Chapter 19

Financial Analysis and Planning

Mila Getmansky Sherman

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Financial Analysis and

DecisionsSCH-MGMT

640

19- 2

Topics Covered

Financial StatementsExecutive Paper CorporationFinancial PlanningFinancial Planning ModelsGrowth and External Financing

19- 3

Executive Paper

Executive Paper Balacne Sheet (millions)

Dec Dec2004 2005 diff

Assets

Current AssetsCash & Securities 75 110 35Receivables 433.1 440 6.9Inventory 339.9 350 10.1

Total 848 900 52

Fixed AssetsP, P, E 929.5 1000 70.5accum Depr 396.7 450 53.3

Net Fixed Assets 532.8 550 17.2

Total Assets 1,380.80 1,450.00 69.2

Executive Paper Balacne Sheet (millions)

Dec Dec2004 2005 diff

Assets

Current AssetsCash & Securities 75 110 35Receivables 433.1 440 6.9Inventory 339.9 350 10.1

Total 848 900 52

Fixed AssetsP, P, E 929.5 1000 70.5accum Depr 396.7 450 53.3

Net Fixed Assets 532.8 550 17.2

Total Assets 1,380.80 1,450.00 69.2

19- 4

Executive Paper

Executive Paper Balacne Sheet (millions)

Dec Dec2004 2005 diff

Liabilities and Equity

Current LiabilitiesDebt due in 1 year 96.6 100.0 3.4Payable 349.9 360.0 10.1

Total current liabilities 446.5 460.0 13.5

Long term debt 425.0 450.0 25.0

Shareholders equity 509.3 540.0 30.7

Total liabilities and equity 1,380.80 1,450.00 69.2

Executive Paper Balacne Sheet (millions)

Dec Dec2004 2005 diff

Liabilities and Equity

Current LiabilitiesDebt due in 1 year 96.6 100.0 3.4Payable 349.9 360.0 10.1

Total current liabilities 446.5 460.0 13.5

Long term debt 425.0 450.0 25.0

Shareholders equity 509.3 540.0 30.7

Total liabilities and equity 1,380.80 1,450.00 69.2

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Executive Paper

Executive Paper - Other Data 2004 2005

Market value of equity 598 708

Average number of shares, millions 14.16 14.16

Share price, dollars 42.25 50

Executive Paper - Other Data 2004 2005

Market value of equity 598 708

Average number of shares, millions 14.16 14.16

Share price, dollars 42.25 50

19- 6

Executive Paper

Executive Paper Income Statement (2005)

$ millionsRevenues 2,200.00Costs 1,980.00

Depreciation 53.30EBIT 166.70Interest 42.50Tax 49.70Net income 74.50

Dividend 43.80Retained earnings 30.70Earnings per share, dollars 5.26Dividend per share, dollars 3.09

Executive Paper Income Statement (2005)

$ millionsRevenues 2,200.00Costs 1,980.00

Depreciation 53.30EBIT 166.70Interest 42.50Tax 49.70Net income 74.50

Dividend 43.80Retained earnings 30.70Earnings per share, dollars 5.26Dividend per share, dollars 3.09

19- 7

Executive Paper

Executive Paper Sources and Uses of Funds (2005)

Sources: $ millionsNet Income 74.50 Depreciation 53.30

Operating cash flow 127.80 Borrowing 25.00 Stock issues - Total sources 152.80

Uses:Increase in net working capital 38.50 Investment 70.50 Dividends 43.80 Total uses 152.80

Executive Paper Sources and Uses of Funds (2005)

Sources: $ millionsNet Income 74.50 Depreciation 53.30

Operating cash flow 127.80 Borrowing 25.00 Stock issues - Total sources 152.80

Uses:Increase in net working capital 38.50 Investment 70.50 Dividends 43.80 Total uses 152.80

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Leverage Ratios

L o n g t e r m d e b t r a t io =lo n g t e r m d e b t

lo n g t e r m d e b t + e q u i ty

D e b t e q u i t y r a t i o =l o n g t e r m d e b t + v a l u e o f l e a s e s

e q u i t y

19- 9

Leverage Ratios

Total debt ratio =total liabilities

total assets

Times interest earned =EBIT

interest payments

Cash coverage ratio =EBIT + depreciation

interest payments

19- 10

Liquidity Ratios

Net working capital

to total assets ratio=

Net working capital

Total assets

Current ratio =current assets

current liabilities

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Liquidity Ratios

Cash ratio =cash + marketable securities

current liabilities

Quick ratio =cash + marketable securities + receivables

current liabilities

Interval measure =cash + marketable securities + receivables

average daily expenditures from operations

19- 12

Efficiency Ratios

Asset turnover ratio =Sales

Average total assets

capital gnet workin average

sales= turnoverNWC

19- 13

Efficiency Ratios

Days' sales in inventory =average inventory

cost of goods sold / 365

Inventory turnover ratio =cost of goods sold

average inventory

Average collection period =average receivables

average daily sales

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Profitability Ratios

Return on assets =EBIT - tax

average total assets

Net profit margin =EBIT - tax

sales

Return on equity =earnings available for common stock

average equity

19- 15

Profitability Ratios

Plowback ratio =earnings - dividends

earnings

= 1 - payout ratio

Payout ratio =dividends

earnings

Growth in equity from plowback =earnings - dividends

earnings

19- 16

Market Value Ratios

Forecasted PE ratio =P

aveEPS

1

r - g0

1

=Di vEPS

x1

1

PE Ratio =stock price

earnings per share

Dividend yield =dividend per share

stock price

19- 17

Market Value Ratios

Market to book ratio =stock price

book value per share

Price per share = P =Div

r - g01

Tobins Q =market value of assets

estimated replcement cost

19- 18

Executive Paper Ratios

Executive PaperPaper

Industry

Leverage Ratios:Debt ratio 0.45 0.69Debt ratio (including short-term debt) 0.5 0.74Debt-equity ratio 0.83 1Times-interest-earned 5.2 2.6

Liquidity Ratios:

Net-working-capital-to-total assets 0.3 0.05Current ratio 2 1.4Quick ratio 1.2 0.8Cash ratio 0.2 0.05Interval measure 101.4 85.1

Executive PaperPaper

Industry

Leverage Ratios:Debt ratio 0.45 0.69Debt ratio (including short-term debt) 0.5 0.74Debt-equity ratio 0.83 1Times-interest-earned 5.2 2.6

Liquidity Ratios:

Net-working-capital-to-total assets 0.3 0.05Current ratio 2 1.4Quick ratio 1.2 0.8Cash ratio 0.2 0.05Interval measure 101.4 85.1

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Executive Paper Ratios (continued)

Executive PaperPaper

Industry

Efficiency Ratios:Sales-to-assets ratio 1.55 0.89Sales-to-net-working-capital 5.2 3.7Days in inventory 63.6 56.1Inventory turnover 5.7 6Average collection period (days) 72.4 40.6Receivable turnover 5 8.2

Profitability Ratios:Net profit margin 5.30% 6.50%Return on assets (ROA) 8.30% 3.80%Return on equity (ROE) 14.20% 1.70%Payout Ratio 0.60 0

Market-Value Ratios:Price-earning ratio (P/E) 9.50 13.8Dividend yield 6.20% 0Market-to-book ratio 1.30% 1.6

Executive PaperPaper

Industry

Efficiency Ratios:Sales-to-assets ratio 1.55 0.89Sales-to-net-working-capital 5.2 3.7Days in inventory 63.6 56.1Inventory turnover 5.7 6Average collection period (days) 72.4 40.6Receivable turnover 5 8.2

Profitability Ratios:Net profit margin 5.30% 6.50%Return on assets (ROA) 8.30% 3.80%Return on equity (ROE) 14.20% 1.70%Payout Ratio 0.60 0

Market-Value Ratios:Price-earning ratio (P/E) 9.50 13.8Dividend yield 6.20% 0Market-to-book ratio 1.30% 1.6

19- 20

The DuPont System

A breakdown of ROE and ROA into component ratios

equity

interest-tax-EBIT=ROE

assets

taxes-EBIT=ROA

19- 21

The DuPont System

ROA =sales

assetsx

EBIT - taxes

sales

assetturnover

profitmargin

19- 22

The DuPont System

ROE =assets

equityx

sales

assetsx

EBIT - taxes

salesx

EBIT - taxes - interest

EBIT - taxes

leverageratio

assetturnover

profitmargin

debtburden

19- 23

Common Size Balance SheetFor S&P Composite Index Firms during 2005

19- 24

Common Size Income StatementFor S&P Composite Index Firms during 2005

19- 25

Financial Ratios

2005 Ratios for selected firms

19- 26

Executive Paper

Financial Planning

1. Best case

2. Normal growth

3. Retrenchment

19- 27

Executive Paper

Financial Planning Models

Executive Paper - Latest & Proforma Income Statements

2005 2006 2010Revenue 2,200.0 2,640.0 5,474.0 Costs (90% of revenue) 1,980.0 2,376.0 4,927.0 Depreciation (10% of fixed assets) 53.3 55.0 114.0 EBIT 166.7 209.0 433.4 Interest (10% of LT debt) 42.5 45.0 131.3 Tax (40% of pretax profit) 49.7 65.6 120.8 Net Income 74.5 98.4 181.2 Operating cash flow 127.8 153.4 295.3

Executive Paper - Latest & Proforma Income Statements

2005 2006 2010Revenue 2,200.0 2,640.0 5,474.0 Costs (90% of revenue) 1,980.0 2,376.0 4,927.0 Depreciation (10% of fixed assets) 53.3 55.0 114.0 EBIT 166.7 209.0 433.4 Interest (10% of LT debt) 42.5 45.0 131.3 Tax (40% of pretax profit) 49.7 65.6 120.8 Net Income 74.5 98.4 181.2 Operating cash flow 127.8 153.4 295.3

19- 28

Executive Paper

Financial Planning Models

Executive Paper - Latest & Proforma Statemet of Cash Flows

2005 2006 2010Increase in NWC (NWC=20% of revenues) 38.5 88 182.5Invetment in fixed assets (FA=25% of revenues) 70.5 165 342.1Dividends (60% of net income) 44.7 59 108.7Total uses of funds 152.8 312 633.4External capital requried (Uses-operating CF) 25 158.6 338.1

Executive Paper - Latest & Proforma Statemet of Cash Flows

2005 2006 2010Increase in NWC (NWC=20% of revenues) 38.5 88 182.5Invetment in fixed assets (FA=25% of revenues) 70.5 165 342.1Dividends (60% of net income) 44.7 59 108.7Total uses of funds 152.8 312 633.4External capital requried (Uses-operating CF) 25 158.6 338.1

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Executive Paper

Financial Planning Models

Executive Paper - Latest & Proforma Balance Sheets

2005 2006 2010Net working capital (20% of revenues) 440.0 528.0 1,095.0 Net fixed assets (25% of revenues) 550.0 660.0 1,369.0 Total net assets 990.0 1,188.0 2,463.0 Long-term debt 450.0 608.6 1,651.0 Equity 540.0 579.4 812.0 Total long-term liabilities and equity 990.0 1,188.0 2,463.0

Executive Paper - Latest & Proforma Balance Sheets

2005 2006 2010Net working capital (20% of revenues) 440.0 528.0 1,095.0 Net fixed assets (25% of revenues) 550.0 660.0 1,369.0 Total net assets 990.0 1,188.0 2,463.0 Long-term debt 450.0 608.6 1,651.0 Equity 540.0 579.4 812.0 Total long-term liabilities and equity 990.0 1,188.0 2,463.0

19- 30

Growth and Retained Earnings

%98.3assetsnet

earnings retained rategrowth Internal

%98.3assetsnet

earnings retained rategrowth Internal

%98.3or 0398.

5455.1822.40.assetsnet

equityequity on returnratioplowback

assets

equity

equity

incomenet

incomenet

earnings retainedrate growth Internal

%98.3or 0398.

5455.1822.40.assetsnet

equityequity on returnratioplowback

assets

equity

equity

incomenet

incomenet

earnings retainedrate growth Internal

Executive Paper Growth

19- 31

Web Resources

www.ibm.com/investor/financialguide

www.jaxworks.com

edgarscan.pwcglobal.com

www.reportgallery.com

www.prars.com

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