Financial
Statement
Analysis
Part One: Financial Accounting
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© The McGraw-Hill Companies, Inc., 1999
Return on Assets (ROA)
Return on assets =
Return on assets =
Return on assets =
Slide 13-1
Net income + Interest (1 - Tax rate)
Total assets
$680.7 + $33.3(.66)
$4,237.1
16.6 percent
Return on assets (ROA) reflects how much the
firm has earned on the investment of all the
financial resources committed to the firm.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Return on Invested Capital
Return on invested capital =
Return on invested capital =
Slide 13-2
Net income + Interest (1 - Tax rate)
Long-term liabilities + Shareholders’
equity
$680.7 + $33.3(.66)
$1,309.1 + $1,713.4
Return on invested capital = 23.2 percent
Return on invested capital focuses more on the
use of permanent capital (noncurrent liabilities
plus shareholders’ equity)
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Return on Shareholders’ Equity
Return on shareholders’ equity =
Return on shareholders’ equity =
Return on shareholders’ equity =
Slide 13-3
Net income
Shareholders’ equity
$680.7
$1,713.4
39.7 percent
Return on shareholders’ equity (ROE) reflects
how much the firm has earned on the funds
invested by the shareholders.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Return on Investment
Slide 13-4
Net income
Sales
profit margin or
return on sales
Irwin/McGraw-Hill
Sales
*
Investment
turnover
© The McGraw-Hill Companies, Inc., 1999
Price/Earnings Ratio (P/E)
Slide 13-5
Market price per share
Price/earnings ratio =
Net income per share
$65.375
Price/earnings ratio =
Price/earnings ratio =
$2.94
22 times
The price/earnings ratio (P/E) is the
best indicator of how investors judge
the firm’s future performance.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Gross Margin Percentage
Slide 13-6
Gross margin
Gross margin percentage =
Net sales revenues
$3,306.4
Gross margin percentage =
Gross margin percentage =
Irwin/McGraw-Hill
$6,295.4
52.5 percent
© The McGraw-Hill Companies, Inc., 1999
Profit Margin
Slide 13-7
Net income
Profit margin =
Net sales revenues
$680.7
Profit margin =
Profit margin =
Irwin/McGraw-Hill
$6,295.4
10.8 percent
© The McGraw-Hill Companies, Inc., 1999
Earnings Per Share
Slide 13-8
Net income
Earnings per share =
Number of shares of
common stock
outstanding
$680.7
Earnings per share =
Earnings per share =
Irwin/McGraw-Hill
231.5
$2.94
© The McGraw-Hill Companies, Inc., 1999
Asset Turnover
Slide 13-9
Sales revenue
Asset turnover =
Total assets
$6,295.4
Asset turnover =
Asset turnover =
Irwin/McGraw-Hill
$4,237.1
1.5 times
© The McGraw-Hill Companies, Inc., 1999
Investment Capital Turnover
Slide 13-10
Sales revenue
Invested capital turnover =
Invested capital
$6,295.4
Invested capital turnover =
Invested capital turnover =
Irwin/McGraw-Hill
$4,237.1
1.5 times
© The McGraw-Hill Companies, Inc., 1999
EquityTurnover
Slide 13-11
Sales revenue
Equity turnover =
Shareholders’ equity
$6,295.4
Equity turnover =
Equity turnover =
Irwin/McGraw-Hill
$1,713.4
3.7 times
© The McGraw-Hill Companies, Inc., 1999
Capital Intensity
Slide 13-12
Sales revenue
Capital intensity =
Property, plant, and
equipment
$6,295.4
Capital intensity =
Capital intensity =
$2,768.4
2.3 times
The capital intensity ratio focuses only on the usage of
property, plant, and equipment. Companies with a high
ratio are particularly vulnerable to cyclical fluctuations.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Working Capital Turnover
Slide 13-13
Sales revenue
Working capital turnover =
Working capital
$6,295.4
Working capital turnover =
Working capital turnover =
$30.5
206 times
Working capital is current assets
minus current liabilities
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Days’ Payables
Slide 13-14
Operating payables
Days’ payables
=
Days’ payables
=
Pretax cash expenses/365
$308.8 + $76.5 +
$233.8
+ $141.4
$760.5
$4,996.1/365
Days’ payables
=
56 days
Operating payables include accounts payable, accrued
wages and payroll taxes, and other items that represent
deferred payments for operating expenses.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Cash Conversion Cycle
Slide 13-15
Days
Receivables conversion period (days’ receivables)
Plus: inventory conversion period (days’ inventory
Operating cycle
Less: payment deferral period (days’ payable)
Cash conversion cycle
31
49
80
56
24
The result of this calculation is a measure of liquidity; it also
indicates the time interval for which additional short-term
financing might be needed to support a spurt in sales.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Dividend Yield
Slide 13-16
Dividends per share
Dividend yield =
Market price per share
$1.32
Dividend yield =
Dividend yield =
Irwin/McGraw-Hill
$65.375
2.0 percent
© The McGraw-Hill Companies, Inc., 1999
Dividend Payout
Slide 13-17
Dividends
Dividend payout =
Net income
$305.2
Dividend payout =
Dividend payout =
Irwin/McGraw-Hill
$680.7
45 percent
© The McGraw-Hill Companies, Inc., 1999
Other Key Ratios
Slide 13-18
Days’ cash
Cash
Cash expenses/365
Days’ receivables
Accounts receivable
Sales/365
Days’ inventory
Inventory
Cost of sales/365
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Other Key Ratios
Slide 13-19
Inventory turnover
Cost of Sales
Inventory
Current ratio
Current assets
Current liabilities
Acid-test (quick) ratio
Monetary current assets
Current liabilities
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Other Key Ratios
Slide 13-20
Financial leverage ratio
Assets
Stockholders’ equity
Debt/equity ratio
Long-term liabilities
Shareholders’ equity
Times interest earned
Pretax operating profit + Interest
Interest
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© The McGraw-Hill Companies, Inc., 1999
Chapter 13
The End
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999