FIN-3403 Lecture Notes - Lecture 2: Cash Flow, Current Liability, Current Asset
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Document Summary
Cash flow is king: lenders care about cash and ability to repay, shareholders should care about cash, only cash can be paid out as dividends or reinvested in the firm. Income statement: a measurement over time of how much income the company has made. Earnings before interest, taxes, depreciation, & amortization (ebitda) Net income/ # common shares outstanding = earnings per share (eps) = total liabilities & equity: working capital management focuses on current assets and current liabilities, capital budgeting is managing net fixed assets, capital structure would focus on total liabilities and equity. Cash flow: activities that bring cash in to the company are sources of cash, activities that make cash flow out of the company are uses of cash, mechanical rules for determining sources and uses, sources. Increase in liability or equity account: decrease in asset account, uses, decrease in liability or equity account pay off a debt. Increase in asset account use of cash.
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| Joshua & White Technologies: December 31 Balance Sheets | ||||||
| (Thousands of Dollars) | ||||||
| Assets | 2010 | 2009 | ||||
| Cash and cash equivalents | $21,000 | $20,000 | ||||
| Short-term investments | 3,759 | 3,240 | ||||
| Accounts Receivable | 52,500 | 48,000 | ||||
| Inventories | 84,000 | 56,000 | ||||
| Total current assets | $161,259 | $127,240 | ||||
| Net fixed assets | 218,400 | 200,000 | ||||
| Total assets | $379,659 | $327,240 | ||||
| Liabilities and equity | ||||||
| Accounts payable | $33,600 | $32,000 | ||||
| Accruals | 12,600 | 12,000 | ||||
| Notes payable | 19,929 | 6,480 | ||||
| Total current liabilities | $66,129 | $50,480 | ||||
| Long-term debt | 67,662 | 58,320 | ||||
| Total liabilities | $133,791 | $108,800 | ||||
| Common stock | 183,793 | 178,440 | ||||
| Retained Earnings | 62,075 | 40,000 | ||||
| Total common equity | $245,868 | $218,440 | ||||
| Total liabilities and equity | $379,659 | $327,240 | ||||
| Joshua & White Technologies December 31 Income Statements | ||||||
| (Thousands of Dollars) | ||||||
| 2010 | 2009 | |||||
| Sales | $420,000 | $400,000 | ||||
| Expenses excluding depr. and amort. | 327,600 | 320,000 | ||||
| EBITDA | $92,400 | $80,000 | ||||
| Depreciation and Amortization | 19,660 | 18,000 | ||||
| EBIT | $72,740 | $62,000 | ||||
| Interest Expense | 5,740 | 4,460 | ||||
| EBT | $67,000 | $57,540 | ||||
| Taxes (40%) | 26,800 | 23,016 | ||||
| Net Income | $40,200 | $34,524 | ||||
| Common dividends | $18,125 | $17,262 | ||||
| Addition to retained earnings | $22,075 | $17,262 | ||||
| Other Data | 2010 | 2009 | ||||
| Year-end Stock Price | $90.00 | $96.00 | ||||
| # of shares (Thousands) | 4,052 | 4,000 | ||||
| Lease payment (Thousands of Dollars) | $20,000 | $20,000 | ||||
| Sinking fund payment (Thousands of Dollars) | $0 | $0 | ||||
| Ratio Analysis | 2010 | 2009 | Industry Avg | |||
| Liquidity Ratios | ||||||
| Current Ratio | 2.38 | 2.52 | 2.58 | |||
| Quick Ratio | 1.17 | 1.41 | 1.53 | |||
| Asset Management Ratios | ||||||
| Inventory Turnover | 1.11 | 1.22 | 7.69 | |||
| Days Sales Outstanding | 45.63 | 43.80 | 47.45 | |||
| Fixed Assets Turnover | 1.92 | 2.00 | 2.04 | |||
| Total Assets Turnover | 3.81 | 5.64 | 1.23 | |||
| Debt Management Ratios | ||||||
| Debt Ratio | 32.1% | |||||
| Times-interest-earned ratio | 15.33 | |||||
| EBITDA coverage ratio | 4.18 | |||||
| Profitability Ratios | ||||||
| Profit Margin | 9.57% | 8.63% | 8.86% | |||
| Basic Earning Power | 19.16% | 18.95% | 19.48% | |||
| Return on Assets | 10.59% | 10.55% | 10.93% | |||
| Return on Equity | 21.87% | 19.35% | 16.10% | |||
| Market Value Ratios | ||||||
| Earnings per share | NA | |||||
| Price-to-earnings ratio | 10.65 | |||||
| Cash flow per share | NA | |||||
| Price-to-cash flow ratio | 7.11 | |||||
| Book Value per share | NA | |||||
| Market-to-book ratio | 1.72 | |||||
| a. Has Joshua & White's liquidity position improved or worsened? Explain. | ||||||
| The position of JW has worsend because there ration has fallen from 1.41 to 1.17 | ||||||
| b. Has Joshua & White's ability to manage its assets improved or worsened? Explain. | ||||||
| c. How has Joshua & White's profitability changed during the last year? | ||||||
| d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009. | ||||||
| ROE = | PM x | TA Turnover x Equity Multiplier | ||||
| 2010 | ||||||
| 2009 | ||||||
| e. Perform a common size analysis. What has happened to the composition | ||||||
| (that is, percentage in each category) of assets and liabilities? | ||||||
| Common Size Balance Sheets | ||||||
| Assets | 2010 | 2009 | ||||
| Cash and cash equivalents | ||||||
| Short-term investments | ||||||
| Accounts Receivable | ||||||
| Inventories | ||||||
| Total current assets | ||||||
| Net fixed assets | ||||||
| Total assets | ||||||
| Liabilities and equity | 2010 | 2009 | ||||
| Accounts payable | ||||||
| Accruals | ||||||
| Notes payable | ||||||
| Total current liabilities | ||||||
| Long-term debt | ||||||
| Total liabilities | ||||||
| Common stock | ||||||
| Retained Earnings | ||||||
| Total common equity | ||||||
| Total liabilities and equity | ||||||
| Common Size Income Statements | 2010 | 2009 | ||||
| Sales | ||||||
| Expenses excluding depr. and amort. | ||||||
| EBITDA | ||||||
| Depreciation and Amortization | ||||||
| EBIT | ||||||
| Interest Expense | ||||||
| EBT | ||||||
| Taxes (40%) | ||||||
| Net Income | ||||||
| f. Perform a percent change analysis. What does this tell you about the change in profitability | ||||||
| and asset utilization? | ||||||
| Percent Change Balance Sheets | Base | |||||
| Assets | 2010 | 2009 | ||||
| Cash and cash equivalents | ||||||
| Short-term investments | ||||||
| Accounts Receivable | ||||||
| Inventories | ||||||
| Total current assets | ||||||
| Net fixed assets | ||||||
| Total assets | ||||||
| Base | ||||||
| Liabilities and equity | 2010 | 2009 | ||||
| Accounts payable | ||||||
| Accruals | ||||||
| Notes payable | ||||||
| Total current liabilities | ||||||
| Long-term debt | ||||||
| Total liabilities | ||||||
| Common stock | ||||||
| Retained Earnings | ||||||
| Total common equity | ||||||
| Total liabilities and equity | ||||||
| Base | ||||||
| Percent Change Income Statements | 2010 | 2009 | ||||
| Sales | ||||||
| Expenses excluding depr. and amort. | ||||||
| EBITDA | ||||||
| Depreciation and Amortization | ||||||
| EBIT | ||||||
| Interest Expense | ||||||
| EBT | ||||||
| Taxes (40%) | ||||||
| Net Income | ||||||
| Joshua & White Technologies: December 31 Balance Sheets | ||||||
| (Thousands of Dollars) | ||||||
| Assets | 2010 | 2009 | ||||
| Cash and cash equivalents | $21,000 | $20,000 | ||||
| Short-term investments | 3,759 | 3,240 | ||||
| Accounts Receivable | 52,500 | 48,000 | ||||
| Inventories | 84,000 | 56,000 | ||||
| Total current assets | $161,259 | $127,240 | ||||
| Net fixed assets | 218,400 | 200,000 | ||||
| Total assets | $379,659 | $327,240 | ||||
| Liabilities and equity | ||||||
| Accounts payable | $33,600 | $32,000 | ||||
| Accruals | 12,600 | 12,000 | ||||
| Notes payable | 19,929 | 6,480 | ||||
| Total current liabilities | $66,129 | $50,480 | ||||
| Long-term debt | 67,662 | 58,320 | ||||
| Total liabilities | $133,791 | $108,800 | ||||
| Common stock | 183,793 | 178,440 | ||||
| Retained Earnings | 62,075 | 40,000 | ||||
| Total common equity | $245,868 | $218,440 | ||||
| Total liabilities and equity | $379,659 | $327,240 | ||||
| Joshua & White Technologies December 31 Income Statements | ||||||
| (Thousands of Dollars) | ||||||
| 2010 | 2009 | |||||
| Sales | $420,000 | $400,000 | ||||
| Expenses excluding depr. and amort. | 327,600 | 320,000 | ||||
| EBITDA | $92,400 | $80,000 | ||||
| Depreciation and Amortization | 19,660 | 18,000 | ||||
| EBIT | $72,740 | $62,000 | ||||
| Interest Expense | 5,740 | 4,460 | ||||
| EBT | $67,000 | $57,540 | ||||
| Taxes (40%) | 26,800 | 23,016 | ||||
| Net Income | $40,200 | $34,524 | ||||
| Common dividends | $18,125 | $17,262 | ||||
| Addition to retained earnings | $22,075 | $17,262 | ||||
| Other Data | 2010 | 2009 | ||||
| Year-end Stock Price | $90.00 | $96.00 | ||||
| # of shares (Thousands) | 4,052 | 4,000 | ||||
| Lease payment (Thousands of Dollars) | $20,000 | $20,000 | ||||
| Sinking fund payment (Thousands of Dollars) | $0 | $0 | ||||
| Ratio Analysis | 2010 | 2009 | Industry Avg | |||
| Liquidity Ratios | ||||||
| Current Ratio | 2.38 | 2.52 | 2.58 | |||
| Quick Ratio | 1.17 | 1.41 | 1.53 | |||
| Asset Management Ratios | ||||||
| Inventory Turnover | 1.11 | 1.22 | 7.69 | |||
| Days Sales Outstanding | 45.63 | 43.80 | 47.45 | |||
| Fixed Assets Turnover | 1.92 | 2.00 | 2.04 | |||
| Total Assets Turnover | 3.81 | 5.64 | 1.23 | |||
| Debt Management Ratios | ||||||
| Debt Ratio | 32.1% | |||||
| Times-interest-earned ratio | 15.33 | |||||
| EBITDA coverage ratio | 4.18 | |||||
| Profitability Ratios | ||||||
| Profit Margin | 9.57% | 8.63% | 8.86% | |||
| Basic Earning Power | 19.16% | 18.95% | 19.48% | |||
| Return on Assets | 10.59% | 10.55% | 10.93% | |||
| Return on Equity | 21.87% | 19.35% | 16.10% | |||
| Market Value Ratios | ||||||
| Earnings per share | NA | |||||
| Price-to-earnings ratio | 10.65 | |||||
| Cash flow per share | NA | |||||
| Price-to-cash flow ratio | 7.11 | |||||
| Book Value per share | NA | |||||
| Market-to-book ratio | 1.72 | |||||
| a. Has Joshua & White's liquidity position improved or worsened? Explain. | ||||||
| The position of JW has worsend because there ration has fallen from 1.41 to 1.17 | ||||||
| b. Has Joshua & White's ability to manage its assets improved or worsened? Explain. | ||||||
| c. How has Joshua & White's profitability changed during the last year? | ||||||
| d. Perform an extended Du Pont analysis for Joshua & White for 2008 and 2009. | ||||||
| ROE = | PM x | TA Turnover x Equity Multiplier | ||||
| 2010 | ||||||
| 2009 | ||||||
| e. Perform a common size analysis. What has happened to the composition | ||||||
| (that is, percentage in each category) of assets and liabilities? | ||||||
| Common Size Balance Sheets | ||||||
| Assets | 2010 | 2009 | ||||
| Cash and cash equivalents | ||||||
| Short-term investments | ||||||
| Accounts Receivable | ||||||
| Inventories | ||||||
| Total current assets | ||||||
| Net fixed assets | ||||||
| Total assets | ||||||
| Liabilities and equity | 2010 | 2009 | ||||
| Accounts payable | ||||||
| Accruals | ||||||
| Notes payable | ||||||
| Total current liabilities | ||||||
| Long-term debt | ||||||
| Total liabilities | ||||||
| Common stock | ||||||
| Retained Earnings | ||||||
| Total common equity | ||||||
| Total liabilities and equity | ||||||
| Common Size Income Statements | 2010 | 2009 | ||||
| Sales | ||||||
| Expenses excluding depr. and amort. | ||||||
| EBITDA | ||||||
| Depreciation and Amortization | ||||||
| EBIT | ||||||
| Interest Expense | ||||||
| EBT | ||||||
| Taxes (40%) | ||||||
| Net Income | ||||||
| f. Perform a percent change analysis. What does this tell you about the change in profitability | ||||||
| and asset utilization? | ||||||
| Percent Change Balance Sheets | Base | |||||
| Assets | 2010 | 2009 | ||||
| Cash and cash equivalents | ||||||
| Short-term investments | ||||||
| Accounts Receivable | ||||||
| Inventories | ||||||
| Total current assets | ||||||
| Net fixed assets | ||||||
| Total assets | ||||||
| Base | ||||||
| Liabilities and equity | 2010 | 2009 | ||||
| Accounts payable | ||||||
| Accruals | ||||||
| Notes payable | ||||||
| Total current liabilities | ||||||
| Long-term debt | ||||||
| Total liabilities | ||||||
| Common stock | ||||||
| Retained Earnings | ||||||
| Total common equity | ||||||
| Total liabilities and equity | ||||||
| Base | ||||||
| Percent Change Income Statements | 2010 | 2009 | ||||
| Sales | ||||||
| Expenses excluding depr. and amort. | ||||||
| EBITDA | ||||||
| Depreciation and Amortization | ||||||
| EBIT | ||||||
| Interest Expense | ||||||
| EBT | ||||||
| Taxes (40%) | ||||||
| Net Income | ||||||
