BUS 320 Lecture Notes - Lecture 4: Profit Margin, Inventory Turnover, Accounts Receivable
Chapter 4 – Analysis of Financial Statements
Balance Sheet: Assets
Balance Sheet: Liabilities and Equity
Income Statement:
Other Data:
Why are ratios useful?
• Ratios standardize numbers and facilitate comparisons.
• Ratios are used to highlight weaknesses and strengths.
• Ratio comparisons should be made through time and with competitors.
o Industry analysis
o Benchmark (peer) analysis
o Trend analysis
Cash
A/R
Inventories
Total CA
Gross FA
Less: Deprec.
Net FA
Total Assets
2016
7,282
632,160
1,287,360
1,926,802
1,202,950
263,160
939,790
2,866,592
2017E
85,632
878,000
1,716,480
2,680,112
1,197,160
380,120
817,040
3,497,152
Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total Equity
Total L & E
2016
524,160
489,600
636,808
1,650,568
723,432
460,000
32,592
492,592
2,866,592
2017E
436,800
408,000
300,000
1,144,800
400,000
1,721,176
231,176
1,952,352
3,497,152
Sales
COGS
Other expenses
EBITDA
Deprec. & amort.
EBIT
Interest exp.
EBT
Taxes
Net income
2016
6,034,000
5,528,000
519,988
(13,988)
116,960
(130,948)
136,012
(266,960)
(106,784)
(160,176)
2017E
7,035,600
5,875,992
550,000
609,608
116,960
492,648
70,008
422,640
169,056
253,584
No. of shares
EPS
DPS
Stock price
Lease pmts
2017E
250,000
$1.014
$0.220
$12.17
$40,000
2016
100,000
-$1.602
$0.110
$2.25
$40,000
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Five Major Categories of Ratios and the Questions They Answer
• Liquidity: Can we make required payments?
• Asset Management: Right amount of assets vs. sales?
• Debt Management: Right mix of debt and equity?
• Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM,
ROE, and ROA?
• Market Value: Do investors like what they see as reflected in P/E and M/B ratios?
D’Leon’s Forecasted Current Ratio and Quick Rato for 2017
Current Ratio = Current Assets / Current Liabilities
= $2,680 / $1,145
= 2.34
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
= ($2,640 - $1,716) / $1,145
= 0.84
Comments on Liquidity Ratios
• Expected to improve but still below industry average
• Liquidity position is weak
D’Leon’s Inventory Turnover vs. Industry average
Inv. Turnover = Sale / Inventories
= $7,036 / $1,716
= 4.10
Comments on Inventory Turnover
• Inventory turnover is below industry average
• D’Leon might have old inventory, or its control might be poor.
• No improvement is currently forecasted
DSO: Average Number of Days After Making a Sale Before Receiving Cash
DSO = Receivables / Avg. Sales Per Day
= Receivables / (Annual Sales/365)
= $878 / ($7,036/365)
= 45.55 days
Appraisal of DSO
2017E 2016 2015 Ind.
Current ratio 2.34x 1.17x 2.33x 2.70x
Quick ratio 0.84x 0.39x 0.85x 1.00x
2017E 2016 2015 Ind.
Inventory turnover 4.10x 4.69x 4.80x 6.10x
2017E 2016 2015 Ind.
DSO 45.55 38.24 37.35 32.00
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Document Summary
Why are ratios useful: ratios standardize numbers and facilitate comparisons, ratios are used to highlight weaknesses and strengths, ratio comparisons should be made through time and with competitors. Industry analysis: benchmark (peer) analysis, trend analysis. D"leon"s forecasted current ratio and quick rato for 2017. Current ratio = current assets / current liabilities. Quick ratio = (current assets inventories) / current liabilities. 1. 00x: expected to improve but still below industry average, liquidity position is weak. Inventory turnover is below industry average: d"leon might have old inventory, or its control might be poor, no improvement is currently forecasted. Dso: average number of days after making a sale before receiving cash. 32. 00: d"leon collects on sales too slowly, and is getting worse, d"leon has a poor credit policy. Fixed assets and total assets turnover ratios vs industry average. Fa turnover = sales / net fixed assets. Evaluating the fa turnover and ta turnover ratios.
