Graduate School of Business Administration 548 - Corporation Finance MBA.PM
Spring 2006 Semester - J. K. Dietrich
Financial Statement Analysis and Assumptions for Valuation
Introduction
Financial ratio analysis can be viewed as a systematic sequence of questions about the
determinants of a firm’s performance. The analysis leads to an understanding of how a firm’s
performance varies from period to period (time series comparisons), or how different firms in the
same industry vary (cross-section comparisons). The objective is to understand the major sources
of changes in a firm’s performance, important sources of variability in the firm’s performance,
and to choose reasonable assumptions concerning the firm’s future operations.
The analysis presented here is well established, is widely known as Dupont Analysis, and
is the basis of many systematic approaches to understanding firms’ operations (like the BISECT
analysis used by Professor Babcock of USC). It uses the formulas described in Appendix 2.1 but
structures their use into a consistent framework leading to the underlying analysis needed for the
assumptions used in projecting future cash flows, like those required in Worksheet 2, “Cash
Flow,” of PVFIRM05. This discussion provides a conceptual framework and uses examples from
the ratio section of the Wharton Compustat “Complete Financial Statements” (CFS) report
available for listed companies from Wharton’s database, WRDSX. The discussion following uses
Nike Corporation’s data for examples and the ratios included CFS report (provided in Table 1)
and some additional analysis of Nike using the Excel data (Table 2) are attached for convenience.
Table 3 reproduces the operating assumptions used for Nike 2003-2007 projections as an example
of assumptions used throughout this handout.
Ratio analysis is based on accounting information. Care has to be taken to know how
ratios are calculated: they can be simple ratios of year-ending data or a ratio of an income
statement item divided by the average of two year-ending balance sheet averages. Ratios
sometimes compare accounting and market data (as in the “market to book” or MVEQ/BVEQ
ratio in the CFS Ratio Report.) The ratios used for assumptions must furthermore be judged by
the reasonableness of the results they generate. The ultimate criterion of an analysis is how
persuasive and plausible it is, not whether it is “right” because there is no right answer about the
future.
Return on Equity (ROE) and Return on Assets (ROA)
Since maximizing shareholders’ wealth or return on wealth is our objective function, it
makes the most sense to focus on the accounting ratio that most captures that goal, the return on
equity (ROE) as defined below. ROE can be further decomposed into three “sub-ratios” as
follows:
ROE 
EAC  EAC   EBIT
SALES   EBT ASSETS 






BVE  EBT   SALES ASSETS   EBIT
BVE 
where the following abbreviations are used:
EAC = earnings available for common shareholders;
BVE = book value of common equity;
EBT = earnings before tax;
EBIT = earnings before interest and taxes.
1
ROE (Return on Common Equity in the Wharton Ratio Report) for Nike can be found in the
middle of the “Financial Statement and Market Relation” and has varied from a high of 28% to a
low of 12% with an average (calculated on the right) of 20% and standard deviation of 5% over
the period 1992 to 2001 (Nike’s fiscal year ends on May 31.) The variability ratio (standard
deviation divided by the mean) is then about 25%. The question raised is, of course, what causes
Nike’s ROE to vary from year to year.
In order to explore the sources of a firm’s variation in ROE, we can focus on the
determinants of a firm’s ROE. The square brackets break down the ROE into three sets of ratios
that we discuss in turn:
EAC
 (1  TAverage )  Pullthroug h
EBT
EBIT
SALES

 ROA  Earning Power
SALES ASSETS
EBT ASSETS

 Leverage Effects
EBIT
BVE
Where TAverage is the corporation’s average tax rate. We discuss each of these sub-ratios in turn.
Pullthrough: This is the firm’s average income passed through after tax (“pulled through”) to
shareholders. Normally, this ratio should not change much from year to year unless the firm has
substantial tax issues or there have been changes in corporate income tax laws. In the additional
ratios calculated from financial data in the CFS shown in Table 2 using data on income before tax
and taxes for Nike, the average tax rate is calculated as 38% with a standard deviation of 2%,
implying a variability ratio of about 5%. Tax treatment is not normally a major source of year-toyear changes in ROE.
Earning Power: This is the most important source of variation in ROE for most companies and
one that we will examine below in more detail. For Nike, for example, the ROA in Table 2,
calculated using operating income, sales, and assets from the Complete Financial Statements for
Nike, varied from a low of 15.6% to a high of 28% with an average from 1992 to 2001 of 20%
and a standard deviation of 19%, implying a variability ratio of nearly one, higher than the
variability ratio of the ROE. For most firms, ROA is the key factor determining variations in
ROE. ROA is determined by the firm’s sales, costs, and assets before financing or tax
considerations, hence it represents the raw economic earning power of the firm. Many analysts
call the firm’s ROA its earning power. We analyze factors affecting the firm’s earning power
extensively below.
Leverage Effects: There are two factors in the “leverage effects” sub-ratio: the first comes from
two items in firm’s income statement (EBIT and EBT) and the second from two balance sheet
items (ASSETS and BVE). Both are related to the firm’s financial structure. The difference
between EBIT and EBT is the firm’s payments of interest to creditors. The difference between
ASSETS and BVE are the total liabilities of the firm. For this reason, we can interpret these two
ratios as measuring the impact of the cost of debt (in the form of interest expense) in the first
factor and the amount of debt (in terms of assets not financed by equity) in the second factor of
2
the “Leverage Effects”. For most firms, changes in the cost of financing and financial structure
are not major sources of year-to-year variation in ROE. In the Wharton “Financial Statement and
Market Relation” report, Total Assets to Common Equity (the second factor) has varied from a
low of 1.33 to high of 1.87 with an average 1.61 for the years 1992 to 2001. The ratio of EBIT to
EBT is not calculated in the Wharton ratio report but could easily be calculated if sufficient
concern about that variable warranted it.
Analysis of a Firm’s ROA or Earning Power
The firm’s ROA can be analyzed further by noticing the following:
ROA 
EBIT
SALES

 M arg in  Turnover
SALES ASSETS
Two elements determine a firm’s ROA or earning power. The first is operating income, measured
as EBIT, over sales, called “operating margin”. Note that operating margin is not influenced by
financing or tax issues. The second element determining ROA is sales over assets, called
“turnover”, and reflecting how may dollars of sales the firm’s management is able to squeeze out
of each dollar of assets. These two relations form the basis for a sequence of questions relating to
the firm’s operating cost structure and required investments
Analyzing the Firm’s Margin
Operating profits are calculated in the CFS as sales minus Cost of Goods Sold (COG),
Selling, General and Administrative Expenses (SG&A), and Depreciation. Note that cost of
goods sold does not include depreciation. You should check your “Income Statement” for the
Wharton Complete Financial Statements to confirm your understanding of these calculations.
Analysis of the firm’s margin typically uses a “common size” income statement where all costs
are expressed as a percent of sales.
Sheet 2, “Cash Flow,” of PVFIRM05 requires assumptions on the cost of goods sold (in the
Complete Financial Statement’s definition, i.e. without depreciation) and sales and administrative
expenses. The ratio report included in the Wharton Complete Financial Statements as shown in
Table 1 below calculates COG and SG&A over sales. These two ratios average 59% and 27%,
respectively, in the period 1992 to 2001. The cost of goods ratio had very little variation, while
the SG&A has tended to increase. In the assumptions for Nike, I used 59% for the first ratio and
29%, its 2001 level, for the second. The management discussion explains the increase in SG&A
as a percent of sales as coming from higher athlete endorsement costs so I assume the more recent
results will continue to influence margins in the future.
Other firms may display substantially more variation in the cost of goods as a percent of
sales, where cost of goods are primarily labor and material costs. Cost of goods for firms
anticipating changes in the cost of labor due to new processes, new contracts, or other reasons,
should include those changes in the assumptions. Firms that probably will experience changes in
material or energy costs also should have those expected changes incorporated in the cost-ofgoods ratio assumptions.
Other factors may also influence assumptions concerning cost of goods and sales and
administrative expenses. For example, if the firm is expanding, economies of scale would
suggest that variable costs like costs of goods sold may decline as a percent of sales as the firm’s
operations become more efficient. Sales and administrative expenses may also be spread over a
larger sales base, implying a declining percent of those costs as a percent of sales. Of course, the
3
opposite assumptions may be valid for firms facing sharp sales declines or new operating
procedures during an adjustment period.
Depreciation in PVFIRM05 is not computed as a percent of sales but rather as a percent of
net plant. The historical experience with depreciation and amortization as a percent of net plant is
calculated using the Excel data in the Wharton data report and shown in Table 2. The ratio of
depreciation to net plant is reported in the CFS ratio report in Table 1 as its inverse (one over the
number) called “Age of Remaining Plant.” Table 2 demonstrates that the depreciation over net
plant ratio has averaged 16% in the last ten years. I assume that to be true in the future.
Analyzing the Firm’s Turnover
A firm’s turnover is determined the assets required to support assumed sales levels. Of
course, assets are either working capital assets (cash, inventory, and receivables), or fixed assets
(net plant). PVFIRM05 approaches working capital assets and liabilities differently than fixed
assets for reasons discussed below.
Net Plant Assumptions
PVFIRM05 models changes in net plant as an annual growth rate in net plant. This
growth rate can be the same over the projection period or it can change from year to year. The
reason for this approach to assumptions concerning net plant is that some firm’s capital
investments are lumpy, for example a large plant expansion will be followed by several years of
negative growth in net plant as depreciation charges are larger than capital expenditures. Usually
management’s discussion of operations in the annual report or 10-K provides some sense for the
likely future capital expenditures. On the other hand, if you are buying the company, you can
assume your own capital expenditure program.
Net plant will of course affect calculated net plant turnover defined as sales divided by
net plant. Declining net plant and increasing sales imply increasing net plant turnover. Nike does
all its manufacturing abroad through contractors and most of its net plant investments are related
to corporate activities and distribution. Nike has recently spent quite a bit on capital expenditures
(nearly $2 billion in the last five years reported by Wharton, an average of $382 million per year),
but spent only $283 million on capital expenditures in fiscal year 2002. I assume that Nike’s net
plant will grow more slowly in the forecast period and assume net plant will grow by only 1.5%
per year.
Working Capital Ratios affecting Turnover
Inventory Turnover Ratio
Inventory turnover (cost of goods sold divided by inventories) is used to project future
levels of inventories in PVFIRM05. This ratio is calculated as part of the Wharton Complete
Financial Statements report shown in Table 1. For example, Nike’s inventory turnover ratio has
averaged 4.38 over the period 1992 to 2001, although there has been quite a bit of variation
(standard deviation of the ratio is .4). The most recent year’s inventory turnover is 4.29 and I
assume that 4.3 will be the future ratio of cost of goods sold to inventories.
Accounts Receivable
Accounts receivable represent payments due from customers buying on open-book
accounts. PVFIRM05 models this as an average collection period in days, calculated on the
Wharton Complete Financial Statements ratio report as Days Sales in Accounts Receivable. This
4
value is calculated by estimating daily sales as sales/365 and dividing average daily sales into
accounts receivable balances. For Nike, the average has been 63 days but the last year’s average
collection period was 62 days. I assume that the next few years’ collection period will be similar
to Nike’s most recent experience, namely 62 days.
Cash to Sales
PVFIRM05 assumes that cash needs are determined by sales and therefore cash is set
equal to a ratio of sales in projections. Table 2 uses data for Nike in the Wharton Complete
Financial Statements to calculate the cash to sales ratio for the years of data provided. For Nike,
this ratio has averaged 5%, although with substantial variability.
Cash balances for companies often display substantial variability. There are several
reasons for this. First, cash is of course a residual asset and year-end numbers may not be
reflective of average performance. Cash is also subject to some year-end “window dressing” by
firms, often because of restrictions on net working capital or working capital ratios placed by
borrowing agreements or covenants of indenture contracts are usually measured using fiscal yearend audited financial statements. Another source of cash balances is that some banks require
minimum cash balances as part of their banking arrangements with firms. PVFIRM05 makes a
simple future cash balance assumption, namely that cash is a percent of sales. On the other hand,
there may well be reasons why another basis for cash projections should be made and changes
made in the spreadsheet cash calculations warranted. However, the PVFIRM05 assumption is not
too unrealistic and changes in the spreadsheet should be done cautiously because of the many
relations between variables built into it.
Current Liabilities
Current liabilities in PVFIRM05 are those current liabilities that can be expected to vary
with the firm’s operations or sales, namely bank borrowings, accounts payables (or trade
payables), and accrued expenses. The ratio of current liabilities defined to include these three
sources of short-term funds to sales is the basis for projecting future short-term borrowings.
Historical performance is provided in Table 2 calculated from data in the Wharton Complete
Financial Statements. For Nike, the ratio of current liabilities defined this way to sales has
averaged .18 but with a standard deviation of .04. To project the future, the Nike projections
assume this ratio will be .14. This assumption is discussed more below.
Asset and Liability Assumptions: Diagnostic Review
Assumptions are only good if they are reasonable, can be defended, and produce credible
projections. After making a set of assumptions, students should carefully review the projections
in Worksheet 3, “Cash Flow.” Normally, assumptions should not produce large changes in any of
the asset or liability categories unless they are the result of a policy change or an assumed change
in the firm’s operating characteristics. For example, using a current liability of sales ratio for
Nike of .16 resulted in unrealistic borrowing levels and cash inflows, so .14 was used. Each
schedule should be reviewed for the reasonableness of the results it contains. The pro forma
income statement and balance sheets, as well as the sample ratios at the bottom of the balance
sheet, should also be examined for the plausibility of the projected values. Unless explicitly
explained and justified, large changes in net income, net cash flows, capital expenditures, and
other variables usually are not evident in projections resulting from reasonable assumptions. On
the other hand, major changes can be assumed if the underlying assumptions are justified by
references to management’s discussion of operations or if changes in the firm’s operations are
planned and discussed.
5
Table 1: Ratio Report from Wharton Complete Financial Statements with Averages and Standard Deviations
FINANCIAL STATEMENT AND MARKET RELATION
TYPE
------------------------------------------------LIFE OF GROSS PLANT
PLANT
AGE OF DEPRECIATED PLANT
PLANT
AGE OF REMAINNIG PLANT
PLANT
CURRENT ASSETS / CURRENT LIABILITIES
LIQUIDITY
CASH / CURRENT LIBILITIES
LIQUIDITY
ACCOUNTS RECEIVABLE TURNOVER
LIQUIDITY
DAYS SALES IN ACCOUNTS RECEIVABLE
LIQUIDITY
DOUBTFUL ACCOUNTS/ACCOUNTS RECEIVABLE
LIQUIDITY
INVENTORY TURNOVER
LIQUIDITY
DAYS TO SELL INVENTORY
LIQUIDITY
ACID-TEST
LIQUIDITY
ROE/ROA
FIN_LEV
TOTAL ASSETS / COMMON EQUITY
FIN_LEV
AVG TOTAL ASSETS / AVG COMMON EQUITY
FIN_LEV
TOTAL LIABILITIES / TOTAL ASSETS
FIN_LEV
TOTAL DEBT / TOTAL ASSETS
FIN_LEV
TOTAL LIBILITIES / COMMON EQUITY
FIN_LEV
TOTAL DEBT /COMMON EQUITY
FIN_LEV
PREFERRED STOCK / TOTAL ASSETS
FIN_LEV
PREFERRED STOCK / COMMON EQUITY
FIN_LEV
OIADP / INTEREST
COVERAGE
OIADP / (INTEREST + PS_DIV)
COVERAGE
CASHFLOW - ASSETS PRE-TAX / INTEREST
COVERAGE
CASHFLOW - ASSETS PRE-TAX / (INTEREST+PS_DIV)
COVERAGE
RETURN ON COMMON EQUITY
ROR
RETURN ON TOTAL ASSETS
ROR
RETURN ON COMMON EQUITY (BEFORE EI&DO)
ROR
RETURN ON TOTAL ASSETS (BEFORE EI&DO)
ROR
INCOME TO CS / SALES
ROR
INCOME/SALES
ROR
INCOME ON ASSETS / SALES
EFF
SALES / AVG TOTAL ASSETS
ROR
COST OF GOODS SOLD / SALES
EXP_SALE
SELLING, GEN & ADMIN / SALES
EXP_SALE
DEPREC & AMORTIZATION / SALES
EXP_SALE
INTEREST EXPENSE / SALES
EXP_SALES
INCOME TAXES / SALES
EXP_SALE
EI&DO / SALES
EXP_SALE
ADVERTISING / SALES
EXP_SALE
RESEARCH AND DEVELOPMENT / SALES
EXP_SALE
PRICE / EARNINGS (PRIMARY)
MULTIPLE
PRICE / EARNINGS (PRIMARY BEFORE EI&DO)
MULTIPLE
PRICE / OPERATING CASH FLOW (PRIMARY)
MULTIPLE
PRICE / CASH FLOW TO EQUITY (PRIMARY)
MULTIPLE
PRICE / SALES (PRIMARY)
MULTIPLE
PRICE/ OIADP(PRIMARY)
MULTIPLE
PRICE / COMMON DIVIDENDS
MULTIPLE
MVEQ / BVEQ
MULTIPLE
(MVEQ + BV_DEBT) / TOTAL ASSETS
MULTIPLE
COMMON STOCK RETURN - FISCAL YEAR
RETURN
May-92
May-93
May-94
May-95
May-96
May-97
May-98
May-99
May-00
May-01 Average
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------9.46
8.93
10.57
8.81
9.03
8.91
9.2
11.59
11.98 .
3.2
3.26
3.99
3.4
3.19
3.26
3.38
3.92
4.38 .
6.26
5.67
6.58
5.41
5.85
5.64
5.82
7.67
7.6 .
3.58
3.15
1.85
1.86
2.05
2.07
2.26
1.68
2.03
2.26
0.64
0.92
0.2
0.18
0.24
0.06
0.14
0.12
0.17
0.31
6.22
5.53
5.42
5.39
5.93
5.57
5.43
5.76
5.95
5.77
5.70
57.86
65.13
66.43
66.75
60.75
64.6
66.25
62.54
60.53
62.38
63.32
0.03
0.04
0.04
0.04
0.04
0.04
0.05
0.04
0.05 .
4.39
4.22
5.1
4.9
4.73
4.3
4.08
3.94
3.89
4.29
4.38
81.97
85.22
70.56
73.45
76.15
83.72
88.24
91.29
92.46
83.87
82.69
2.12
2.18
1.15
1.1
1.18
1.05
1.21
0.85
1.08
1.3
1.32
1.3
1.3
1.43
1.54
1.6
1.52
1.51
1.63
1.64
1.6
1.51
1.33
1.36
1.6
1.63
1.7
1.65
1.57
1.87
1.67
1.68
1.61
1.36
1.35
1.49
1.61
1.67
1.68
1.61
1.72
1.76
1.67
1.59
0.25
0.27
0.37
0.38
0.41
0.4
0.36
0.46
0.4
0.4
0.37
0.23
0.26
0.37
0.38
0.41
0.4
0.36
0.46
0.4
0.4
0.37
0.33
0.36
0.6
0.63
0.7
0.65
0.57
0.87
0.67
0.68
0.61
0.31
0.35
0.59
0.62
0.7
0.65
0.57
0.87
0.67
0.68
0.60
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
23.07
32.06
27.03
23.24
24.68
12.69
16.42
19.41
14.88
22.43
21.59
23.03
31.96
26.98
23.21
24.66
12.68
16.4
19.39
14.87
22.41
21.56
15.81
44.7
15.33
12.32
8.31
4.85
18.23
14.79
10.82
7.99
15.32
15.78
44.56
15.3
12.3
8.3
4.85
18.21
14.78
10.82
7.98
15.29
0.25
0.18
0.22
0.25
0.28
0.12
0.14
0.18
0.18
0.18
0.20
0.19
0.14
0.15
0.16
0.18
0.08
0.09
0.11
0.11
0.11
0.13
0.25
0.18
0.22
0.25
0.28
0.12
0.14
0.18
0.18
0.18
0.20
0.19
0.14
0.15
0.16
0.18
0.08
0.09
0.11
0.11
0.11
0.13
0.09
0.08
0.08
0.09
0.09
0.04
0.05
0.06
0.06
0.07
0.07
0.09
0.08
0.08
0.09
0.09
0.04
0.05
0.06
0.06
0.07
0.07
0.1
0.08
0.09
0.09
0.09
0.05
0.05
0.07
0.07
0.07
0.08
1.94
1.66
1.73
1.82
1.97
1.78
1.65
1.62
1.63
1.61
1.74
0.59
0.59
0.59
0.59
0.58
0.62
0.6
0.58
0.59
0.61
0.59
0.23
0.26
0.25
0.25
0.25
0.27
0.28
0.29
0.28
0.29
0.27
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02
0.02 .
0.02
0.01
0
0.01
0.01
0.01
0.01
0.01
0.01
0.01
0
0.01
0.06
0.05
0.05
0.05
0.05
0.03
0.03
0.04
0.03
0.04
0.04
0
0
0
0
0
0
0
0
0
-0.08
-0.01
4.25
4.18
6.47
9.13
15.29
14.8
18.57
14.61
17.55 .
11.65
0.25
0.28
0.38
0.67
1.14
1.4
1.85
1.44 .
.
0.93
15.3
14.9
14.5
26.62
21.46
33.33
38.33
20.42
18.85
21.67
22.54
15.3
14.9
14.5
26.62
21.46
33.33
38.33
20.42
18.85
21.5
22.52
21.06
7.72
22.74
44.65
46.64
25.66
17.96
15.56
16.9 .
24.32
29.07
8.31 .
114.32 .
224.01
25.02 .
20.45
64.97
69.45
1.42
1.17
1.22
2.28
1.86
1.39
1.97
1.31
1.17
1.45
1.52
9.14
8.93
8.77
15.71
12.56
15.73
20.62
12.23
11.11
13.47
12.83
103.57
73.75
87.64
182.5
164.29
104.55
126.95
89.32
85.63
111.98
113.02
3.34
2.48
2.87
5.93
5.27
4.05
5.16
3.69
3.16 .
3.99
2.76
2.09
2.17
4.03
3.51
2.84
3.64
2.44
2.3 .
2.86
0.26
-0.18
0.35
0.28
-0.42
-0.19
0.34
-0.29
-0.03
0.32
0.04
6
StdDev
0.28
2.99
0.40
7.34
0.45
0.13
0.16
0.14
0.06
0.07
0.16
0.16
5.87
5.85
11.13
11.09
0.05
0.04
0.05
0.04
0.02
0.02
0.02
0.13
0.01
0.02
0.00
0.00
0.01
0.03
5.68
0.61
8.01
8.02
13.11
77.10
0.38
3.75
35.45
1.20
0.70
0.30
Table 2: Ratios Computed using Wharton Complete Financial Statements and Averages and Standard Deviations
May-92
611.43
3,930.98
2,187.46
27.95%
15.55%
1.797
May-93
498.63
3,789.67
2,373.82
21.01%
13.16%
1.596
May-94
661.42
4,760.83
3,142.75
21.05%
13.89%
1.515
May-95
938
6,470.63
3,951.63
23.74%
14.50%
1.637
May-96
1,360.08
9,186.54
5,361.21
25.37%
14.81%
1.714
May-97
844
9,553.10
5,397.40
15.64%
8.83%
1.770
May-98
837.4
8,776.90
5,247.70
15.96%
9.54%
1.673
May-99
966.4
8,995.10
5,856.90
16.50%
10.74%
1.536
May-00
998.6
9,488.80
5,819.60
17.16%
10.52%
1.630
May-01 Average StdDev
1,067.90
9,893.00
6,443.00
16.57% 20.09% 19.31%
10.79% 12.23% 11.90%
0.10
1.64
1.535
60.39
378
0.160
71.55
405.85
0.176
84.29
554.88
0.152
118.95
643.46
0.185
157.8
922.37
0.171
204.3
1,153.10
0.177
217.6
1,265.80
0.172
206.5
1,583.40
0.130
213
1,618.80
0.132
278.6
1,614.50
0.173
0.16
0.02
Income before Tax
Taxes
Taxes/EBT
594.52
229.5
0.3860
490.59
191.8
0.3910
649.86
250.2
0.3850
899.09
345.9
0.3847
1,295.22
499.4
0.3856
653
253.4
0.3881
746.1
294.7
0.3950
919.2
340.1
0.3700
921.4
331.7
0.3600
1,017.30
349
0.3431
0.38
0.02
Cash
291.28
518.82
216.07
262.12
445.42
108.6
198.1
254.3
304
575.5
135.7
108.17
138.56
3,930.98
210.58
127.38
181.89
3,789.67
297.66
397.1
345.22
4,760.83
455.03
445.06
480.41
6,470.63
687.12
553.15
570.5
9,186.54
584.6
480.2
608.5
9,553.10
373.2
419.1
653.6
8,776.90
543.8
924.2
621.9
8,995.10
432
855.3
472.1
9,488.80
504.4
425.2
768.3
9,893.00
Cash/Sales
Current Liabilities/Sales
0.0741
0.0973
0.1369
0.1372
0.0454
0.2184
0.0405
0.2133
0.0485
0.1971
0.0114
0.1752
0.0226
0.1647
0.0283
0.2323
0.0320
0.1854
0.0582
0.1716
0.05
0.18
0.04
0.04
Net Income
Cash Dividends
Dividends/Net Income
365.02
53.02
0.1453
298.79
60.28
0.2017
399.66
65.42
0.1637
553.19
78.83
0.1425
795.82
100.9
0.1268
399.6
127.3
0.3186
451.4
136.2
0.3017
579.1
133.1
0.2298
589.7
129.7
0.2199
663.3
128.9
0.1943
0.20
0.07
Capital Expenditure
97.04
95.27
154.13
216.38
465.91
505.9
384.1
419.9
317.6
282.8
Net Plant Turnover
10.399
9.338
8.580
10.056
9.960
8.285
6.934
5.681
5.862
6.128
8.12
1.84
Data and Ratios Calculated from Wharton CFS
Op Inc (Before Extraordinary Items and Special Charges)
Sales (Net)
TOTAL ASSETS
EBIT/Assets = Return on Assets = "Earning Power"
EBIT/Sales = Margin
Sales/Assets = Turnover
Depreciation+Amortization
Net Plant
Depreciation/Net Plant
Accounts Payable
Notes Payable
Accrued Expenses
Sales (Net)
7
8
Table 3: Operating Assumptions for Nike in PVFIRM05
Forecast
Forecast
Forecast
Forecast
Forecast
Operating Assumptions
2003
2004
2005
2006
2007
Sales Growth Rate (percentage)
7.50%
7.50%
7.50%
7.50%
7.50%
Cost of Good Sold (as a percentage of Sales)
59.00%
59.00%
59.00%
59.00%
59.00%
Selling, Gen. & Adm. (as a percentage of Sales)
29.00%
29.00%
29.00%
29.00%
29.00%
Depreciation (as a percentage of Net PP&E)
16.00%
16.00%
16.00%
16.00%
16.00%
0.00
0.00%
0.00%
0.00%
0.00%
36.00%
36.00%
36.00%
36.00%
36.00%
1.50%
1.50%
1.50%
1.50%
1.50%
4.30
4.30
4.30
4.30
4.30
62.00
62.00
62.00
62.00
62.00
5.00%
5.00%
5.00%
5.00%
5.00%
14.00%
14.00%
14.00%
14.00%
14.00%
20%
20%
20%
20%
20%
Other Income/Expense (dollar)
Tax Rate (as a percentage of Taxable Income)
Net PP&E Growth (percentage)
Inventory Turnover Ratio (COGS/average inv.)
A/R (average collection period, days)
Operating Cash (as a percentage of Sales)
C/L (as a percentage of Sales)
Dividend Payout Ratio
9