Analysis of Financial
Statements

Financial statements and reports

Ratio analysis
The Annual Report Provides



A verbal description of the
firms operating results
during the past year
Discussion of new
developments
Financial statements
Key Financial Statements



Balance sheet
Income statement
Statement of cash flows
Example of Balance Sheets: Assets
Cash
Short-term inv.
Acct Receivable
Inventories
Total Current Asset
Gross Fixed Asset
Less: Depreciation
Net Fixed Asset
Total assets
2011
9,000
48,600
351,200
715,200
1,124,000
491,000
146,200
344,800
1,468,800
Example of Balance Sheets: Liabilities
and Equity
Accts payable
Notes payable
Accruals
Total Current Liability
Long-term debt
Common stock
Retained earnings
Total equity
Total liability and equity
2011
145,600
200,000
136,000
481,600
323,432
460,000
203,768
663,768
1,468,800
Example of Income Statement
Sales
COGS
Other expenses
Deprecication
Tot. operating. costs
EBIT
Interest expenses
EBT
Taxes (30%)
Net income
2011
3,432,000
2,864,000
340,000
18,900
3,222,900
209,100
62,500
146,600
43,980
102,620
Good to Know!!
EBITDA (Earnings before interest,
taxes, depreciation and amortization
To measure cash earnings without
accrual accounting, cancelling tax
jurisdiction effects, and cancelling
the effects of different capital
structures.
Statement of Cash
Flows

The Statement of Cash
Flows reports:
• Operating activities
• Investing activities
• Financing activities
To determine whether a change in a balance
sheet account by using these rules
Sources of Cash
Uses of Cash
Increase in a liabilities or
equity account
- Borrowing funds or selling
stock provides the firm
with cash
Decrease in a liabilities or
equity account
- Paying off a loan or buying
back stock uses cash
Increase in an asset account
Decrease in an asset
account
- Selling inventory or
collecting receivables
provides cash
- Buying fixed assets or
buying more
inventory uses cash.
2011 Statement of Cash Flows
Cash flow from operating activities:
Net income
Additions (sources of cash):
Depreciation
Incr. in accruals
Incr. in accounts payable
Subtractions (uses of cash):
Incr. in receivables
Incr. in inventories
NCF from operations
$ 44,220
20,000
4,000
29,600
(50,800)
( 120,800)
($ 73,780)
Cash flow from investing activities:
Investment in fixed assets
($ 36,000)
Cash flow from financing activities:
Increase in notes payable
Increase in L-T debt
Common dividends
NCF from financing
$ 25,000
101,180
( 22,000)
$104,180
Net increase (decr.) in cash
Cash at beginning of year
Cash at end of year
($
5,600)
57,600
$ 52,000
Management Reports





Daily Revenue Report
Daily Payroll Cost Report
Rooms Revenue Forecast
Food and Beverage Menu Abstract
Accounts Receivable Aging Schedule
Daily Revenue Report
ALL SPORTS RESORT
As of Friday, 11/10/2008
Today
Actual
KEY METRICS
Budget
Last Year
Period-to-Date
Actual
Budget
Last Year
70.3%
90.4%
91.8%
TOTAL OCCUPANCY %
70.4%
80.0%
72.2%
76.8%
91.2%
92.5%
AVAILABLE OCCUPANCY %
76.7%
80.6%
73.4%
391
391
391
TOTAL ROOMS
10,948
10,948
10,948
275
353
359
ROOMS SOLD
7,706
8,753
7,900
279
357
362
OCCUPIED ROOMS
7,818
8,835
7,971
4
3
4
COMPLIMENTARY ROOMS
112
82
74
112
34
28
VACANT ROOMS
3,130
2,113
2,974
358
388
388
AVAILABLE ROOMS
10,052
10,866
10,758
46.40
77.83
65.42
REVPAR
65.97
73.29
67.78
248
N/A
267
ARRIVALS
4,382
N/A
4,382
122
N/A
218
DEPARTURES
4,149
N/A
4,087
522
N/A
636
GUESTS
9,482
N/A
9,734
46
78
136
ROOMS SOLD-Transient
3,243
4,297
4,212
172
220
183
ROOMS SOLD-Group
3,131
2,870
2,365
57
59
39
ROOMS SOLD-Contract
1,332
1,586
1,335
85.61
111.06
81.29
AVERAGE RATE- Transient
117.97
111.06
113.44
66.14
85.41
72.09
AVERAGE RATE- Group
87.04
85.40
89.72
49.23
49.34
47.18
AVERAGE RATE- Contract
48.57
49.34
49.00
Daily Payroll Cost Report
Daily Payroll Report
Florencia Hotel and Conference Center
Date:
6/5/2008
Daily
Rooms
Regular
Overtime
Front Desk
38.10
0.00
38.10
$565.79
Reservations
13.03
0.00
13.03
Guest Services
22.03
0.00
Housekeeping
85.70
Management
Total Rooms
Total
Month-to-Date
Payroll $
%
Regular
Overtime
2.10%
671.98
1.67
673.65
$9,930.64
3.99%
3.49%
$206.70
0.77%
269.27
14.66
283.93
$4,131.34
1.66%
1.74%
22.03
$252.39
0.94%
338.09
15.84
353.93
$4,412.27
1.77%
1.98%
0.00
85.70
$905.15
3.35%
1,685.39
125.35
1,810.74
$19,480.01
7.82%
9.50%
0.00
0.00
0.00
$0.00
0.00%
0.00
0.00
0.00
$0.00
0.00%
0.30%
158.86
0.00
158.86
$1,930.03
7.15%
2,964.73
157.52
3,122.25
$37,954.26
15.24%
16.70%
Daily
Rooms
Regular
Overtime
Front Desk
38.10
0.00
Reservations
13.03
Guest Services
Payroll $
Payroll %
Month-to-Date
Hours
Budgeted %
Budget
Payroll $
Cost/Room
Regular
Overtime
38.10
$565.79
$3.93
671.98
1.67
673.65
$9,930.64
$6.23
$5.29
0.00
13.03
$206.70
$1.44
269.27
14.66
283.93
$4,131.34
$2.59
$2.64
22.03
0.00
22.03
$252.39
$1.75
338.09
15.84
353.93
$4,412.27
$2.77
$3.00
Housekeeping
85.70
0.00
85.70
$905.15
$6.29
1,685.39
125.35
1,810.74
$19,480.01
$12.23
$14.43
Management
0.00
0.00
0.00
$0.00
$0.00
0.00
0.00
0.00
$0.00
$0.00
$0.45
158.86
0.00
158.86
$1,930.03
$13.40
2,964.73
157.52
3,122.25
$37,954.26
$23.83
$25.36
Total Rooms
Total
Hours
Payroll $
Cost/Room
Cost/Room
Rooms Revenue Forecast
FORECAST: as of 11/30/08
City:
Los Angeles
Property:
Huntington - Airport
# Rooms:
86
Division:
Rooms
Huntington Los Angeles Airport
12/1/08
12/2/08
12/3/08
12/4/08
12/5/08
12/6/08
12/7/08
12/8/08
12/9/08
12/10/00
8
12/11/08
12/12/08
Avail Rooms
86
86
86
86
86
86
86
86
86
86
86
86
Forecast #
55
53
26
25
36
48
46
53
53
65
23
23
63.95%
61.63%
30.23%
29.07%
41.86%
55.81%
53.49%
61.63%
61.63%
75.58%
26.74%
26.74%
6215
5313
2653
2724
4050
5272
4741
5313
5157
6153
2300
2473
$113.00
$ 100.25
$ 102.04
$ 108.96
$ 112.50
$ 109.83
$ 103.07
$ 100.25
$ 97.30
$ 94.66
$ 100.00
$ 107.52
12-Day Forecast Report
Forecast Occupancy %
Net Rooms Revenues
Average Rate
Food and Beverage Menu Abstract
Food Menu Abstract
Date:
Restaurant:
Menu Item Name
Mexicana Cantina
Meal
Period:
January-March, 2008
Lunch
Number
Menu
Item
Item
Item
Menu
Menu
Menu
Sold
Mix
Food
Selling
CM
Costs
Revenues
CM
(MM)
%
Cost
Price
(E - D)
(D * B)
(E * B)
(F * B)
Bean, Cheese and Jalapeno Nachos
170
1.21%
$2.44
$7.25
$4.81
$414.80
$1,232.50
$817.70
Beef, Bean, Cheese and Jalapeno Nachos
180
1.29%
$2.78
$8.50
$5.72
$500.40
$1,530.00
$1,029.60
Chicken Fajita, Bean, Cheese and Jalapeno Nachos
222
1.59%
$2.83
$9.95
$7.12
$628.26
$2,208.90
$1,580.64
Beef Fajita, Bean, Cheese and Jalapeno Nachos
253
1.81%
$3.28
$9.95
$6.67
$829.84
$2,517.35
$1,687.51
Cheese Quesadillas
195
1.39%
$1.64
$7.75
$6.11
$319.80
$1,511.25
$1,191.45
Chicken Fajita Quesadillas
286
2.04%
$2.02
$8.95
$6.93
$577.72
$2,559.70
$1,981.98
Beef Fajita Quesadillas
259
1.85%
$2.48
$8.95
$6.47
$642.32
$2,318.05
$1,675.73
Shrimp and Scallop Quesadillas
158
1.13%
$3.82
$11.50
$7.68
$603.56
$1,817.00
$1,213.44
Shrimp Quesadillas
176
1.26%
$3.44
$11.50
$8.06
$605.44
$2,024.00
$1,418.56
Spinach Quesadillas
125
0.89%
$1.83
$8.50
$6.67
$228.75
$1,062.50
$833.75
Mixed Vegetable Quesadillas
91
0.65%
$1.75
$8.50
$6.75
$159.25
$773.50
$614.25
Mixed Vegetable Queso Flameado
37
0.26%
$1.24
$7.50
$6.26
$45.88
$277.50
$231.62
Accounts Receivable Aging Schedule
Aging Schedule for Hanover Country Club
Members
Total
Number of Days Past Due
1-30
31-60
61-90
Over 90
C. DeCarlo
$200
T. Vangard
$450
J. Samuel
$100
$100
F. Engel
$320
$320
M. Pratel
$335
M. Morgan
$600
Others
Total
$450
$335
$600
$26,875
$14,000
$10,000
$1,000
$200
1,675
$28,880
$14,200
$10,450
$1,600
$535
$2,095
1.5%
2.0%
10%
20%
40%
$213
$209
$160
$107
$838
Estimated uncollectible
Total Bad Debts
$200
$1,527
Ratio Analysis Categories





Liquidity
Asset management
Debt management
Profitability
Market value


Liquidity = the ability of a firm to meet its
short-term obligations as they come due.
Liquidity analysis requires use of a
forecasted cash budget but ratio analysis
provides some quick measures of liquidity.
Measures of Liquidity
Current ratio =
CA
CL
.
To indicate the extent to which the
claims of S-T creditors are covered
by assets that will soon be
converted to cash
Quick ratio =
CA - Inv.
.
CL
To measure how quick the firm can
pay off S-T debt without liquidating
inventories
Current ratio =
Quick ratio =
Current
Quick
CA
.
CL
CA - Inv.
.
CL
2010
2011
2.3x
0.8x
2.4x
0.8x
A little weaker than average.
Industry
2.7x
1.0x
Asset Management Ratios




Inventory turnover ratio
Days sales outstanding
(accounts receivable)
Fixed assets turnover
Total assets turnover
Inventory turnover =
Sales
Inventory .
(To indicate whether a firm carries too many inventories and
whether it manages inventories effectively.)
2010
4.8x
2011
4.6x
Industry
7.0x
Low inventory turnover--excess
inventory for current level of sales.
Problems with Inventory Turnover
Measurement



Sales prices include markups but inventories carried
at cost.
Sales occur throughout the year, but inventory is at
a particular point in time.
Differences in accounting methods may make
comparisons difficult (e.g. LIFO vs. FIFO).
Days Sales Outstanding (DSO) is
the average number of days the
firm must wait after making a sale
before it receives cash.
Receivables .
DSO =
Sales/day
$402,000
2011 DSO =
$3,850,000/360
= 37.59 days.
DSO
2010
2011
Industry
36.8
37.6
32.0
High DSO--firm is collecting too slowly
or has overly liberal credit terms.
Fixed assets turnover =
Sales
.
Fixed assets
[ To show how effective the firms utilizes its fixed
assets to generate sales.]
Sales
Total assets turnover =
.
TA
[To indicate the extent to which a firm uses its
total resources to generate sales.]
FATO
TATO
2010
2011
Industry
10.0
2.3
10.7
2.3
10.7
2.6
Fixed assets turnover OK, but total
assets turnover is low--indicates
problem with current assets
(inventory and receivables).
Debt Management Ratios




Debt ratio (balance sheet)
Debt/equity ratio (balance sheet)
Times interest earned (income
statement)
Fixed charge coverage (income
statement)
Debt Management Ratios
D
Debt ratio =
A
D
=
.
D+E
[It measures the proportion of a firm’s total assets that is
financed with creditors’ funds.]
D
Debt/equity = E .
[It is similar to debt ratio and relates the amount of a firm’s
debt financing to the amount of equity financing.]
and Equity multiplier = A/E
= 1/(1 - D/A).
Times interest earned (TIE)
EBIT
Interest
=
.
charges
[It tells the extent to which the firm’s current earnings are able
to meet current interest payments.]
DR
TIE
2010
2011
Industry
54.8%
3.3
58.4%
2.0
50.0%
2.5
Debt ratio high, TIE low and falling.
Debt is risky; would have high kd.
Profitability Ratios





Profit margin (PM)
Basic earning power (BEP)
Return on assets (ROA)
Return on equity (ROE)
Return on investors capital (ROC)
NI
PM =
.
Sales
[ It gives the profit per dollar of sales.]
2010
2.6%
2011
1.1%
Industry
3.5%
Indicates: Sales prices are low and/or
costs are high.
EBIT
BEP =
.
TA
[It shows the raw earning power of the firm’s assets,
before influence of taxes and leverage. ]
2010
14.2%
2011
9.1%
Industry
19.1%
Indicates: Firm is doing a poor job of
generating earnings from its assets.
NI
ROA =
.
TA
[It measures a firm’s net
income in relation to the
total asset investment.]
NI
ROE =
.
Common
equity
[It measures the rate of return that
the firm earns on stockholders’
equity.]
Profitability Ratios Summary
ROA
ROE
2010
2011
Industry
6.0%
13.3%
2.7%
6.4%
9.1%
18.2%
All profitability measures are low and
falling.
High inventory, A/R levels lead to low
profits.
Market Value Ratios
Price/Share
P/E =
.
Earnings/Share
[The price the market places on $1 of a firm’s earnings.]
Common equity
Book value/Share =
.
# Shares
Price/Share
Market/Book =
.
Book value/Share
[The higher the rate of return a firm is earning on its common equity
relative to the return required by investors (the cost of common
equity), the higher will be the M/B.]
2010
P/E
M/B
2011
9.7% 13.6%
1.3
0.9
Industry
14.2%
1.4
P/E ratios can rise if a decline in EPS
is not expected to be permanent.
M/B ratio is low. “Normalized” P/E
probably low too.
Use the Du Pont Equation to get an
overview of the firm’s financial position
Profit
Total asset
Equity
ROE =
x
x
margin
turnover
multiplier
NI
=
E
NI
S
x
S
TA
x
.
TA
E
Du Pont Equation Provides an Overview





Profitability measured by ROE
Expense control measured by PM
Asset utilization measured by TATO
Financial leverage measured by EM (debt
utilization)
The interaction between the determinants of ROE
ROE = PM x TATO x EM
2010
13.30%
2.60
2.3
2.2
2011
6.40%
1.15
2.3
2.4
IND.
18.20%
3.50
2.6
2.0
What is common size analysis?

Converting income statement and balance sheet
values into % to facilitate comparison between firms
of different sizes and firms over time.
 Income
statement: Divide by sales.
 Balance sheet: Divide by total assets.

Used to supplement ratio analysis.
Readers of Financial Analysis
Owners
Track and evaluate management’s performance
Lenders
Determine the risk of the business defaulting on its loan
Managers
Compare actual and budgeted results
Government
Ensure that taxes have been paid
Readers of Financial Analysis cont.
Suppliers
Evaluate the company’s ability to pay its obligations
Investment
Analysts
Evaluate the company’s performance
Mergers and
Acquisitions
Highlight financial strengths, upside potential, and future
value
Types of Analysis

Vertical Analysis
Used to analyze variable expenses
All accounts are sized using either:
Total revenue or
Departmental revenue
Variable expenses should increase or
decrease with the level of sales
Management Decision Making

Employee Scheduling
Based on:
Accurate revenue forecasts
Productivity goals
Customer service goals
Management Decision Making

Food and Beverage Pricing
Track sales of each menu item
Calculate each items gross profitability
Set menu prices
Remove unprofitable items from the menu
Management Decision Making

Revenue Management
Goal is to maximize RevPAR

RevPar= Rooms Revenue/Rooms Available
 Rooms revenue = the revenue generated by room sales
 Rooms Available= the number of rooms available for
in the time period
sale
Management Decision Making

Revenue Management
 Strategies
 Close lower levels of pricing during high
demand
 Open all pricing levels during times of low
demand
Management Decision Making

Profit Flexing
Utilized when revenues fall behind budget
Adjust pricing and reduce expenses
Without impacting customer service
Maximize remaining revenue opportunities
Management Decision Making

Cost-volume-profit Modeling
Also known as Breakeven Analysis
Target the amount of revenue required to reach the owner’s
goal
Cost-volume-profit Equations
Breakeven Volume of Sales =
Desired Occupancy % =
Desired Volume =
Fixed costs
(sale price – variable cost)
Rooms sold
Rooms available for sale
Fixed Costs + Desired Profits
Sale Price – Variable Cost
Breakeven Volume Example



Sale price = $250 a night
Fixed costs = $40,000 per month
Variable cost = $35 per room
Breakeven Volume of Sales =
=
=
=
Fixed costs
(sale price – variable cost)
40,000
(250 - 35)
40,000
215
186 rooms