Finance Assignment 3.2

C3 Took Kit

Tool Kit for Analysis of Financial Statements
Financial statements are analyzed by calculating certain key ratios and then comparing them with the ratios of other firms and by examining the trends in ratios over time. We can also combine ratios to make the analysis more revealing, those indicated below are exceptionally useful for this type of analysis.
RATIO ANALYSIS (Section 3.1)
Input Data:
			2014	2015
Year-end common stock price			$23.00	$26.00
Year-end shares outstanding (in millions)			50	50
Tax rate			40%	40%
After-tax cost of capital			11.0%	10.8%
Lease payments			$28	$28
Required sinking fund payments			$20	$20
Balance Sheets
(in millions of dollars)
Assets			2014	2015
Cash and equivalents			$10	$15
Short-term investments			$0	$65
Accounts receivable			$375	$315
Inventories			$615	$415
Total current assets			$1,000	$810
Net plant and equipment			$1,000	$870
Total assets			$2,000	$1,680
Liabilities and equity
Accounts payable			$60	$30
Notes payable			$110	$60
Accruals			$140	$130
Total current liabilities			$310	$220
Long-term bonds			$754	$580
Total liabilities			$1,064	$800
Preferred stock (400,000 shares)			$40	$40
Common stock (50,000,000 shares)			$130	$130
Retained earnings			$766	$710
Total common equity			$896	$840
Total liabilities and equity			$2,000	$1,680
Income Statements
(in millions of dollars)
			2014	2015
Net sales			$3,000.0	$2,850.0
Operating costs			$2,616.2	$2,497.0
Earnings before interest, taxes, depr. & amort. (EBITDA)			$383.8	$353.0
Depreciation			$100.0	$90.0
Amortization			$0.0	$0.0
Depreciation and amortization			$100.0	$90.0
Earnings before interest and taxes (EBIT)			$283.8	$263.0
Less interest			$88.0	$60.0
Earnings before taxes (EBT)			$195.8	$203.0
Taxes (40%)			$78.3	$81.2
Net income before preferred dividends			$117.5	$121.8
Preferred dividends			$4.0	$4.0
Net income available to common stockholders			$113.5	$117.8
Common dividends			$57.5	$53.0
Addition to retained earnings			$56.0	$64.8
Calculated Data: Operating Performance and Cash Flows
			2014	2015
Net operating working capital (NOWC)			$800.0	$585.0
Total operating capital			$1,800.0	$1,455.0
Net Operating Profit After Taxes (NOPAT)			$170.3	$157.8
Net Cash Flow (Net income + Depreciation)			$213.5	$207.8
Operating Cash Flow (OCF)			$270.3	$247.8
Free Cash Flow (FCF)			($174.7)	N/A
Calculated Data: Per-share Information
			2014	2015
Earnings per share (EPS)			$2.27	$2.36
Dividends per share (DPS)			$1.15	$1.06
Book value per share (BVPS)			$17.92	$16.80
Cash flow per share (CFPS)			$4.27	$4.16
Free cash flow per share (FCFPS)			($3.49)	N/A
LIQUIDITY RATIOS (Section 3.2)				Industry
		2014	2015	Average
Liquidity ratios
Current Ratio		3.23	3.68	4.2
Quick Ratio		1.24	1.80	2.1
ASSET MANAGEMENT RATIOS (Section 3.3)				Industry
		2014	2015	Average
Asset Management ratios
Inventory Turnover		4.88	6.87	9
Days Sales Outstanding		45.6	40.34 Christopher Buzzard: To calculate the DSO ratio, a 365-day accounting year was used.	36
Fixed Asset Turnover		3.00	3.28	3
Total Asset Turnover		1.50	1.70	1.8
DEBT MANAGEMENT RATIOS (Section 3.4)				Industry
		2014	2015	Average
Debt Management ratios
Debt Ratio		53.20%	47.62%	40.00%
Debt-to-Equity Ratio		1.14	0.91	0.67
Market Debt Ratio		48.06%	38.10%	N/A
Times Interest Earned		3.23	4.38	6
EBITDA Coverage Ratio		3.03 Brigham: (EBITDA + Lease Payments) / (Interest + Loan Payments + Lease Payments)	3.53	8
PROFITABILITY RATIOS (Section 3.5)				Industry
		2014	2015	Average
Profitability ratios
Profit Margin		3.78%	4.13%	5.00%
Basic Earning Power		14.19%	15.65%	17.20%
Return on Assets		5.67%	7.01%	9.00%
Return on Equity		12.67%	14.02%	15.00%
MARKET VALUE RATIOS (Section 3.6)				Industry
		2014	2015	Average
Market Value ratios
Price-to Earnings Ratio		10.13	11.04	12.5
Price-to-Cash Flow Ratio		5.39	6.26 Christopher Buzzard: P/CF ratio is calculated by dividing the price by the net cash flow per share.	Brigham: (EBITDA + Lease Payments) / (Interest + Loan Payments + Lease Payments)	Christopher Buzzard: To calculate the DSO ratio, a 365-day accounting year was used.	6.8
Price-to-EBITDA		3.00	3.68	4.6
Market-to-Book Ratio		1.28	1.55	1.7
TREND ANALYSIS, COMMON SIZE ANALYSIS, AND PERCENT CHANGE ANALYSIS (Section 3.7)
TREND ANALYSIS
Trend analysis allows you to see how a firm's results are changing over time. For instance, a firm's ROE may be slightly below the benchmark, but if it has been steadily rising over the past four years, that should be seen as a good sign.
A trend analysis and graph have been constructed on this data regarding MicroDrive's ROE over the past 5 years. (MicroDrive and indusry average data for earlier years has been provided.)
		ROE
		MicroDrive	Industry
	2010	14.0%	13.2%
	2011	16.1%	15.0%
	2012	14.8%	16.0%
	2013	14.0%	16.2%
	2014	12.7%	15.0%
Figure 3-1 Rate of Return on Common Equity
COMMON SIZE ANALYSIS
In common size income statements, all items for a year are divided by the sales for that year.
Figure 3-2 Common Size Income Statements
			Industry Composite	MicroDrive
			2014	2014	2015
Net sales			100.0%	100.0%	100.0%
Operating costs			87.6%	87.2%	87.6%
Earnings before interest, taxes, depr. & amort. (EBITDA)			12.4%	12.8%	12.4%
Depreciation and amortization			2.8%	3.3%	3.2%
Earnings before interest and taxes (EBIT)			9.6%	9.5%	9.2%
Less interest			1.3%	2.9%	2.1%
Earnings before taxes (EBT)			8.3%	6.5%	7.1%
Taxes (40%)			3.3%	2.6%	2.8%
Net income before preferred dividends			5.0%	3.9%	4.3%
Preferred dividends			0.0%	0.1%	0.1%
Net income available to common stockholders (profit margin)			5.0%	3.8%	4.1%
In common sheets, all items for a year are divided by the total assets for that year.
Figure 3-3 Common Size Balance Sheets
		Industry Composite	MicroDrive
		2014	2014	2015
Assets
Cash and equivalents		1.0%	0.5%	0.9%
Short-term investments		2.2%	0.0%	3.9%
Accounts receivable		17.8%	18.8%	18.8%
Inventories		19.8%	30.8%	24.7%
Total current assets		40.8%	50.0%	48.2%
Net plant and equipment		59.2%	50.0%	51.8%
Total assets		100.0%	100.0%	100.0%
Liabilities and equity
Accounts payable		1.8%	3.0%	1.8%
Notes payable		4.4%	5.5%	3.6%
Accruals		3.6%	7.0%	7.7%
Total current liabilities		9.8%	15.5%	13.1%
Long-term bonds		30.2%	37.7%	34.5%
Total liabilities		40.0%	53.2%	47.6%
Preferred stock		0.0%	2.0%	2.4%
Total common equity		60.0%	44.8%	50.0%
Total liabilities and equity		100.0%	100.0%	100.0%
PERCENT CHANGE ANALYSIS
In percent change analysis, all items are divided by the that item's value in the beginning, or base, year.
Figure 3-4 Income Statement Percent Change Analysis
Base year =	2015		Percent Change in
			2014
Net sales			5.3%
Operating costs			4.8%
Earnings before interest, taxes, depr. & amort. (EBITDA)			8.7%
Depreciation and amortization			11.1%
Earnings before interest and taxes (EBIT)			7.9%
Less interest			46.7%
Earnings before taxes (EBT)			(3.5%)
Taxes (40%)			(3.5%)
Net income before preferred dividends			(3.5%)
Preferred dividends			0.0%
Net income available to common stockholders			(3.7%)
Balance Sheet Percent Change Analysis (not in textbook)
Base year =	2015		Percent Change in
			2014
Assets
Cash and equivalents			-33.3%
Short-term investments			-100.0%
Accounts receivable			19.0%
Inventories			48.2%
Total current assets			23.5%
Net plant and equipment			14.9%
Total assets			19.0%
Liabilities and equity
Accounts payable			100.0%
Notes payable			83.3%
Accruals			7.7%
Total current liabilities			40.9%
Long-term bonds			30.0%
Total liabilities			33.0%
Preferred stock (400,000 shares)			0.0%
Common stock (50,000,000 shares)			0.0%
Retained earnings			7.9%
Total common equity			6.7%
Total liabilities and equity			19.0%
DU PONT ANALYSIS (Section 3.8)
		ROE =	(Profit margin)	(TA turnover)	(Equity Multiplier)
MicroDrive	2014	12.67%	3.78%	1.50	2.23
MicroDrive	2015	14.02%	4.13%	1.70	2.00
Industry Average		15.00%	5.00%	1.80	1.67

MicroDrive

2010 2011 2012 2013 2014 0.14000000000000001 0.161 0.14800000000000002 0.14023809523809525 0.12665178571428584 Industry

2010 2011 2012 2013 2014 0.13200000000000001 0.15 0.16 0.16200000000000001 0.15

ROE (%)