# Calculating Earning Statements

Document Sample

```					             A                    B                   C                   D                   E                    F            G
1   Ch 07 Tool Kit                                                                                                 1/28/2001
2
3                              Chapter 7. Tool Kit for Analysis of Financial Statements
4
5   Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios of other
6   firms and by examining the trends in ratios over time. We can also combine ratios to make the analysis more revealing,
7   as is done with the DuPont analysis, and graphs can be used to facilitate trend analysis. Spreadsheet models such as the
8   one below are exceptionally useful for this type of analysis.
9
10   Note that financial analysis is generally the starting point for a forecast of future performance. We analyze historical
11   data, then plan changes in operations, and then forecast what results will be under the new operating plan. This is
12   where spreadsheets become REALLY useful, as we can make changes in assumptions and instantly see the results of
13   those changes. Thus, the Chapter 7 model is really a lead-in to the one for Chapter 8, where we get into forecasting.
14
15   Input Data:
16                                                                               2001                2000
17   Year-end common stock price                                               \$23.00              \$26.00
18   Year-end shares outstanding (in millions)                                     50                  50
19   Tax rate                                                                    40%                 40%
20   After-tax cost of capital                                                 11.0%               10.8%
21   Lease payments                                                               \$28                 \$28
22   Required sinking fund payments                                               \$20                 \$20
23
24   Balance Sheets
25   (in millions of dollars)
26
27   Assets                                                                      2001                2000
28   Cash and equivalents                                                         \$10                 \$15
29   Short-term investments                                                        \$0                 \$65
30   Accounts receivable                                                         \$375                \$315
31   Inventories                                                                 \$615                \$415
32   Total current assets                                                      \$1,000                \$810
33   Net plant and equipment                                                   \$1,000                \$870
34   Total assets                                                              \$2,000              \$1,680
35
36   Liabilities and equity
37   Accounts payable                                                             \$60                 \$30
38   Notes payable                                                               \$110                 \$60
39   Accruals                                                                    \$140                \$130
40   Total current liabilities                                                   \$310                \$220
41   Long-term bonds                                                             \$754                \$580
42   Total debt                                                                \$1,064                \$800
43   Preferred stock (400,000 shares)                                             \$40                 \$40
44   Common stock (50,000,000 shares)                                            \$130                \$130
45   Retained earnings                                                           \$766                \$710
46   Total common equity                                                         \$896                \$840
47   Total liabilities and equity                                              \$2,000              \$1,680
48
49   Income Statements
50   (in millions of dollars)
51                                                                                2001                2000
52   Net sales                                                                \$3,000.0            \$2,850.0
53   Operating costs                                                          \$2,616.2            \$2,497.0
54   Earnings before interest, taxes, & depr. (EBITDA)                          \$383.8              \$353.0
55   Depreciation                                                               \$100.0               \$90.0
56   Earnings before interest and taxes (EBIT)                                  \$283.8              \$263.0
57   Less interest                                                               \$88.0               \$60.0
58   Earnings before taxes (EBT)                                                \$195.8              \$203.0
59   Taxes (40%)                                                                 \$78.3               \$81.2
60   Net Income before preferred dividends                                      \$117.5              \$121.8
61   Preferred dividends                                                          \$4.0                \$4.0
62   Net Income available to common stockholders                                \$113.5              \$117.8
63   Common dividends                                                            \$57.5               \$53.0
64   Addition to retained earnings                                               \$56.0               \$64.8
A                    B                 C                   D                  E                    F                   G
65
66    Calculated Data: Operating Performance and Cash Flows                  2001                2000
67    Net operating working capital (NOWC)                                 \$800.0              \$585.0
68    Total operating capital                                            \$1,800.0            \$1,455.0
69    Net Operating Profit After Taxes (NOPAT)                             \$170.3              \$157.8
70    Net Cash Flow (Net income + Depreciation)                            \$213.5              \$207.8
71    Operating Cash Flow (OCF)                                            \$270.3              \$247.8
72    Free Cash Flow (FCF)                                                (\$174.7)                N/A
73
74    Calculated Data: Per-share Information                                    2001               2000
75    Earnings per share (EPS)                                                 \$2.27              \$2.36
76    Dividends per share (DPS)                                                \$1.15              \$1.06
77    Book value per share (BVPS)                                             \$17.92             \$16.80
78    Cash flow per share (CFPS)                                              \$4.27              \$4.16
79    Free cash flow per share (FCFPS)                                       (\$3.49)                N/A
80
81    Calculated Data: Ratios                                                                Industry
82                                                          2001               2000           Average
83    Liquidity ratios
84     Current Ratio                                        3.23                3.68                 4.2
85     Quick Ratio                                          1.24                1.80                 2.1
86    Asset Management ratios                                                                                                Note: Red tic
87     Inventory Turnover                                   4.88                6.87                   9                     indicates comment
88     Days Sales Outstanding                                 45               39.79                  36                     box. Put pointer on
89     Fixed Asset Turnover                                 3.00                3.28                   3                     cell to read it.
90     Total Asset Turnover                                 1.50                1.70                 1.8
91    Debt Management ratios
92     Debt Ratio                                        53.20%              47.62%             40.00%
93     Times Interest Earned                                3.23                4.38                  6
94     EBITDA Coverage Ratio                                3.03                3.53                  8
95    Profitability ratios
96     Profit Margin                                      3.78%               4.13%              5.00%
97     Basic Earning Power                               14.19%              15.65%             17.20%
98     Return on Assets                                   5.67%               7.01%              9.00%
99     Return on Equity                                  12.67%              14.02%             15.00%
100   Market Value ratios
101    Price-to Earnings Ratio                             10.13               11.04                12.5
102    Price-to-Cash Flow Ratio                             5.39                6.26                 6.8
103    Market-to-Book Ratio                                 1.28                1.55                 1.7
104
105   Du Pont Analysis                             ROE =               P.M.        X     T.A.T.O.      X Equity Multiplier
106          MicroDrive           2001            12.67%              3.78%                1.50                2.23
107         MicroDrive            2000            14.02%              4.13%                1.70                2.00
108   Industry Average                            15.00%              5.00%                1.80                1.67
109
110
111   Trend Analysis--Graphing
112
113   A picture is said to be worth a thousand words, and a graph provides a picture of a set of data. We illustrate graphing
114   techniques here with a trend analysis of MicroDrive's ROE. We also assume that the industry average ROE is a constant. In
115   a more realistic problem, we would have more years of data, and historical data on the industry average, but our
116   purpose here is just to illustrate the technique.
117
118   We will make a "scatter diagram," with years on the horizontal axis and ROE on the vertical axis. First, we need
119   the data arranged in the proper order, with years in the first column and ROE's in the second one. This is shown below:
120
121                                       ROE
122         Years            MicroDrive          Industry
123         1999              14.02%              15.00%
124         2000              12.67%              15.00%
125
126   The graph below shows that MicroDrive's ROE is below that of the average firm in its industry, and is trending down. This is
127   bad, and management should take corrective actions. We discuss this in Chapter 8.
128
129
130
MicroDrive's ROE Vs. Industry
A              B               C                 D             E   F   G
MicroDrive's ROE Vs. Industry
131
132
133         16%
134
14%
135
136         12%
137
138         10%
Lahio
139
ROE

140         8%                                     Industry
141         6%
142
143         4%
144
145         2%
146
0%
147
148           1999                                            2000
149
Common Size Analysis and Percent Change Analysis
In common size analysis, all income statement items are divided by sales, and all balance sheet items are divided by total
assets.

In percent change analysis, all items are expressed as a percent change from the first year, called the base year, of the
analysis.

Common Sized Analysis

Balance Sheets
(in millions of dollars)                                                                       Common Size Balance Sheets
2001
Assets                                                       2000           2001                   2000         2001 Industry
Cash and equivalents                                           \$15            \$10                  0.9%        0.5%         1.0%
Short-term investments                                         \$65             \$0                  3.9%        0.0%         2.2%
Accounts receivable                                          \$315           \$375                  18.8%       18.8%        17.8%
Inventories                                                  \$415           \$615                  24.7%       30.8%        19.8%
Total current assets                                         \$810          \$1,000                 48.2%       50.0%        40.8%
Net plant and equipment                                      \$870          \$1,000                 51.8%       50.0%        59.2%
Total assets                                                \$1,680         \$2,000                100.0%      100.0%       100.0%

Liabilities and equity
Accounts payable                                               \$30            \$60                    1.8%         3.0%           1.8%
Notes payable                                                  \$60          \$110                     3.6%         5.5%           4.4%
Accruals                                                     \$130           \$140                     7.7%         7.0%           3.6%
Total current liabilities                                    \$220           \$310                    13.1%        15.5%           9.8%
Long-term bonds                                              \$580           \$754                    34.5%        37.7%          30.2%
Total debt                                                   \$800          \$1,064                   47.6%        53.2%          40.0%
Preferred stock (400,000 shares)                               \$40            \$40                    2.4%         2.0%           0.0%
Common stock (50,000,000 shares)                             \$130           \$130                     7.7%         6.5%           8.5%
Retained earnings                                            \$710           \$766                    42.3%        38.3%          51.5%
Total common equity                                          \$840           \$896                    50.0%        44.8%          60.0%
Total liabilities and equity                                \$1,680         \$2,000                  100.0%       100.0%         100.0%

Income Statements                                                                              Common Size Income Statements
(in millions of dollars)                                                                                                2001
2000           2001                   2000        2001 Industry
Net sales                                                 \$2,850.0       \$3,000.0                100.0%      100.0%     100.0%
Operating costs                                           \$2,497.0       \$2,616.2                 87.6%       87.2%      87.6%
Earnings before interest, taxes, & depr. (EBITDA)          \$353.0         \$383.8                  12.4%       12.8%       2.8%
Depreciation                                                 \$90.0        \$100.0                   3.2%        3.3%      90.4%
Earnings before interest and taxes (EBIT)                  \$263.0         \$283.8                   9.2%        9.5%       9.6%
Less interest                                                \$60.0          \$88.0                  2.1%        2.9%       1.3%
Earnings before taxes (EBT)                                \$203.0         \$195.8                   7.1%        6.5%       8.3%
Taxes (40%)                                                  \$81.2          \$78.3                  2.8%        2.6%       3.3%
Net Income before preferred dividends                      \$121.8         \$117.5                   4.3%        3.9%       5.0%
Preferred dividends                                           \$4.0           \$4.0                  0.1%        0.1%       0.0%
Net Income available to common stockholders                \$117.8         \$113.5                   4.1%        3.8%       5.0%
Percent Change Analysis

Balance Sheets
(in millions of dollars)                                                  Percent Change Balance Sheets
Base
Assets                                                2000       2001           2000        2001
Cash and equivalents                                    \$15        \$10         0.0%      -33.3%
Short-term investments                                  \$65         \$0         0.0%     -100.0%
Accounts receivable                                   \$315       \$375          0.0%       19.0%
Inventories                                           \$415       \$615          0.0%       48.2%
Total current assets                                  \$810      \$1,000         0.0%       23.5%
Net plant and equipment                               \$870      \$1,000         0.0%       14.9%
Total assets                                         \$1,680     \$2,000         0.0%       19.0%

Liabilities and equity
Accounts payable                                        \$30        \$60         0.0%      100.0%
Notes payable                                           \$60      \$110          0.0%       83.3%
Accruals                                              \$130       \$140          0.0%        7.7%
Total current liabilities                             \$220       \$310          0.0%       40.9%
Long-term bonds                                       \$580       \$754          0.0%       30.0%
Total debt                                            \$800      \$1,064         0.0%       33.0%
Preferred stock (400,000 shares)                        \$40        \$40         0.0%        0.0%
Common stock (50,000,000 shares)                      \$130       \$130          0.0%        0.0%
Retained earnings                                     \$710       \$766          0.0%        7.9%
Total common equity                                   \$840       \$896          0.0%        6.7%
Total liabilities and equity                         \$1,680     \$2,000         0.0%       19.0%

Income Statements                                                         Percent Change Income Statements
(in millions of dollars)                                                        Base
2000       2001          2000        2001
Net sales                                           \$2,850.0   \$3,000.0        0.0%         5.3%
Operating costs                                     \$2,497.0   \$2,616.2        0.0%         4.8%
Earnings before interest, taxes, & depr. (EBITDA)    \$353.0     \$383.8         0.0%         8.7%
Depreciation                                           \$90.0    \$100.0         0.0%       11.1%
Earnings before interest and taxes (EBIT)            \$263.0     \$283.8         0.0%         7.9%
Less interest                                          \$60.0      \$88.0        0.0%       46.7%
Earnings before taxes (EBT)                          \$203.0     \$195.8         0.0%        -3.5%
Taxes (40%)                                            \$81.2      \$78.3        0.0%        -3.5%
Net Income before preferred dividends                \$121.8     \$117.5         0.0%        -3.5%
Preferred dividends                                     \$4.0       \$4.0        0.0%         0.0%
Net Income available to common stockholders          \$117.8     \$113.5         0.0%        -3.7%

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