Chapter 14
Suggestions for Case Analysis
Case Analysis
Research: Annual reports 10K form Income statements Balance sheets Cash flow statements Economic conditions Industry information
Case Analysis
Resources for Case Library Research:
Company Information:
Moodys Manuals on Investment Standard & Poors Register of Corporations, Directors, and Executives Value Lines Investment Survey Findex: The Directory of Market Research Reports, Studies and Surveys
Case Analysis
Resources for Case Library Research:
Economic Information:
Business Cycle Development U.S. Census Bureau Current Business Reports Economic Indicators Long-Term Economic Growth Monthly Labor Review U.S. Industrial Outlook Overseas Business Reports
Case Analysis
Resources for Case Library Research:
Industry Information:
Business Week Fortune Industry Survey Industry Week Forbes Inc.
Case Analysis
Resources for Case Library Research:
Directory and Index Information:
Business Periodical Index Directory of National Trade Associations Encyclopedia of Associations Funk and Scotts Index of Corporations and Industries Thomass Register of American Manufacturers Wall Street Journal Index
Case Analysis
Resources for Case Library Research:
Ratio Analysis Information:
Almanac of Business and Industrial Financial Ratios Annual Statement Studies Duns Review Industry Norms and Key Business Ratios
Case Analysis
Resources for Case Library Research:
Online Information:
www.hoovers.com www.sec.gov www.pathfinder.com www.dbisna.com/dnb/dnbhome.htm www.fuld.com www.economist.com www.w100.com www.bloomberg.com
Case Analysis
Financial Analysis:
Ratio analysis
Liquidity ratios- examines firm cash generation levels & cash convertibility Profitability ratios- show extent to which firm activities generate profits Activity ratios- explores cycles of cash and product turnover in firms Leverage ratios- demonstrates firm debt levels & interest responsibilities
Financial Ratio Analysis Liquidity
Formula
1. Liquidity Ratios Current ratio
Current assets Current liabilities
How Expressed
Meaning
Decimal
A short-term indicator of the companys ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. Measures the companys ability to pay off its short-term obligations from current assets, excluding inventories. A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory. Measures the extent to which the companys capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets.
Quick (acid test) ratio
Current assets Inventory Current liabilities Inventory Current assets Current liabilities
Decimal
Inventory to net working capital
Decimal
Cash ratio
Cash + Cash equivalents Current liabilities
Decimal
Financial Ratio Analysis Profitability
Formula
2. Profitability Ratios Net profit margin Gross profit margin
Net profit after taxes Net sales Sales Cost of goods sold Net sales Net profit after taxes Total assets
How Expressed
Meaning
Percentage Percentage
Shows how much after-tax profits are generated by each dollar of sales. Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. Measures the rate of return on the total assets utilized in the company; a measure of managements efficiency, it shows the return on all the assets under its control regardless of source of financing. Measures the rate of return on the book value of shareholders total investment in the company. Shows the after-tax earnings generated for each share of common stock.
Return on investment (ROI)
Percentage
Return on equity (ROE) Earnings per share (EPS)
Net profit after taxes Shareholders equity Net profit after taxes preferred stock dividends Average number of common shares
Percentage
Dollars per share
Financial Ratio Analysis Activity
Formula
3. Activity Ratios Inventory turnover Net sales Inventory Inventory Cost of goods sold 365 Net sales Net working capital Sales Total assets Sales Fixed assets Accounts receivable Sales for year 365 Annual credit sales Accounts receivable Accounts payable Purchases for year 365 Cash Net sales for year 365
How Expressed
Meaning
Decimal
Days of inventory Net working capital turnover Asset turnover
Days Decimal Decimal
Fixed asset turnover
Decimal
Average collection period
Days
Accounts receivable turnover Accounts payable period Days of cash
Decimal Days Days
Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the number of one days worth of inventory that a company has on hand at any given time. Measures how effectively the net working capital is used to generate sales. Measures the utilization of all the companys assets; measures how many sales are generated by each dollar of assets. Measures the utilization of the companys fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets. Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers. Indicates the number of times that accounts receivable are cycled during the period (usually a year). Indicates the average length of time in days that the company takes to pay its credit purchases. Indicates the number of days of cash on hand, at present sales levels.
Financial Ratio Analysis Leverage
Formula
4. Leverage Ratios Debt to asset ratio
Total debt Total assets
How Expressed
Meaning
Percentage
Measures the extent to which borrowed funds have been used to finance the companys assets. Measures the funds provided by creditors versus the funds provided by owners. Measures the long-term component of capital structure. Indicates the ability of the company to meet its annual interest costs. A measure of the companys ability to meet all of its fixed-charge obligations. Measures the short-term financing portion versus that provided by owners.
Debt to equity ratio
Total debt Shareholders equity Long-term debt Shareholders equity Profit before taxes + Interest charges Interest charges Profit before taxes + Interest charges + Lease charges Interest charges + Lease obligations Current liabilities Shareholders equity
Percentage
Long-term debt to capital structure Times interest earned Coverage of fixed charges Current liabilities to equity
Percentage
Decimal
Decimal
Percentage
Financial Ratio Analysis Other
Formula
5. Other Ratios Price/earning ratio
Market price per share Earnings per share
How Expressed
Meaning
Decimal
Shows the current markets evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings.
Dividend payout ratio
Annual dividends per share Annual earnings per share
Percentage
Indicates the percentage of profit that is paid out as dividends.
Dividend yield on common stock
Annual dividends per share Current market price per share
Percentage
Indicates the dividend rate of return to common shareholders at the current market price.
Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, for his definitions of these ratios.
Case Analysis
Analyzing Financial Statements:
Scrutinize historical statements Compare historical statements over time Calculate changes in categories from year to year Determine the change as a percentage Adjust for inflation
Case Analysis
Analyzing Financial Statements (cont.):
Use Financial Statements To: Compare historical statements of one firm over time (explore trends) Examine performance relative to direct competitors Examine performance relative to industry averages
Case Analysis
Economic Measures:
Constant dollars
Dollars adjusted for inflation to make them comparable over various years.
CPI
Prime interest rate
Rate of interest banks charge on their lowest risk loans.
Gross Domestic Product (GDP)
Total output of goods and services within a countrys borders.
Strategic Audit Worksheet: Part 1
Strategic Audit Heading (+) Factors I. Current Situation
A. Past Corporate Performance Indexes B. Strategic Posture Current Mission Current Objectives Current Strategies Current Policies
Analysis (-) Factors
Com m ents
SW OT Analysis Begins: II. Corporate Governance
A. Board of Directors B. Top Management
III. External Environment (EFAS): Opportunities and Threats(SW OT)
A. Societal Environment B. Task Environment Industry Analysis
IV. Internal Environment (IFAS): Strengths and Weaknesses(SWOT)
A. Corporate Structure B. Corporate Culture C. Corporate Resources
Strategic Audit Worksheet: Part 2
S trategic Aud it Heading (+) Factors
1. M arketing 2. Finance 3. Research and Developm ent 4. Operations and Logistics 5. Hum an Resources 6. Inform ation System s
Analysis (-) Factors
C om m ents
V. Analysis of Strategic Factors (SFAS)
A. Key Internal and External Strategic Factors (SW OT) B. Review of Mission and Objectives
SW OT Analysis Ends. Recom m endation Begins: V I. Alternatives and Recom m endations
A. Strategic Alternatives B. Recomm ended Strategy
V II. Im ple m entation V III. E valuation and C ontrol
Case Analysis
Case Analysis Method: Read case Read case with strategic audit Begin SWOT analysis
EFAS IFAS
Case Analysis
Case Analysis Method: Write Strategic Audit
Parts I IV
Write Strategic Audit
Part V SFAS
Case Analysis
Write Strategic Audit
Part VI
Alternatives Recommendations
Write Strategic Audit
Part VII
Implementation
Write Strategic Audit
Part VIII
Evaluation & Control
14.1a Financial Ratio Analysis Liquidity (Table 14.1)
Financial Ratio Analysis Liquidity
Formula
1. Liquidity Ratios Current ratio
Current assets Current liabilities
How Expressed
Meaning
Decimal
A short-term indicator of the companys ability to pay its short-term liabilities from short-term assets; how much of current assets are available to cover each dollar of current liabilities. Measures the companys ability to pay off its short-term obligations from current assets, excluding inventories. A measure of inventory balance; measures the extent to which the cushion of excess current assets over current liabilities may be threatened by unfavorable changes in inventory. Measures the extent to which the companys capital is in cash or cash equivalents; shows how much of the current obligations can be paid from cash or near-cash assets.
Quick (acid test) ratio
Current assets Inventory Current liabilities Inventory Current assets Current liabilities
Decimal
Inventory to net working capital
Decimal
Cash ratio
Cash + Cash equivalents Current liabilities
Decimal
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14.1b Financial Ratio Analysis Profitability (Table 14.1)
Financial Ratio Analysis Profitability
Formula How Expressed
2. Profitability Ratios Net profit margin Gross profit margin
Net profit after taxes Net sales Sales Cost of goods sold Net sales Net profit after taxes Total assets
Meaning
Percentage Percentage
Shows how much after-tax profits are generated by each dollar of sales. Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit. Measures the rate of return on the total assets utilized in the company; a measure of managements efficiency, it shows the return on all the assets under its control regardless of source of financing. Measures the rate of return on the book value of shareholders total investment in the company. Shows the after-tax earnings generated for each share of common stock.
Return on investment (ROI)
Percentage
Return on equity (ROE) Earnings per share (EPS)
Net profit after taxes Shareholders equity Net profit after taxes preferred stock dividends Average number of common shares
Percentage
Dollars per share
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14.1c Financial Ratio Analysis Activity (Table 14.1)
Financial Ratio Analysis Activity
Formula
3. Activity Ratios Inventory turnover Net sales Inventory Inventory Cost of goods sold 365 Net sales Net working capital Sales Total assets Sales Fixed assets Accounts receivable Sales for year 365 Annual credit sales Accounts receivable Accounts payable Purchases for year 365 Cash Net sales for year 365
How Expressed
Meaning
Decimal
Days of inventory Net working capital turnover Asset turnover
Days Decimal Decimal
Fixed asset turnover
Decimal
Average collection period
Days
Accounts receivable turnover Accounts payable period Days of cash
Decimal Days Days
Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the number of one days worth of inventory that a company has on hand at any given time. Measures how effectively the net working capital is used to generate sales. Measures the utilization of all the companys assets; measures how many sales are generated by each dollar of assets. Measures the utilization of the companys fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets. Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers. Indicates the number of times that accounts receivable are cycled during the period (usually a year). Indicates the average length of time in days that the company takes to pay its credit purchases. Indicates the number of days of cash on hand, at present sales levels.
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14.1d Financial Ratio Leverage (Table 14.1)
Financial Ratio Analysis Leverage
Formula
4. Leverage Ratios Debt to asset ratio
Total debt Total assets
How Expressed
Meaning
Percentage
Measures the extent to which borrowed funds have been used to finance the companys assets. Measures the funds provided by creditors versus the funds provided by owners. Measures the long-term component of capital structure. Indicates the ability of the company to meet its annual interest costs. A measure of the companys ability to meet all of its fixed-charge obligations. Measures the short-term financing portion versus that provided by owners.
Debt to equity ratio
Total debt Shareholders equity Long-term debt Shareholders equity Profit before taxes + Interest charges Interest charges Profit before taxes + Interest charges + Lease charges Interest charges + Lease obligations Current liabilities Shareholders equity
Percentage
Long-term debt to capital structure Times interest earned Coverage of fixed charges Current liabilities to equity
Percentage
Decimal
Decimal
Percentage
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14.1e Financial Ratio Analysis Other (Table 14.1 )
Financial Ratio Analysis Other
Formula
5. Other Ratios Price/earning ratio
Market price per share Earnings per share
How Expressed
Meaning
Decimal
Shows the current markets evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings.
Dividend payout ratio
Annual dividends per share Annual earnings per share
Percentage
Indicates the percentage of profit that is paid out as dividends.
Dividend yield on common stock
Annual dividends per share Current market price per share
Percentage
Indicates the dividend rate of return to common shareholders at the current market price.
Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard and Poors and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M UniversityCorpus Christi, Corpus Christi, Texas, for his definitions of these ratios.
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