ADM 1340 Lecture Notes - Lecture 14: Financial Statement, Book Value, Income Statement

Book: Financial management

1. Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Brinker International, which is a real company. Don't complete the minicase itself, just Brinker. Do the analysis on the basis of the figures for the most recent year. For part g, use the 2 most recent years. Download 10K financial statements for the most recent year for Brinker. A good source is the company's home page. Also compare the Brinker ratios to the industry averages and commend on significant differences. You'll note that some of the company's ratios you calculate won't agree with those found on the web page. Ratios are calculated in different ways, however, you should use the formulas in the text. Also, you won't find all of the industry averages, but you will find most of them. You'll need the company's stock price for several of the ratios; use the fiscal year end price. The company's stock symbol is EAT.

(Visit Brinker web site) (Links to an external site.)

(Access industry averages) (Links to an external site.)

Note:

All quantitative work must be done in Excel; Word is not acceptable. You can download Brinker's 10K (annual financial statements they send the Securities and Exchange Commission each year) at the following site:

http://phx.corporate-ir.net/phoenix.zhtml?c=119205&p=irol-sec

You then need to take the various items off the financial statements such as Revenues, Inventory, etc. and calculate the ratios to answer the case questions.

b. calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2012, 2013, and as projected for 2014? We often think of rations as being useful 1. To managers to help run the business, 2. To bankers for credit analysis, and 3. To stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2014 inventory turnover, days sales outstanding, fixed assets turnover, and total assets turnover. How does Brinker utilization of assets stack up against that of other firms in its industry?

d. calculate the 2014 debt ratio, liabilities to assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Brinker compare with the industry with respect to financial leverage: what can you conclude from these ratios:

e. Calculate the 2014 profit margin, basic earning power, return on assets, and return on equity. What can you say about these ratios?

f. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate the investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Brinker?

h. use the extended DuPont equation to provide a summary and overview of Brinker’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a company’s likely future financial performance.

This term you have learned to understand a company’s financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the company’s financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.

Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.

The bank will base its decision on the following averages for the DME industry:

The balance sheet data for Dependable DME Company follows:

The income statement data for Dependable DME Company follows:

Required:

Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.

You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)

Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)

Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)

In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)

Compare Companies --- Netflix (NFLX) vs. GEO Holdings (TOK) Compute financial ratios, time value, variables, and returns using industry standard tools for optimizing financial success. Analyze corporate financial data in evaluating past and future financial performances.

Use formulas to calculate the following financial indicators for each year of data: Three fiscal years for Netflix and GEO Holdings for:

o Price to earnings ratio

o Debt to equity ratio

o Free cash flow

o Earnings per share

o Return on equity

o Net profit margin

V. Performance Over Time

A. Analyze the performance of the Netflix over time. What financial strengths and weaknesses does this company have? Consider addressing the free cash flows and ratios you calculated earlier.

B. Analyze the performance of your GEO Holdings over time. What financial strengths and weaknesses does this company have? Consider addressing the free cash flows and ratios you calculated earlier.

C. Analyze how the data differ between these two companies. Why do you think this is? Consider addressing the free cash flows and ratios you calculated earlier.

VI. Investment

A. Are the companies considered growth or value companies? Why?

B. Which company’s stock is the better investment?