Financial Statement Analysis

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W

W Company Years Years Comments
Annual Income Statement (Values in Millions) 5 4 3 2 1 5 4 3 2 1
Sales 42,201.60 37,508.20 32,505.40 28,681.10 24,623.00 100.0% 100.0% 100.0% 100.0% 100.0% Average Annual Growth 14.4% Years 1-5
Cost of Sales 30,383.70 26,907.30 23,360.10 20,768.80 17,779.70 72.0% 71.7% 71.9% 72.4% 72.2%
Gross Operating Profit 11,817.90 10,600.90 9,145.30 7,912.30 6,843.30 28.0% 28.3% 28.1% 27.6% 27.8% Steady
Selling, General & Admin. Expense 9,363.80 8,055.10 6,950.90 5,980.80 5,175.80 22.2% 21.5% 21.4% 20.9% 21.0%
Depreciation & Amortization 482.10 403.10 346.10 307.30 269.20 1.1% 1.1% 1.1% 1.1% 1.1%
EBIT 1,972.00 2,142.70 1,848.30 1,624.20 1,398.30 4.7% 5.7% 5.7% 5.7% 5.7% Average Annual Growth 9.0%
Other Income, Net 31.60 33.60 40.40 13.10 27.50 0.1% 0.1% 0.1% 0.0% 0.1%
Total Income Avail for Interest Exp. 2,003.60 2,176.30 1,888.70 1,637.30 1,425.80 4.7% 5.8% 5.8% 5.7% 5.8%
Interest Expense 0.00 0.00 0.00 0.00 3.10 0.0% 0.0% 0.0% 0.0% 0.0% Interest Coverage Infinite
Minority Interest 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Pre-tax Income 2,003.60 2,176.30 1,888.70 1,637.30 1,422.70 4.7% 5.8% 5.8% 5.7% 5.8% Dropped in year 5
Income Taxes 896.10 816.10 713.00 618.10 537.10 2.1% 2.2% 2.2% 2.2% 2.2% Tax Rate: year 5 44.7%
Special Income/Charges 0.00 0.00 0.00 0.00 0.00
Net Income from Cont. Operations 1,107.50 1,360.20 1,175.70 1,019.20 885.60 2.6% 3.6% 3.6% 3.6% 3.6% Average Annual Growth 5.7% Years 1-5
Net Income from Discont. Opers. 452.00 0.00 0.00 0.00 0.00 1.1% 0.0% 0.0% 0.0% 0.0%
Net Income from Total Operations 1,559.50 1,360.20 1,175.70 1,019.20 885.60 3.7% 3.6% 3.6% 3.6% 3.6%
Extraordinary Income 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Income from Cum. Eff. of Acct. Chg. 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Income from Tax Loss Carryforward 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Other Gains (Losses) 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Total Net Income 1,559.50 1,360.20 1,175.70 1,019.20 885.60 3.7% 3.6% 3.6% 3.6% 3.6%
Dividends Paid per Share 0.21 0.17 0.15 0.14 0.14 Note: You can put your cursor on all numbers
Preferred Dividends 0.00 0.00 0.00 0.00 0.00 in this worksheet and see:
a) where those numbers came from;
Basic EPS from Cont. Operations 1.35 1.33 1.15 1.00 0.87 b) how calculated amounts were derived.
Basic EPS from Discont. Operations 0.00 0.00 0.00 0.00 0.00 c) except for the numbers in the financial
Basic EPS from Total Operations 1.39 1.33 1.15 1.00 0.87 statements, which were simply copied
from the actual financial statements.
Diluted EPS from Cont. Operations 1.52 1.32 1.14 0.99 0.86
Diluted EPS from Discont. Operations 0.00 0.00 0.00 0.00 0.00 Further, all derived numbers are shown by
Diluted EPS from Total Operations 1.52 1.32 1.14 0.99 0.86 their cell references, so that any changes to
the financial statement numbers will be
Stock Price 27.26 automatically reflected in the numbers
Price Earnings Ratio 24.11 derived from financial statement numbers.
Beta 0.32
These practices should always be adopted
when using Excel spreadsheets.
Years Averages Ratio Values
Annual Balance Sheet (Values in Millions) 5 4 3 2 1 Yrs 4-5 Yrs 3-4 Ratio Yrs 4-5 Yrs 3-4 Comments
Assets
Current Assets
Cash and Equivalents 576.8 1,695.50 1,017.10 449.9 16.9
Receivables 1,396.30 1,169.10 1,017.80 954.8 798.3 1,282.70 1,093.45 Days Receivables 11.1 10.6 Steady
Inventories 5,592.70 4,738.60 4,202.70 3,645.20 3,482.40 5,165.65 4,470.65 Days Inventory 62.1 60.6 Steady
Other Current Assets 750.7 161.2 120.5 116.6 96.3
Total Current Assets 8,316.50 7,764.40 6,358.10 5,166.50 4,393.90 8,040.45 7,061.25 Current Ratio 1.9 1.9 Steady
Quick Ratio 0.7 0.7 Steady
Non-Current Assets
Property, Plant & Equipment, Gross 8,150.20 7,094.30 6,362.30 5,917.90 5,503.30
Accum. Depreciation & Depletion 1,985.20 1,647.90 1,422.30 1,326.50 1,158.00
Property, Plant & Equipment, Net 6,165.00 5,446.40 4,940.00 4,591.40 4,345.30
Intangibles 0 0 0 0 0
Other Non-Current Assets 127.3 131.3 107.8 120.9 94.6
Total Non-Current Assets 6,292.30 5,577.70 5,047.80 4,712.30 4,439.90
Total Assets 14,608.80 13,342.10 11,405.90 9,878.80 8,833.80 13,975.45 12,374.00 Total Asset Turnover 3.0 3.0 Steady
Net Income:Total Assets 7.9% 11.0% Dropped in year 5
Averages Ratio Values
Liabilities & Shareholder's Equity Yrs 4-5 Yrs 3-4 Ratio Yrs 4-5 Yrs 3-4
Current Liabilities
Accounts Payable 2,918.20 2,641.50 2,077.00 1,836.40 1,546.80 2,779.85 2,359.25 Days Payables 33.4 32.0 Steady
Short Term Debt 0 0 0 0 440.7
Other Current Liabilities 1,562.80 1,436.40 1,343.50 1,118.80 1,024.10
Total Current Liabilities 4,481.00 4,077.90 3,420.50 2,955.20 3,011.60 4,279.45 3,749.20
Non-Current liabilites
Long Term Debt 0 0 0 0 0 LT Debt: Equity 0.0 0.0
Deferred Income Taxes 240.4 327.6 228 176.5 137
Other Non-Current Liabilities 997.7 708.6 561.7 516.9 478 Total Assets/Total Common Equity 1.6 4.1
Minority Interest 0 0 0 0 0
Total Non-Current Liabilities 1,238.10 1,036.20 789.7 693.4 615 1,137.15 912.95 Non-Current Liabilities:Equity 13.3% 11.8% Slight increase in year 5
Total Liabilities 5,719.10 5,114.10 4,210.20 3,648.60 3,626.60
Shareholder's Equity 20.3% 24.8% EBIT/Total NonCurrent Liabilities + Total Equity
Preferred Stock Equity 0 0 0 0 0
Common Stock 3,000.00 3,000.00 3,000.00 3,000.00 3,000.00 3,000.00 3,000.00 Net Income:Equity 12.9% 17.6% Dropped in year 5
Retained Earnings 5,889.70 5,228.00 4,195.70 3,230.20 2,207.20 5,558.85 4,711.85
Total Equity 8,889.70 8,228.00 7,195.70 6,230.20 5,207.20 8,558.85 7,711.85 Market to Book 3.1
Total Liabilities & Equity 14,608.80 13,342.10 11,405.90 9,878.80 8,833.80
Total Common Shares Outstanding 1,013 Excludes Treasury Shares
Preferred Shares 0
Treasury Shares 11.9 2.1 0 0 0
Common Equity: Market Value 27,614
Common Equity: Market to Book 3.1
Common Equity: Book to Market 0.3
Annual Cash Flow (in Millions) 5 4 3 2 1 5 4 3 2 1
Cash Flow from Operating Activities
Net Income (Loss) 1,559.50 1,360.20 1,175.70 1,019.20 885.6 100.0% 100.0% 100.0% 100.0% 100.0%
Depreciation and Amortization 482.1 403.1 346.1 307.3 269.2
Deferred Income Taxes -70.8 72.2 58.9 22.9 46.9
Operating (Gains) Losses 108.4 81.2 53.6 48.2 69.4
Extraordinary (Gains) Losses 0 0 0 0 0
Change in Working Capital
(Increase) Decr. in Receivables -224.9 -171.6 -56.7 -170.6 -177.3
(Increase) Decr. in Inventories -854 -536 -557.5 -162.8 -651.6
(Increase) Decr. in Other Curr. Assets 0 0 0 0 0
(Decrease) Incr. in Payables 276.7 233.7 240.6 289.6 182.8
(Decrease) Incr. in Other Curr. Liabs. 102.8 167.7 182.5 89.3 76.8
Other Non-Cash Items -8.6 42.2 48.3 30.7 17.4
Net Cash from Cont. Operations 1,371.20 1,652.70 1,491.50 1,473.80 719.2
Net Cash from Discont. Operations 0 0 0 0 0
Net Cash from Operations 1,371.20 1,652.70 1,491.50 1,473.80 719.2 87.9% 121.5% 126.9% 144.6% 81.2% Cash from Operations % of Net Income
Cash Flow used for Investing Activities
5 4 3 2 1 5 4 3 2 1
Cash Flow Used For:
Sale of Property, Plant, Equipment 15.5 6.2 84.5 368.1 43.5
Sale of Short Term Investments 11,519.90 0 0 0 0
Cash Used by:
Purchase of Property, Plant, Equipmt. -1,237.50 -939.5 -795.1 -934.4 -1,237.00
Purchase of Short Term Investments -10,742.00 0 0 0 0
Other Investing Changes Net 10.1 10.2 8.4 14.4 59
Net Cash used by Investing -434 -923.1 -702.2 -551.9 -1,134.50 315.9% 179.0% 212.4% 267.0% 63.4% Cash Invested % of Cash from Operations
Cash from Operations as % of Investing
Cash Flow from Financing Activities
5 4 3 2 1 5 4 3 2 1
Cash Flow Provided by:
Issuance of Debt 0 0 0 0 440.7
Issuance of Capital Stock 177.5 145.1 0 111.1 126.1
Cash Used for:
Repayment of Debt 0 0 0 -440.7 0
Repurchase of Capital Stock -781.8 -299.2 0 0 0
Payment of Cash Dividends -214.5 -176.9 -152.4 -147 -140.9
Other Financing Charges, Net 14.4 28.9 -69.7 -12.3 -6.5
Net Cash from Financing -804.4 -302.1 -222.1 -488.9 419.4 -58.7% -18.3% -14.9% -33.2% 58.3% Cash from Financing % of Cash from Operations
Effect of Exchange Rate Changes 0 0 0 0 0
Net Change in Cash & Cash Equivalents 132.8 427.5 567.2 433 4.1
Source of data: MSN Money

C

C Company Years Years Comments
Annual Income Statement (Values in Millions) 5 4 3 2 1 5 4 3 2 1
Sales 30,594.30 26,588.00 24,181.50 22,241.40 20,087.50 100.0% 100.0% 100.0% 100.0% 100.0% Average Annual Growth 11.1% Years 1-5
Cost of Sales 22,620.00 19,725.00 18,112.70 16,550.40 14,725.80 73.9% 74.2% 74.9% 74.4% 73.3%
Gross Operating Profit 7,974.30 6,863.00 6,068.80 5,691.00 5,361.70 26.1% 25.8% 25.1% 25.6% 26.7% Steady
Selling, General & Admin. Expense 6,079.70 5,097.70 4,552.30 4,247.10 3,742.40 19.9% 19.2% 18.8% 19.1% 18.6%
Depreciation & Amortization 439.90 341.70 310.30 320.80 296.60 1.4% 1.3% 1.3% 1.4% 1.5%
EBIT 1,454.70 1,423.60 1,206.20 1,123.10 1,322.70 4.8% 5.4% 5.0% 5.0% 6.6% Average Annual Growth 2.4%
Other Income, Net 0.00 0.00 0.00 4.20 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Total Income Avail for Interest Exp. 1,454.70 1,423.60 1,206.20 774.80 1,322.70 4.8% 5.4% 5.0% 3.5% 6.6%
Interest Expense 58.30 48.10 50.40 65.20 79.30 0.2% 0.2% 0.2% 0.3% 0.4% Interest Coverage 25.0 29.6
Minority Interest 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Pre-tax Income 1,396.40 1,375.50 1,155.80 709.60 1,243.40 4.6% 5.2% 4.8% 3.2% 6.2% Dropped in year 5
Income Taxes 477.60 528.20 439.20 296.40 497.40 1.6% 2.0% 1.8% 1.3% 2.5% Tax Rate: year 5 34.2%
Special Income/Charges 0.00 0.00 0.00 -352.50 0.00
Net Income from Cont. Operations 918.80 847.30 716.60 413.20 746.00 3.0% 3.2% 3.0% 1.9% 3.7% Average Annual Growth 5.3% Years 1-5
Net Income from Discont. Opers. 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Net Income from Total Operations 918.80 847.30 716.60 413.20 746.00 3.0% 3.2% 3.0% 1.9% 3.7%
Extraordinary Income 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Income from Cum. Eff. of Acct. Chg. 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Income from Tax Loss Carryforward 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Other Gains (Losses) 0.00 0.00 0.00 0.00 0.00 0.0% 0.0% 0.0% 0.0% 0.0%
Total Net Income 918.80 847.30 716.60 413.20 746.00 3.0% 3.2% 3.0% 1.9% 3.7%
Dividends Paid per Share 0.13 0.12 0.12 0.12 0.12 Note: You can put your cursor on all numbers
Preferred Dividends 14.20 14.60 14.80 14.70 14.60 in this worksheet and see:
a) where those numbers came from;
Basic EPS from Cont. Operations 1.14 1.06 0.90 0.51 0.94 b) how calculated amounts were derived.
Basic EPS from Discont. Operations 0.00 0.00 0.00 0.00 0.00 c) except for the numbers in the financial
Basic EPS from Total Operations 1.14 1.06 0.90 0.51 0.94 statements, which were simply copied
from the actual financial statements.
Diluted EPS from Cont. Operations 1.10 1.03 0.88 0.50 0.92
Diluted EPS from Discont. Operations 0.00 0.00 0.00 0.00 0.00 Further, all derived numbers are shown by
Diluted EPS from Total Operations 1.10 1.03 0.88 0.50 0.92 their cell references, so that any changes to
the financial statement numbers will be
Stock Price 22.01 automatically reflected in the numbers
Price Earnings Ratio 18.11 derived from financial statement numbers.
Beta 0.78
These practices should always be adopted
when using Excel spreadsheets.
Years Averages Ratio Values
Annual Balance Sheet (Values in Millions) 5 4 3 2 1 Yrs 4-5 Yrs 3-4 Ratio Yrs 4-5 Yrs 3-4 Comments
Assets
Current Assets
Cash and Equivalents 392.30 843.20 700.40 236.30 337.30
Receivables 1,764.20 1,349.60 1,019.30 966.20 824.50 1,556.90 1,184.45 Days Receivables 18.6 16.3 Steady
Inventories 5,453.90 4,016.50 4,013.90 3,918.60 3,557.60 4,735.20 4,015.20 Days Inventory 76.4 74.3 Steady
Other Current Assets 309.10 287.20 248.50 333.00 217.20
Total Current Assets 7,919.50 6,496.50 5,982.10 5,454.10 4,936.60 7,208.00 6,239.30 Current 1.7 1.9 Steady
Quick 0.6 0.7 Steady
Non-Current Assets
Property, Plant & Equipment, Gross 5,275.00 3,960.40 3,405.60 2,818.10 2,601.30
Accum. Depreciation & Depletion 1,769.10 1,418.30 1,189.80 970.80 859.20
Property, Plant & Equipment, Net 3,505.90 2,542.10 2,215.80 1,847.30 1,742.10
Intangibles 2,766.40 1,292.70 1,230.30 827.00 818.50
Other Non-Current Assets 355.00 211.80 217.10 499.80 452.30
Total Non-Current Assets 6,627.30 4,046.60 3,663.20 3,174.10 3,012.90
Total Assets 14,546.80 10,543.10 9,645.30 8,628.20 7,949.50 12,544.95 10,094.20 Total Asset Turnover 2.4 2.6 Steady
Net Income:Total Assets 7.3% 8.4% Dropped in year 5
Years Averages Ratio Values
5 4 3 2 1 Yrs 4-5 Yrs 3-4 Ratio Yrs 4-5 Yrs 3-4
Liabilities & Shareholder's Equity
Current Liabilities
Accounts Payable 2,275.90 1,666.40 1,707.90 1,535.80 1,351.50 1,971.15 1,687.15 Days Payables 31.8 31.2 Steady
Short Term Debt 916.20 323.20 36.80 262.20 611.20
Other Current Liabilities 1,666.70 1,499.60 1,361.20 1,267.90 1,001.40
Total Current Liabilities 4,858.80 3,489.20 3,105.90 3,065.90 2,964.10 4,174.00 3,297.55
Non-Current liabilites
Long Term Debt 1,925.90 753.10 1,076.30 810.40 536.80 1,339.50 914.70 LT Debt: Common Equity 21.4% 17.1%
Deferred Income Taxes 0.00 41.60 0.00 35.30 28.00
Other Non-Current Liabilities 774.90 237.40 266.10 149.70 116.00 Total Assets/Total Common Equity 2.0 1.9
Minority Interest 0.00 0.00 0.00 0.00 0.00
Total Non-Current Liabilities 2,700.80 1,032.10 1,342.40 995.40 680.80 1,866.45 1,187.25 Non-Current Liabilities:Equity 29.8% 22.1% Slight increase in year 5
Total Liabilities 7,559.60 4,521.30 4,448.30 4,061.30 3,644.90
17.4% 20.9% EBIT/Total NonCurrent Liabilities + Total Equity
Shareholder's Equity
Preferred Stock Equity 228.40 242.70 250.40 261.20 267.50 235.55 246.55
Common Stock 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00
Retained Earnings 4,758.80 3,779.10 2,946.60 2,305.70 2,037.10
Total Common Equity 6,758.80 5,779.10 4,946.60 4,305.70 4,037.10 6,268.95 5,362.85 Net Income:Common Equity 14.7% 15.8% Dropped in year 5
Total Equity 6,987.20 6,021.80 5,197.00 4,566.90 4,304.60 6,504.50 5,609.40
Total Liabilities & Equity 14,546.80 10,543.10 9,645.30 8,628.20 7,949.50
Total Common Shares Outstanding 801.9 790.8 786.1 781.8 784.6
Preferred Shares 4.3 Mil 4.5 Mil 4.7 Mil 4.9 Mil 5.0 Mil
Treasury Shares 26.6 Mil 29.6 Mil 32.4 Mil 35.3 Mil 30.1 Mil
Common Equity: Market Value 17,649.82
Common Equity: Market to Book 2.61
Common Equity: Book to Market 0.38
Annual Cash Flow (in Millions) 5 4 3 2 1 5 4 3 2 1
Cash Flow from Operating Activities
Net Income (Loss) 959.30 847.30 716.60 413.20 746.00 100.0% 100.0% 100.0% 100.0% 100.0%
Depreciation and Amortization 439.90 341.70 310.30 320.80 296.60
Deferred Income Taxes -7.20 41.10 71.80 -83.50 43.80
Operating (Gains) Losses 0.00 0.00 0.00 352.50 0.00
Extraordinary (Gains) Losses 0.00 0.00 0.00 0.00 0.00
Change in Working Capital
(Increase) Decr. in Receivables -48.40 -311.10 -53.10 -141.70 -86.70
(Increase) Decr. in Inventories -509.80 2.10 -95.30 -366.80 -98.10
(Increase) Decr. in Other Curr. Assets 44.20 -3.40 -22.80 -9.80 -43.10
(Decrease) Incr. in Payables 109.40 -41.50 172.00 184.40 -133.60
(Decrease) Incr. in Other Curr. Liabs. -73.20 92.70 105.30 11.50 55.30
Other Non-Cash Items 0.00 0.00 0.00 0.00 0.00
Net Cash from Cont. Operations 914.20 968.90 1,204.80 680.60 780.20
Net Cash from Discont. Operations 0.00 0.00 0.00 0.00 0.00
Net Cash from Operations 914.20 968.90 1,204.80 680.60 780.20 95.3% 114.4% 168.1% 164.7% 104.6% Cash from Operations % of Net Income
Cash Flow used for Investing Activities
5 4 3 2 1 5 4 3 2 1
Cash Flow Used For:
Sale of Property, Plant, Equipment 14.30 13.40 17.70 12.60 18.80
Sale of Short Term Investments 0.00 0.00 0.00 0.00 0.00
Cash Used by:
Purchase of Property, Plant, Equipmt. -3,641.40 -1,254.80 -1,202.30 -872.70 -958.60
Purchase of Short Term Investments 0.00 0.00 0.00 0.00 0.00
Other Investing Changes Net 463.80 487.80 448.80 323.30 299.30
Net Cash used by Investing -3,163.30 -753.60 -735.80 -536.80 -640.50 28.9% 128.6% 163.7% 126.8% 121.8% Cash Invested % of Cash from Operations
Cash from Operations as % of Investing
Cash Flow from Financing Activities
5 4 3 2 1 5 4 3 2 1
Cash Flow Provided by:
Issuance of Debt 2,089.70 0.00 296.90 295.90 138.70
Issuance of Capital Stock 129.80 38.30 34.00 47.30 97.80
Cash Used for:
Repayment of Debt -301.50 -5.60 -230.90 -353.80 -0.90
Repurchase of Capital Stock 0.00 0.00 0.00 -129.00 -163.20
Payment of Cash Dividends -119.80 -105.20 -104.90 -105.20 -104.80
Other Financing Charges, Net 0.00 0.00 0.00 0.00 0.00
Net Cash from Financing 1,798.20 -72.50 -4.90 -244.80 -32.40 196.7% -7.5% -0.4% -36.0% -4.2% Cash from Financing % of Cash from Operations
Effect of Exchange Rate Changes 0.00 0.00 0.00 0.00 0.00
Net Change in Cash & Cash Equivalents -450.90 142.80 464.10 -101.00 107.30
Source of data: MSN Money

Profiles

How Do They Earn Their Return On Equity?
When we discussed DuPont Analysis and corporate strategy, we noted that Return on Equity was the product
of the following three financial ratios:
Net Income Margin (NI/TR) times
Asset Turnover (TR/TA) times
Leverage (TA/E)
Different companies have different financial ratios. So Return on Equity for any one company is the product of
three ratios which may be quite different in value than the same three ratios for a different company. For example,
here are the three ratios for five individual companies in various industries.
Dell
Computer Company A Company B Company C Company D
Net Income/Total Revenue x 0.06 0.05 0.01 0.09 0.26
Total Revenue/Total Assets x 2.44 0.79 2.28 0.45 0.05
Total Assets/Equity = 3.03 2.74 2.81 3.00 12.37
Net Income/Equity 0.44 0.10 0.09 0.12 0.15
We recognize Dell Computer. But who are the other four companies? They are: Suntrust Banks,
Albertsons (the supermarket chain), Toyota, and Florida Power and Light.
But, which is which? Not so easy to say, is it? But here are some clues:
Banks are very highly levered, and extremely capital intensive.
Supermarkets make very narrow profit margins, but have relatively fast asset turnover.
Auto manufacturers are quite capital intensive, and not excessively leveraged.
Electric utilities are very capital intensive, and have large profit margins.
Now can you tell which company is which? Try to figure it out. For the answers, scroll down to row 77.
Here are the answers:
Clue: Company: Name:
Banks: very highly levered (TA/E), and extremely capital intensive (TR/TA). D Suntrust Banks, Inc.
Supermarkets: narrow profit margins (NI/TR), but fast asset turnover (TR/TA). B Albertsons, Inc.
Auto manufacturers: capital intensive (TR/TA), and not excessively leveraged (TA/E). A Toyota
Electric utilities: very capital intensive (TR/TA), and large profit margins (NI/TR). C Florida Power and Light
How Do Companies Earn Their Return On Equity?
Profit Asset Return on
Margin Turnover Leverage Equity Strategy
Dell Low High Medium Huge Fast asset turnover
Banks High Low High High Very high leverage
Supermarkets Low High Medium Medium Fast asset turnover
Auto Makers Low Low Medium Medium No single factor
Electric Utilities High Low Medium Medium High profit margin
Clearly, there are many different ways to earn a return on equity.
Footnote:
We often hear comments about how difficult it is for a new business to get a loan from a bank. Some people say
that a bank will only lend you an umbrella if you can prove it is not raining! Dupont analysis gives us insight
into this issue. Consider the following ratios:
Net Income/Total Revenue x Total Revenue/Total Assets = Net Income/Total Assets = Return on Assets (ROA)
For Suntrust Banks these ratios are: 0.26 times 0.05 = 1.2% ROA
This 1.2% return on assets for Suntrust is a superior performance. Most banks are pleased to earn just
1% return on assets. For banks, Loans Receivable are the major asset class . Therefore if 1% of loans
receivable turn out to be uncollectible, the bank will fail to earn a profit. If substantially more than 1% of loans
turn out to be uncollectible, then the bank will incur a large loss. That explains why banks are so very careful
when making loans. Bankers have a saying that any fool can make a loan, but it takes real talent to get the loan
repaid!
A final question: ask yourself - how does your company earn its return on equity?

Z Score

Using Financial Ratios to Predict Bankruptcy
Up to this point we have used financial ratios to evaluate past performance. But financial ratios can also be used to
predict future financial condition. Specifically, financial ratios are powerful predictors of future bankruptcy. There are
several methods of using ratios to predict bankruptcy. Probably the best known and longest-used method is the Z Score.
The Z Score was developed from a sample of manufacturing companies by Professor Edward Altman of New York University.
It is described below.
The Z Score is a predictor. All predictors are subject to two types of errors:
(a) False positives - when a firm predicted to remain solvent in fact becomes bankrupt.
(b) False negatives - when a firm predicted to become bankrupt in fact remains solvent .
The error rates for the Z Score have been found to be as follows:
Years before False False
Bankruptcy Positives Negatives
1 6% 3%
2 18% 6%
Given the inherent difficulties of predicting future events, these error rates are quite low, and the Z Score is regarded as a
reasonably reliable predictor.
The Z Score is calculated by the following formula:
Z = 1.2 times Working Capital/Total Assets plus (Working Capital is Current Assets less Current Liabilities)
1.4 times Retained Earnings/Total Assets plus
3.3 times EBIT/Total Assets plus
0.6 times Equity at Market Value/Debt plus
1.0 times Sales/Total Assets
The Z Score indicates the following future events:
Value of Z Prediction
Above 2.99 Solvency
1.81 - 2.99 Gray Area 1.81 - 2.68 suggests bankruptcy, and 2.68 - 2.99 suggests solvency.
Below 1.81 Bankruptcy
From the W Balance Sheet: $millions Ratios Times the
Current Assets Current Liabilities Value Factor Equals
Working Capital $8,040 $4,279 $3,761 Working Capital
Total Assets $13,975 Working Capital/Total Assets 0.27 1.2 0.32
Retained Earnings $5,559 Retained Earnings/Total Assets 0.40 1.4 0.56
EBIT $1,972 EBIT/Total Assets 0.14 3.3 0.47
Equity at Market $27,614 Equity at Market/Debt 24.28 0.6 14.57
Long-term Debt $1,137 Sales/Total Assets 3.02 1.0 3.02
Sales $42,202 Z Score 18.9
Result: with a Z Score of 18.9 W appears to be highly solvent.
Note: You can put your cursor on all numbers
in the above table and see:
a) where those numbers came from;
b) how calculated amounts were derived.
c) except for the numbers in the financial
statements, which were simply copied
from the actual financial statements.
Further, all derived numbers are shown by
their cell references, so that any changes to
the financial statement numbers will be
automatically reflected in the numbers
derived from financial statement numbers.
These practices should always be adopted
when using Excel spreadsheets.

Compare

W Company C Company DIRECT COMPETITOR COMPARISON
Comparison Years Years W C RAD WMT Industry
5 4 5 4 Result Market Cap: 46.73B 22.21B 2.01B 199.68B 2.01B
Short-term Liquidity Employees: 131,400 78,500 38,448 1,700,000 78.50K
Current Ratio 1.9 1.9 1.7 1.9 Similar Qtrly Rev Growth (yoy): 11.30% 13.40% 0.20% 10.10% 1.80%
Quick Ratio 0.7 0.7 0.6 0.7 Similar Revenue (ttm): 42.20B 36.20B 16.80B 305.37B 16.80B
Days Receivable 11 11 19 16 W Better Gross Margin (ttm): 27.93% 26.42% 25.19% 23.02% 26.18% W best
Days Inventory 62 61 76 74 W Better Oper Margins (ttm): 5.72% 4.87% 2.70% 5.87% 1.91% W very good
Days Payables 33 32 32 31 Similar Net Income (ttm): 1.56B 1.06B 212.99M 10.80B 260.73M
EPS (ttm): 1.517 1.273 0.336 2.569 1.27
Winner W P/E (ttm): 30.44 21.43 11.37 18.67 28.36 W best, C low
PEG (5 yr expected): 1.59 1.47 7.8 1.14 1.81 W very good
Profitabilty P/S (ttm): 1.11 0.62 0.12 0.65 0.34 W very good
Sales Growth Years 1-5 14.4% 11.1% W Better
Gross Profit % 28.0% 28.3% 26.1% 25.8% W Better RAD = Rite Aid Corp.
EBIT % 4.7% 5.7% 4.8% 5.4% Similar WMT = Wal-Mart Stores Inc.
Net Income: Cont. Operations % 2.6% 3.6% 3.0% 3.2% Similar Industry = Drug Stores Source: Yahoo Finance
Net Income: Cont. Operations:
Growth Years 1-5 5.7% 5.3% W Better W equals or excels its industry in most categories. C has better profit margins than its industry,
Winner W but has lower market ratios than its industry.
Return on Investment
Net Income:Total Assets 7.9% 11.0% 7.3% 8.4% W Better Note: You can put your cursor on all numbers
EBIT/Total NonCurrent Liabilities in this worksheet and see:
+ Total Equity (Raw earning power) 20.3% 24.8% 17.4% 20.9% W Better a) where those numbers came from;
Net Income:Common Equity 12.9% 17.6% 14.7% 15.8% Similar b) how calculated amounts were derived.
Winner W c) except for the numbers in the financial
statements, which were simply copied
Long-Term Solvency from the actual financial statements.
Interest Coverage No Interest No Interest 25 30 W Better
LT Debt to Common Equity No LT Debt No LT Debt 21.4% 17.1% C more leveraged Further, all derived numbers are shown by
Winner W their cell references, so that any changes to
the financial statement numbers will be
Market Ratios automatically reflected in the numbers
Price Earnings Ratio 24.11 18.11 W Better derived from financial statement numbers.
Beta 0.32 0.78 W Better
Common Stock: Market to Book 3.11 2.61 W Better These practices should always be adopted
Winner W when using Excel spreadsheets.
Cash Flow
Cash from Operations/Net Income 87.93% 121.50% 95.30% 114.35% Similar
Cash from Operations/Investing 315.94% 179.04% 28.90% 128.57% W Better
W
Overall Winner Winner of every ratio category W
Dupont Analysis
Net Income/Sales 2.6% 3.0% C Better
Sales/Total Assets 3.0 2.4 W Better
Total Assets/Common Equity 1.6 2.0 C more leveraged
Common Equity: Book to Market 0.3 0.4 W Better
Earnings to Price Ratio 0.04 0.06 W Better
Price Earnings Ratio 24.1 18.1
Inverse of E/P = P/E 24.0 17.8 Rough check on accuracy of DuPont E/P
DuPont results closely match actual P/E
Interpretation of Dupont Analysis:
W is better on most ratios, but C makes up some ground with higher Net Income/Sales ratio and higher leverage.
Conclusions
W is superior to C in every category: Short-term liquidity
Profitability
Return on investment
Long-term solvency
Market ratios
W also equals or betters its industry in every category.
C equals its industry in profitability margins, but lags on market measures.
W
RAD
WMT