Ratios and Leverage by xiuliliaofz

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									          ENGG 401 X2
Fundamentals of Engineering Management
              Spring 2008



              Chapter 6:
      Ratio Analysis and Leverage


                 Dave Ludwick
        Dept. of Mechanical Engineering
              University of Alberta
          http://members.shaw.ca/dave_ludwick/
                                        ENGG 401 X2 – Fundamentals of Engineering Management



Sample Management Questions
• Is our credit rating good with our suppliers?
• I was talking to a competitor who said their inventory is
  much much lower than ours. Why is that?
• Every time the price of oil drops our receivables go up… are
  we meeting our bank covenants?
• We have a growth opportunity… can we refinance our long
  term debt and raise some money?
• Are we doing a good job in building value in our stock, as
  shown by the price?
• The issues are sometimes blurry. Financial ratios help
  answer these questions.


                                                              Dave Ludwick, Dept. of Mech. Eng.
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Why Do People Invest in a Business?
• One reason is to buy into a job they feel like doing.

• The second reason is to increase the value of their
  investment.
   – Investors who have no relation to management tend to be
     dispassionate about the business and passionate about the rate at
     which their investment increases (the rate of return)! This is why
     management focuses on share price and dividend.

• Ratios get at three issues:
   – How well is management running the business?
   – How “sound” is the business as a result?
   – How does the “market” react by placing a value on the business?


                                                                     Dave Ludwick, Dept. of Mech. Eng.
                                                                     Ch 6 – Ratio Analysis and Leverage
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Ratio Analysis
• Financial ratios are:
   –   Standard tests recognized by almost all analysts
   –   Indicative of some underlying value that is important
   –   Useful in following year-over-year changes in one company
   –   Useful in comparing companies within a given industry
   –   Not useful in comparing companies in very different industries
        • e.g., a capital intensive integrated steel company vs. a grocery chain
   – Used extensively by lenders (including suppliers deciding on
     whether to give credit) and by financial analysts.

• Ratios are an assessment of management capability.
   – Management must pay attention to them to manage credit and stock
     price!


                                                                           Dave Ludwick, Dept. of Mech. Eng.
                                                                           Ch 6 – Ratio Analysis and Leverage
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Types of Ratios
• Five Classes of Ratios:
   – Liquidity Ratios:
       • will the company stay solvent in the short term?
       • i.e., if I lend money or if I’m a supplier, will I get my money back?
   – Efficiency, Activity or Asset Management Ratios:
       • is management making good use of the company’s assets?
       • also called efficiency ratios
   – Leverage or Debt Management Ratios:
       • will the business be able to service the debt it has undertaken, paying
         both interest and principal? Is the business solvent?
   – Profitability Ratios:
       • is the company earning enough on the assets / equity given to the
         business?
   – Market Value Ratios:
       • for publicly traded companies, how does the stock value compare to
         earnings and the book value of assets?

                                                                            Dave Ludwick, Dept. of Mech. Eng.
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Ratio Analysis
• When performing ratios analysis, we often include balance
  sheet and income statement accounts in the formulae
• When using a formula that includes both income statement
  (revenues and expenses) as well as balance sheet account
  (like cash, AR, Inventory, total assets, etc), we will often take
  an average of the beginning and ending period balances
• To take an average, take the number shown for the balance
  sheet account for Year 1 (say, 2004) and Year 2 (say, 2005),
  add them together and divide by 2
• Example: Total Asset Turnover = Net Sales / (Avg Total
  Assets)
   – Total Asset Turnover = Net Sales / ((Total Assets in Year 1 + Total
     Assets in Year 2)/2)
• NOTE: The formulae that follow may not show this explicitly        Dave Ludwick, Dept. of Mech. Eng.
                                                                     Ch 6 – Ratio Analysis and Leverage

  but you still need to know this
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Liquidity Ratios (1)
• Current ratio:                                                            important

                                 Current Assets
                Current Ratio 
                                Current Liabilities

   – The current ratio is a measure of the firm’s ability to pay bills as they
     come due.
   – Frequently used to assess short term lending.
   – Short term lenders will frequently specify a required current ratio and
     a level of working capital.
   – A high current ratio gives assurance that even in a crisis short term
     debt will be repaid.
   – If too low, then company can be at risk of meeting short-term
     obligations. If too high, then there may be too much invested in
     short-term assets
                                                                        Dave Ludwick, Dept. of Mech. Eng.
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Liquidity Ratios (2)
• Quick ratio or “acid test”:                                                    important

                        Current Assets  Inventories
          Quick Ratio 
                             Current Liabilities

   – A more stringent measure of the firm’s ability to pay its bills
   – If greater than 1, then the short term lender can be repaid from
     receivables and prepaid expenses.
       • This is a very comfortable position for a lender.
   – Eliminates the need to worry about the quality or currency of
     inventory.
       • In a crisis, inventory rarely sells at book value.




                                                                             Dave Ludwick, Dept. of Mech. Eng.
                                                                             Ch 6 – Ratio Analysis and Leverage
                                         8                                                         Summer 2008
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Liquidity Ratios (3)
• Cash ratio:

                            Cash and Equivalents
               Cash Ratio 
                              Current Liabilities

   – Even more stringent measure of liquidity
   – The cash ratio is the most conservative liquidity ratio.
       • It only considers the most liquid of all assets (excludes inventory and
         accounts receivable).
   – Measures a company’s ability to immediately pay off short-term
     liabilities.
       • No reliance on the receipt of receivables or sale of inventories.




                                                                           Dave Ludwick, Dept. of Mech. Eng.
                                                                           Ch 6 – Ratio Analysis and Leverage
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Efficiency (1)
• Inventory Turnover = COGS/Average Inventory
   – Where average inventory = (beginning inventory + ending
     inventory)/2
   – Measures the number of times the inventory is “turned over”
   – Generally, a high inventory turnover is an indicator of good inventory
     management.
   – But a high ratio can also mean there is a shortage of inventory,
     which may mean the company may miss a sale due to an out-of-
     stock situation.
   – A low turnover may indicate overstocking or obsolete inventory.
• Days Sales in Inventory = Avg Inventory/COGS x 365
   – shows the average number of days it will take to sell your inventory
     (number of days sales @ cost in inventory)


                                                                      Dave Ludwick, Dept. of Mech. Eng.
                                                                      Ch 6 – Ratio Analysis and Leverage
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Efficiency (2)
• Accounts Receivable Turnover = Net Sales / (Average
  Accounts Receivable)
   –   Where average AR = (beginning AR + ending AR)/2
   –   This measures how fast a company collects its receivables
   –   Measures how good a company is at getting its customers to pay
   –   The higher the turnover, the shorter the time between sales and
       collecting cash
• Days Sales in Receivables = (Avg AR)/Sales x 365
   – average number of days it takes to collect accounts receivable
     (number of days of sales in receivables)
   – Measures a company’s ability to extend credit and collect debts.
        • A high A/R turnover ratio says that a company operates mainly on a
          cash basis or that its extension of credit and collection of accounts
          receivable is efficient.

                                                                           Dave Ludwick, Dept. of Mech. Eng.
                                                                           Ch 6 – Ratio Analysis and Leverage
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Efficiency (3)
• Fixed assets turnover ratio :

                                   Annual Sales
          Fixed Assets Turnover 
                                  Net Fixed Assets

   – Again, Net Fixed Assets is averaged between beginning and end of
     year balances
       • Fixed Assets also known as Capital Assets
   – Measures the extent to which a company “pays for” its fixed assets.
   – Can be distorted by inflation and/or new vs. old assets (due to
     depreciation).
       • e.g. the “big three” automakers would have a higher turnover (lower
         book value of assets) than a new entrant to North America (e.g., Honda)



                                                                         Dave Ludwick, Dept. of Mech. Eng.
                                                                         Ch 6 – Ratio Analysis and Leverage
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Efficiency (4)
• Total assets turnover ratio :

                                    Annual Sales
            Total Assets Turnover 
                                    Total Assets

   – Same issues as fixed asset turnover:
      • of some use within an industry if the asset acquisition time profile is
        comparable.
      • of no use between industries.




                                                                           Dave Ludwick, Dept. of Mech. Eng.
                                                                           Ch 6 – Ratio Analysis and Leverage
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Solvency
• While liquidity is concerned about ability to meet short-
  term obligations, Solvency is concerned about the
  company’s long-term viability and its ability to cover long-
  term debt.
• One of the most important elements of solvency analysis
  is the analysis of a company's capital structure.
   – Capital Structure refers to a company's sources of finances: debt
     and equity




                                                                     Dave Ludwick, Dept. of Mech. Eng.
                                                                     Ch 6 – Ratio Analysis and Leverage
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Solvency (2)
• Debt ratio:                                                                 important

                                 Total Liabilities
                    Debt Ratio 
                                  Total Assets

   – Includes all current liabilities, ST Debt and LT Debt
   – This ratio is sometimes mistakenly called the debt-to-equity ratio.
       • Check to see what is being quoted.
   – This is a crucial test of the “leverage” of a company, meaning the
     relative level of debt it carries.
       • Low leverage helps in riding out downturns, since there is a low interest
         “hurdle” to cover.
       • Low leverage dampens return on equity during upturns.
   – Debt ranks ahead of equity (i.e., it must be serviced before equity).
       • Debt has higher security, but long term has a lower return.
                                                                          Dave Ludwick, Dept. of Mech. Eng.
                                                                          Ch 6 – Ratio Analysis and Leverage
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Solvency (3)
• Times interest earned ratio:                                                important

                                        EBIT
         Times Interest Earned 
                                 Interest Payments

   – Measures the ability of a company to service its debt (i.e., pay the
     interest).
   – EBIT (Earnings Before Interest and Taxes) is a key financial
     measure.
       • Taxes are excluded because as a firm’s earnings drop, so do its taxes
         (and no taxes are payable at break even), hence interest is paid before
         taxes.
   – This ratio is used to reflect the riskiness of repayments with interest
     to creditors
   – This is a key ratio for lenders.
                                                                          Dave Ludwick, Dept. of Mech. Eng.
                                                                          Ch 6 – Ratio Analysis and Leverage
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Solvency (4)
• Fixed charge coverage ratio:

                                  EBIT  Other Fixed Charges
 Fixed Charge Coverage 
                           Interest Payments  Other Fixed Charges

   – Similar to “Times Interest Earned”, except that other fixed charges
     are included.
   – Examples of fixed charges include lease and sinking fund payments.
   – Difficult to calculate from public information, more often used by
     financial analysts.
   – This ratio indicates how easily the company is making its regular
     (monthly, annual) financial “hurdles”




                                                                    Dave Ludwick, Dept. of Mech. Eng.
                                                                    Ch 6 – Ratio Analysis and Leverage
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Profitability Ratios
• Profit margin on sales:

                                Net Operating Income
       Profit Margin on Sales 
                                       Sales

   – Measures how effectively a firm is able to convert sales to profits
     (remembering that Net Income is Sales less all expenses)
   – May also be measured as EBITDA/Sales where EBITDA stands for
     Earnings Before Interest, Taxes, Depreciation and Amortization
   – The thought here is that the ITDA portion does not generally
     contribute directly to generating sales and so should not be
     considered in the calculation of Net Profit Margin




                                                                     Dave Ludwick, Dept. of Mech. Eng.
                                                                     Ch 6 – Ratio Analysis and Leverage
                                   18                                                      Summer 2008
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Profitability Ratios (2)
• Return on total assets:

                                  Operating Income
         Return on Total Assets 
                                    Total Assets

   – A very powerful tool for comparing companies in the same industry.
       • “How much money do you make per unit of assets that you manage?”
   – Sometimes net income is used instead of operating income.
   – Can be used within a company, by product line, on an “EBIT” basis,
     to ask how well our product lines use our shareholders’ capital.
   – Can be used to determine how often assets are being paid for. It is
     a more stringent measure of asset coverage than the Asset
     Turnover ratio since Return on Assets is calculated with net Profit
     rather than Sales

                                                                      Dave Ludwick, Dept. of Mech. Eng.
                                                                      Ch 6 – Ratio Analysis and Leverage
                                    19                                                      Summer 2008
                                                  ENGG 401 X2 – Fundamentals of Engineering Management



Profitability Ratios (3)
• Return on equity:

                                   Net Income
            Return on Equity 
                               Shareholder's Equity

   – NOTE: If Preferred Dividends were declared during the period, then
     the numerator is (Net Income – Preferred Dividends)
       • Preferred Dividends are monies not available to the common
         shareholder, the true owners of the business
   – For the owners of a company, this is the ultimate test.
       • “How much return am I making on my investment in this company?”
   – Unlike return on assets, return on equity is highly influenced by
     financing.
       • it can be leveraged up in good times and down in bad times


                                                                        Dave Ludwick, Dept. of Mech. Eng.
                                                                        Ch 6 – Ratio Analysis and Leverage
                                      20                                                      Summer 2008
                                               ENGG 401 X2 – Fundamentals of Engineering Management



Market Value Ratios
• Price to earnings ratio (often abbreviated as P/E ratio):

                                   Price per Share
        Price to Earnings Ratio 
                                  Earnings per Share

   – This ratio does not derive from financial statements alone, but
     incorporates a liquid public market value of the company.
   – One of the most key and widely quoted values for publicly traded
     shares.
   – A wide range (from 4 to over 100) for companies with positive
     earnings reflects shareholders expectations of future earnings.
   – A key ratio used in stock valuation to determine whether a stock is
     over or under valued or to determine future direction of stock
     movement

                                                                     Dave Ludwick, Dept. of Mech. Eng.
                                                                     Ch 6 – Ratio Analysis and Leverage
                                    21                                                     Summer 2008
                                                     ENGG 401 X2 – Fundamentals of Engineering Management



Market Value Ratios (2)
• Market to book ratio:

                           Market Price per Share
 Market to Book Ratio 
                        Book Value of Equity per Share

   – A company’s “book value” of equity is related to the acquisition cost
     of assets, and often bears little relationship to replacement value
     due to inflation and depreciation of fixed assets.
       • Original purchase price of assets is available.
   – Market to book ratio and market to replacement value can help to
     identify “bargains” in the stock market as mass psychology swings
     past an equilibrium value.
   – Keep in mind that the book value is based on GAAP (which uses all
     of the guidelines of relevance, comparison, historical value,
     amortization calculation rules, etc)
                                                                           Dave Ludwick, Dept. of Mech. Eng.
                                                                           Ch 6 – Ratio Analysis and Leverage
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Market Value Ratios (3)
• Earnings Per Share = Net Income / (Weighted Average
  Number of Common Shares Outstanding)
   – Amount of money earned per common share
   – EPS is calculated at the very bottom of the Income Statement. It
     represents the money earned by each individual share after Sales,
     all discounts, expenses, interest, depreciation, taxes, extraordinary
     items, and preferred dividends




                                                                      Dave Ludwick, Dept. of Mech. Eng.
                                                                      Ch 6 – Ratio Analysis and Leverage
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Uses of Ratio Analysis
• The most basic rule is: a single ratio in isolation provides
  very little information and may be misleading.

• With that in mind, there are at least 4 uses of ratios:
   –   Trend analysis (internal and external)
   –   Comparison to industry averages (internal and external)
   –   Setting and evaluating company goals (internal)
   –   Restrictive debt covenants (external)


• Sometimes it does not matter exactly how you calculate a
  ratio, as long as you calculate it the same way when you
  are using it for comparison


                                                                      Dave Ludwick, Dept. of Mech. Eng.
                                                                      Ch 6 – Ratio Analysis and Leverage
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Concepts in Corporate Finance
• There are several ways to finance a company
   – Common shares, Preferred shares, Debt
• Common shares are the most commonly vehicle for
  ownership. Typically
   – One vote per share at the company’s annual general meeting
   – They hold the last claim on assets in the event of insolvency
   – They generally don’t receive dividends
• Preferred shares are ownership shares that are more
  “senior” to common shares
   – They hold a more senior claim on assets in the event of insolvency
   – They sometimes get a dividend
   – They usually don’t have a vote at the AGM


                                                                     Dave Ludwick, Dept. of Mech. Eng.
                                                                     Ch 6 – Ratio Analysis and Leverage
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Concepts in Corporate Finance
• One of the key managerial tasks of corporate managers is
  to decide on how to raise funds using the instruments of
  common shares, preferred shares and debt.
• Common shares have the lowest claim on assets and don’t
  expect a dividend, but have ownership control (the vote)
• Preferred shares have a more senior claim on assets, no
  vote, but can receive a dividend.
• Debt has the highest claim on assets, have no vote and
  don’t receive a dividend, but debt payments are a
  contractual obligation and can’t be missed.
• Using Preferred Shares or Debt to raise capital are
  examples of financial leverage

                                                            Dave Ludwick, Dept. of Mech. Eng.
                                                            Ch 6 – Ratio Analysis and Leverage
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Concepts in Corporate Finance – Leverage
• Leverage is when you use the money from someone else to
  grow the company, or achieve its goals
• Common share holders (the true owners of the corporation)
  can leverage cash generated from the sale of Preferred
  Shares or Debt to grow the company
• As long as the net income generated is greater than the
  dividends paid to preferred shareholders or the interest paid
  to debt holders, then there is a net increase to the common
  shareholder and leverage has taken place.
   – They have leveraged money from preferred shareholders and debt
     holders to improve the value of the corporation to the common
     shareholder


                                                                  Dave Ludwick, Dept. of Mech. Eng.
                                                                  Ch 6 – Ratio Analysis and Leverage
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Special Features of Preferred Shares
• Preferred shares usually pay a dividend in exchange for the
  fact that they do not have a voting right
• This is called a Dividend Preference: A dividend could not
  be paid to common shareholders until the dividend is paid
  to the preferred shareholders
• Cumulative Preferred Shares have a right to be paid both
  current and all prior periods’ undeclared dividends. This is
  a feature to preferred shares, but it must be a stated feature
  (not all preferred shares carry this feature)
• Participating Preferred Shares have a feature in which
  preferred shareholders share with common shareholders in
  any dividends paid in excess of the dollar amount specified
  for the preferred shares

                                                               Dave Ludwick, Dept. of Mech. Eng.
                                                               Ch 6 – Ratio Analysis and Leverage
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Special Features of Preferred Shares
• Convertible Preferred Shares give holders the option of
  exchanging their preferred shares for common shares.
   – Usually there is a specified time period in which this can be done
     and there is a specified exchange rate for the shares.
   – This gives preferred shareholders the advantage of the dividend, but
     when the company value goes up they can convert to common
     shares.
   – Note that the convertible feature will cause the value of the preferred
     shares themselves to go up since they are connected to the
     common shares.
• Callable Shares give the issuing company the right to buy
  the shares back from owners at a defined date and for
  defined price

                                                                      Dave Ludwick, Dept. of Mech. Eng.
                                                                      Ch 6 – Ratio Analysis and Leverage
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Cash Dividends
• Dividends are distributions of earnings. They are paid out
  of the company’s net income after all expenses and taxes
• Dividends are basically distributions of Retained Earnings
• Dividends can be paid in the form of cash or more stock
• Company’s generally can (or only will) pay dividends if
   – The company has enough Retained Earnings
   – The company has enough Cash to meet debt, grow the company or
     cover emergencies
• In the end, issuing dividends is a corporate decision, not an
  obligation



                                                                 Dave Ludwick, Dept. of Mech. Eng.
                                                                 Ch 6 – Ratio Analysis and Leverage
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The Concept of Debt
• In a western agricultural or industrial society, wealth is held
  primarily by individuals and not by society at large.
   – There are exceptions (e.g., resources), but the profits from
     development generally flow to individuals.
• Most people with wealth wish to preserve or grow wealth.
• Wealth and entrepreneurial spirit often do not align, and
  there are vast differences in the tolerance for risk.
• The borrower believes inherently that he/she can create
  more wealth than the cost of the borrowed funds.
• Lenders trade lower return (growth in wealth) for lower risk
  (the “risk-reward relationship”).
   – Debt is the primary mechanism to reduce risk, since it ranks ahead
     of equity.
                                                                      Dave Ludwick, Dept. of Mech. Eng.
                                                                      Ch 6 – Ratio Analysis and Leverage
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The Concept of Debt (2)
• The benefit to the borrower is that debt does not convey
  ownership.
   – The lender may restrict the business through covenants, but the
     equity owners own the business and its “blue sky” potential.

• Interest is the cost of debt.
   – Think of it as the rental charge for the use of money
   – It is highly variable from loan to loan,
       • it depends on the risk associated with the loan, and over time
       • It reflects the balance between savers and borrowers and inflation rates
   – Often secured
       • i.e., if it’s not repaid the lender can “attach” (seize) certain assets in
         order to recover the principal
   – Always lower than the projected rate of return on equity in the
     project/business.
       • Otherwise, the business would not be able to repay the equity investors
         at an acceptable return.
                                                                              Dave Ludwick, Dept. of Mech. Eng.
                                                                              Ch 6 – Ratio Analysis and Leverage
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The Concept of Leverage
• Return (i.e., growth in wealth) is more volatile (more
  “levered”) as debt goes up and equity goes down.

• This arises because the risk in the project is being
  concentrated onto a smaller base of equity.
   – The debt gets a fixed (and hopefully lower!) return than equity, but it
     ranks ahead of equity; it must be serviced first.
   – By ranking ahead we mean:
       • Payables and interest are paid first before dividends
       • In the event of business failure or wrap-up, all liabilities are paid first
         before any money is given to the owners




                                                                              Dave Ludwick, Dept. of Mech. Eng.
                                                                              Ch 6 – Ratio Analysis and Leverage
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The Concept of Leverage (2)
• Leverage is usually measured by Debt Ratio:
                         Total Liabilities
                          Total Assets

• Alternatively, leverage is also sometimes measured as a
  ratio of bank debts only:
                          Bank Debts
                          Total Assets

• …or sometimes as a ratio of asset value relative to equity:

                          Total Assets
                          Total Equity

                                                                   Dave Ludwick, Dept. of Mech. Eng.
                                                                   Ch 6 – Ratio Analysis and Leverage
                                34                                                       Summer 2008
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Illustrating the Effects of Leverage

             50% Leverage in Good Times

                                                         return on equity
                                                              (12%)

                               A
                                                                 earning power
  %                                                              of investment
Return        A
                                                                      (10%)


                                                                 cost of debt
            Debt              Equity                                (8%)




                                                         Dave Ludwick, Dept. of Mech. Eng.
                                                         Ch 6 – Ratio Analysis and Leverage
                         35                                                    Summer 2008
                                  ENGG 401 X2 – Fundamentals of Engineering Management



Illustrating the Effects of Leverage (2)

             80% Leverage in Good Times

                                                        return on equity
                                       A                     (18%)


                                                                earning power
  %                                                             of investment
Return            A
                                                                     (10%)


                                                                cost of debt
                 Debt               Equity                         (8%)




                                                        Dave Ludwick, Dept. of Mech. Eng.
                                                        Ch 6 – Ratio Analysis and Leverage
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Illustrating the Effects of Leverage (3)

             50% Leverage in Bad Times




                                                                    cost of debt
  %                                                                    (8%)
Return
              A                                                  earning power
                                 A                               of investment
                                                                      (6%)
             Debt              Equity
                                                              return on equity
                                                                    (4%)

                                                           Dave Ludwick, Dept. of Mech. Eng.
                                                           Ch 6 – Ratio Analysis and Leverage
                          37                                                     Summer 2008
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Illustrating the Effects of Leverage (4)

             80% Leverage in Bad Times




                                                                 cost of debt
  %                                                                 (8%)
Return
                  A
                                                              earning power
                                                              of investment
                                                                   (6%)
                 Debt               Equity
                                                           return on equity
                                         A
                                                                (-2%)

                                                        Dave Ludwick, Dept. of Mech. Eng.
                                                        Ch 6 – Ratio Analysis and Leverage
                          38                                                  Summer 2008
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Leverage Example
• Calculate (a) leverage, (b) net income, and (c) return on
  equity of three nearly identical companies in good times:
      Income Statement
                                    Lodebtco Medebtco                 Hidebtco
                            Sales     $10,000  $10,000                  $10,000
                           COGS        $5,000   $5,000                   $5,000
                           Margin      $5,000   $5,000                   $5,000
                           SG&A        $3,000   $3,000                   $3,000
                Operating Income       $2,000   $2,000                   $2,000

      Balance Sheet (partial)
                     Total Assets         $9,700     $9,700                  $9,700
                 Long-term Debt             $970     $3,880                  $6,790
                  Capital Shares          $6,930     $4,020                  $1,110
               Retained Earnings          $1,000     $1,000                  $1,000

                       Leverage
                     Net Income
                 Return on Equity
                                                                         Dave Ludwick, Dept. of Mech. Eng.
                                                                         Ch 6 – Ratio Analysis and Leverage
                                     39                                                        Summer 2008
                                                   ENGG 401 X2 – Fundamentals of Engineering Management



Leverage Example (2)
• Calculate (a) leverage, (b) net income, and (c) return on
  equity of three nearly identical companies in bad times:
      Income Statement
                                    Lodebtco Medebtco                 Hidebtco
                            Sales      $7,000   $7,000                   $7,000
                           COGS        $3,500   $3,500                   $3,500
                           Margin      $3,500   $3,500                   $3,500
                           SG&A        $3,000   $3,000                   $3,000
                Operating Income         $500    $500                      $500

      Balance Sheet (partial)
                     Total Assets         $9,700     $9,700                  $9,700
                 Long-term Debt             $970     $3,880                  $6,790
                  Capital Shares          $6,930     $4,020                  $1,110
               Retained Earnings          $1,000     $1,000                  $1,000

                       Leverage
                     Net Income
                 Return on Equity
                                                                         Dave Ludwick, Dept. of Mech. Eng.
                                                                         Ch 6 – Ratio Analysis and Leverage
                                     40                                                        Summer 2008

								
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