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FUNDAMENTAL GEEK FINANCIAL STATEMENTS AND DECISION MAKING SEGMENT THREE If you haven’t printed this guide, now would be a great time to do so! Table of Contents Movie FG3-Forty Five Pages Timing 0:00 – 1:18 65-66 FG3-Forty Six FG3-Forty Seven FG3-Forty Eight FG3-Forty Nine FG3-Fifty FG3-Fifty One FG3-Fifty Two FG3-Fifty Three FG3-Fifty Four 67 1:18 – 1:52 4:15 – 4:41 4:41 – 5:41 68 69 70 70 5:41 – 7:03 7:03 – 8:04 8:04 – 8:55 8:56 – 11:47 71 71 72-73 74 75 76 11:47 – 15:03 15:03 – 16:04 16:04 – 16:37 16:37 – 18:10 18:10 – 21:07 21:07 – 24:30 24:30 – 25:01 77 78 25:01 – 30:14 30:14 – 32:20 79 80 81 82 32:20 – 36:02 36:02 – 37:24 37:24 – 37:45 37:45 – 38:55 83 38:55 – 42:52 Topic Return on Assets (ROA) “Return” Outcomes and Expectations” Return on Assets ROA Performance ROA Formula – The “Comprehensive” Bottom Line Completing the Trend Table Calculating ROA for Year 2 Calculating ROA for Years 1 & 3 Analyzing ROA Performance Evaluating ROA Disadvantages of ROA Balance Sheet Analysis Working Capital Calculating Working Capital Current Ratio - Calculation The Performance of Assets – Fixed Asset Turnover Ratio (FATR) Calculating FATR Capital Structure – Debt vs. Equity Calculating Debt vs. Equity ROA Summary The Bottom Line Triangle Final Thoughts on the 3 Bottom Lines My 5 Partners Fundamental Geek – Segment 3 64 Outcomes & Expectations After successfully completing Segment 5, you will be able to: • Understand why the “Return” bottom line matters to your growing business • Identify and calculate the formula for ROA • Name the crucial drivers of ROA • Perform a trend analysis of ROA • Recall the strengths and weaknesses of ROA as a bottom line • Analyze balance sheet information from three different viewpoints to identify important performance trends and make strategic decisions. Fundamental Geek – Segment 3 65 The Balance Sheet bottom line is: Managing assets is also about creating good: We chose ROA as the bottom line because: ROA indicates: Fundamental Geek – Segment 3 66 The Formula: ROA = Net Income Total Assets X 100 Why is ROA considered a “comprehensive bottom line”? Fundamental Geek – Segment 3 67 Using the MultiMax Balance Sheet and Income Statement, fill in the numbers needed for ROA: Item Year 3 Year 2 Year 1 Net Income (before taxes) Total Assets Fundamental Geek – Segment 3 68 Now we will calculate the ROA for Year 2: Net Income Total Assets ROA = X 100 Remember, we are using Earnings before taxes! Year 2 Net Income = Year 2 Total Assets = NI TA = = X 100 = Fundamental Geek – Segment 3 69 Now we will calculate Years 1&3: ROA = Net Income Total Assets Item X 100 Year 3 Year 2 Net Income (before taxes 22,530 Total Assets 147,411 ROA Year 1 15.3% Which direction do we want ROA going? How did MultiMax do over the last 3 years? Fundamental Geek – Segment 3 70 To Review: The ROA ratio improves when what increases? Or, what decreases? Notes: Fundamental Geek – Segment 3 71 To further analyze the Balance Sheet, we will look at three major categories. First, let’s look at Working Capital. Working Capital is defined as: minus What are the main components of Current Assets? Fundamental Geek – Segment 3 72 What is the main component of Current Liabilities? What two financial statements do these components impact? Working Capital is primarily evaluated by what bottom line? Working Capital is concerned with managing: Fundamental Geek – Segment 3 73 Calculating Working Capital: Please fill in the table below using the Balance Sheet from your participant guide. Item Year 3 Year 2 Year 1 Current Assets Current Liabilities Working Capital = Current Assets – Current Liabilities Working Capital Is this good or bad? Hard to tell, but there is a better way… Do you remember way back in Basic Geek when we completed the Current Ratio? Well, that is just the deeper dive of Working Capital! Next we will re-visit the Current Ratio and calculate it for Year 3. Fundamental Geek – Segment 3 74 Current Ratio: Item Current Assets Current Liabilities Year 3 Year 2 Year 1 141,748 36,970 126,390 36,232 98,410 26,168 Formula: Current Assets = Current Liabilities Item 141,748 36,970 Year 3 = Year 2 3.83 Year 1 Now let’s calculate the ratios for years 1&2: Current Ratio In “dollar English”, a “3.83 Current Ratio” in year 3 means that for every $3.83 of current assets, the company has in current liabilities. $1.00 Fundamental Geek – Segment 3 75 Now let's look at the Performance of Assets. There are two tests for performance of assets: Since you are already an expert in ROA, we will focus on the second test. We will review at the Fixed Asset Turnover ratio: The Formula: Fixed Asset Turnover Ratio = Sales Fixed Assets Fundamental Geek – Segment 3 76 Please fill in the Balance Sheet and Income Statement numbers needed to calculate the Fixed Asset Turnover ratio. Fixed Asset Turnover Ratio = Item Year 3 Sales Fixed Assets Year 2 Year 1 Fixed Sales Assets Fixed Assets Now calculate the Ratio: FA Turnover Which way do you think these numbers should be going? Notes: Fundamental Geek – Segment 3 77 Now we will look at Capital Structure. A company’s capital structure refers to its relative percentage of debt capital versus On which statement would you find Equity and Liabilities? Notes: Fundamental Geek – Segment 3 78 Calculating Debt vs. Equity Ratio: Please fill in the required numbers from the Balance Sheet: Item Year 3 Year 2 Year 1 Total Liabilities Total SH Equity Formula = Total Liabilities Total Stockholders Equity Debt/Equity Ratio In “Dollar English”, how would you express the debt to equity performance in year 1? In year 1, for every dollar in equity, we had of debt. Notes: Fundamental Geek – Segment 3 79 ROA is comprehensive because it includes elements of managing net income, assets, and cash flow. ROA is a unique bottom line because it is a ratio, which means you can compare performance of organizations or divisions of different sizes. With ROA, you can compare: Fundamental Geek – Segment 3 80 Fundamental Geek – Segment 3 81 Final thoughts on the Three Bottom Lines: The Income Bottom Line: The Operating Cash Flow Bottom Line: The Return on Assets Bottom Line: Fundamental Geek – Segment 3 82 How does your new knowledge about Return affect your 5 Partners? Lenders – our Banker: Vendors: Customers: Employees: Financial Support Staff: How does your new knowledge about Net Profit affect your 5 Partners? Fundamental Geek – Segment 3 83 Lenders – our Banker: Vendors: Customers: Employees: Financial Support Staff: Fundamental Geek – Segment 3 84 MultiMax Financial Statements MultiMax Annual Income Statement Sales Cost of Sales Gross Profit Year 3 279,672 158,838 120,834 Year 2 241,896 136,404 105,492 Year 1 202,621 117,199 85,422 SG&A or Operating Expenses Selling General and Administrative Total SG&A 25,305 72,942 98,248 21,977 61,006 82,983 16,276 53,887 70,163 Earnings from operations 22,586 22,509 15,259 Other Income (expense) Interest Income Interest expense Total Other Income/Expense 2,008 -933 1,075 1,670 -1,649 21 874 -1,573 -700 Earnings before income taxes 23,661 22,530 14,559 Income tax expense 8,524 8,331 5,616 Net Income 15,137 14,199 8,943 Fundamental Geek – Segment 3 85 MultiMax Annual Balance Sheet Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivables Inventory Prepaid expenses and other current assets Total current assets Year 3 Year 2 Year 1 39,903 20,900 35,585 40,842 32,097 12,000 37,155 40,175 39,401 0 28,298 27,234 4,517 141,748 4,962 126,390 3,477 98,410 Fixed Assets (Property and equipment) Total Assets 23,847 $165,595 21,021 $147,411 17,982 $116,391 Current Liabilities: Accounts payable Accrued expenses Total current liabilities 32,981 3,990 36,970 32,345 3,887 36,232 21,887 4,281 26,168 Long term liabilities Total Liabilities 3,292 40,263 21,361 57,593 21,458 47,625 Stockholder's equity Owner's equity Retained Earnings 51,626 73,707 31,283 58,534 25,263 43,503 Total stockholder's equity 125,333 89,817 68,766 Total Liabilities and Stockholders Equity $165,595 $147,411 $116,391 Liabilities And Stockholders Equity Fundamental Geek – Segment 3 86 MultiMax Annual Statement of Cash flows Year 3 Year 2 Year 1 15,137 14,199 8,943 3,444 428 341 3,241 1,172 18 4,414 834 -930 1,590 -609 283 -334 -9,599 -12,873 -706 268 -4,421 2,640 -174 -495 591 -601 9,913 -424 2,755 1,533 20,271 5,208 15,099 -15,135 ($15,135) -17,512 ($17,512) -2,725 ($2,725) Cash flows from financing activities Long term liabilities 1,982 4,584 -149 Net cash provided by financing activities 1,982 4,584 -149 7,118 -7,720 12,225 Cash flows from operating activities: Net Earnings Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation of property and equipment Provision for bad debts and returns Loss (gain) on disposal of equipment (Increase) decrease in assets: Receivables Inventory Prepaid expenses and other current assets Other assets Increase (decrease) in liabilities: Accounts payable Accrued expenses Net Cash provided by operating activities (OCF) Cash flows used in investing activities Fixed Asset Investment (PP&E) Net cash used in investing activities Net increase (decrease) in cash and cash equivalents Effect of exchange rates on cash and cash equivalents Cash and cash equivalents at beginning of year 688 416 -354 32,097 39,401 27,531 Cash and cash equivalents at end of year 39,903 32,097 39,401 Fundamental Geek – Segment 3 87