practice, he would expect more complete
statements of this type.
Loan Officer D then focused upon the current assets section of the statement of financial position as
communicating most about the companies need for the loan:
The need for cash or working capital (a better word) has to come from his current position, wherein
the inventory or the receivables reach such a point theyre not turning fast enough to support the cash
outlay; theyre not turning fast enough or theres some sort of . . . theyre out of kilter [There is
something out of kilter between the relationship of ] the three: receivables, inventory, and cash, so he
has to have satisfied me that the reason for this increase in receivables or inventory is legitimate.
After having satisfied himself as to the legitimacy of the increase, Loan Officer D then proceeded to
compute the following ratios: current, acid, debt/equity, sales/receivables, sales/merchandise
(inventory), profits/equity, and payables/purchases. He started out to compute only the first five and
computed the others also. The first five were felt to be basic to all companies while the latter were felt
to be relevant for this specific firm (from some later comments, we infer due probably to the retail
nature of the company). Loan Officer D was more interested in the trend of a specific ratio than in the
absolute value of the financial ratio.
Loan Officer Ds processing up to this point indicated that the company was a strong candidate as a loan
recipient. The only uncertainty was the amount of the loan, which would be granted. The detailed cash
flow statements previously requested would be utilized to determine the amount that the Loan Officer
would make a commitment of the bank to loan. Loan Officer D was not concerned with the 19-day
slowdown in accounts receivable collection, which the sales/merchandise ratio (computed in days)
indicated. Loan Officer D would, however, request the endorsement of the two Dawson brothers as
principals, even though they did not have controlling ownership of the company, due to his banks
standard policies.
Loan Officer E
Loan Officer E computed the following ratios: cost of sales/inventory, cost of sales/payables, cost of
revenues, operating expenses/revenues, earnings before income taxes/revenues, and net
earnings/revenues. While reviewing the cash flow statements, he placed a large question mark by
Mortgages assumed by purchasers of office properties and prepayment on long-term debt. Loan Officer
E then computed what the accounts payable would have been if they had remained at the same level as
the first year which was contained in the empirical study problem. His computation was undertaken in the
belief that the increase in accounts payable from $1,153,000 (33 days) to $2,272,000 (49 days) indicated
the amount of undercapitalization of the firm. This indicated that the firm was undercapitalized by
10
2007 McGraw-Hill/Irwin
Chapter 13
11