Internal Analysis

Financial Analysis n Competitive position:

Revenue/Costs/Trends(Competitors) n Market Opportunities/Threats n Profitability vs. Market: Products/Areas/

Customers/Distribution Channels/Costs n Global Market

Financial Ratios - Other

Price/earning ratio

Dividend payout ratio

Dividend yield on common stock

How Formula Expressed Meaning

Market price per share————————— Earnings per share Decimal

Percentage

Percentage

Shows the current market’s evaluation of a stock, based on its earnings; shows how much the investor is willing to pay for each dollar of earnings.

Indicates the percentage of profit that is paid out as dividends.

Indicates the dividend rate of return to common shareholders at the current market price.

Annual dividends per share———————————— Annual earnings per share

Annual dividends per share——————————————— Current market price per share

Note: In using ratios for analysis, calculate ratios for the corporation and compare them to the average and quartile ratios for the particular industry. Refer to Standard and Poor’s and Robert Morris Associates for average industry data. Special thanks to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M University–Corpus Christi, Corpus Christi, Texas, for his definitions of these ratios.

Financial Ratios - Activity

Inventory turnover

Days of inventory

Net working capital turnover Asset turnover

Fixed asset turnover

Average collection period

Accounts receivable turnover Accounts payable period Days of cash

How Formula Expressed Meaning

Net sales——————— Inventory Decimal

Days

Decimal

Decimal

Decimal

Days

Decimal

Days

Days

Measures the number of times that average inventory of finished goods was turned over or sold during a period of time, usually a year. Measures the number of one day’s worth of inventory that a company has on hand at any given time. Measures how effectively the net working capital is used to generate sales. Measures the utilization of all the company’s assets; measures how many sales are generated by each dollar of assets. Measures the utilization of the company’s fixed assets (i.e., plant and equipment); measures how many sales are generated by each dollar of fixed assets. Indicates the average length of time in days that a company must wait to collect a sale after making it; may be compared to the credit terms offered by the company to its customers. Indicates the number of times that accounts receivable are cycled during the period (usually a year). Indicates the average length of time in days that the company takes to pay its credit purchases. Indicates the number of days of cash on hand, at present sales levels.

Inventory——————————— Cost of goods sold ÷ 365

Net sales————————— Net working capital

Sales————————— Total assets

Sales——————— Fixed assets

Accounts receivable————————— Sales for year ÷ 365

Annual credit sales————————— Accounts receivable Accounts payable————————————

Purchases for year ÷ 365 Cash———————————

Net sales for year ÷ 365

Financial Ratios - Liquidity

Current ratio

Quick (acid test) ratio

Inventory to net

working capital

Cash ratio

How Formula Expressed Meaning

Current assets —————————

Current liabilities Decimal

Decimal

Decimal

Decimal

A short-term indicator of the company’s

ability to pay its short-term liabilities

from short-term assets; how much of

current assets are available to cover

each dollar of current liabilities.

Measures the company’s ability to pay

off its short-term obligations from

current assets, excluding inventories.

A measure of inventory balance;

measures the extent to which the

cushion of excess current assets over

current liabilities may be threatened by

unfavorable changes in inventory.

Measures the extent to which the

company’s capital is in cash or cash

equivalents; shows how much of the

current obligations can be paid from

cash or near-cash assets.

Current assets – Inventory ————————————

Current liabilities

Inventory ———————————————

Current assets – Current liabilities

Cash + Cash equivalents ———————————

Current liabilities

Financial Ratios - Leverage

Debt to asset ratio

Debt to equity ratio

Long-term debt to capital structure

Times interest earned

Coverage of fixed charges

Current liabilities to equity

How Formula Expressed Meaning

Total debt——————— Total assets

Percentage

Percentage

Percentage

Decimal

Decimal

Percentage

Measures the extent to which borrowed funds have been used to finance the company’s assets.

Measures the funds provided by creditors versus the funds provided by owners.

Measures the long-term component of capital structure.

Indicates the ability of the company to meet its annual interest costs.

A measure of the company’s ability to meet all of its fixed-charge obligations.

Measures the short-term financing portion versus that provided by owners.

Total debt————————— Shareholders’ equity

Long-term debt————————— Shareholders’ equity

Profit before taxes + Interest charges + Lease charges

———————————————— Interest charges + Lease obligations

Profit before taxes + Interest charges———————————————— Interest charges

Current liabilities————————— Shareholders’ equity

Financial Ratios - Profitability

Net profit margin

Gross profit margin

Return on Asset (ROA)

Return on equity

(ROE)

Earnings per share (EPS)

How Formula Expressed Meaning

Net profit after taxes —————————

Net sales Percentage

Percentage

Percentage

Percentage

Dollars per share

Shows how much after-tax profits are generated by each dollar of sales.

Indicates the total margin available to cover other expenses beyond cost of goods sold, and still yield a profit.

Measures the rate of return on the total assets utilized in the company; a

measure of management’s efficiency, it shows the return on all the assets

under its control regardless of source of financing.

Measures the rate of return on the book value of shareholders’ total investment in the company.

Shows the after-tax earnings generated for each share of common

stock.

Sales – Cost of goods sold —————————————

Net sales

Net profit after taxes ————————— Shareholders’ equity

Net profit after taxes – preferred stock dividends

———————————— Average number of

common shares

Net profit after taxes —————————

Total assets

Financial Ratios n Profitability n Liquidity n Leverage n Activity n Other

Financial Analysis n Revenue n Expenses n Cash Flow n Break Even

n Ratio Analysis n Comparison to

Industry n Projections using

Current Strategy

Current-Year-Trends 3-Year Averages

Internal Analysis n Marketing Strategy

n Penetration Goals n Price / Package n Sales / Distribution n Services n Advertising / Promotions

Internal Analysis n Products/Services n Market Analysis

n Target Market Characteristics n Sales/Distribution/Profits by Product/Service

n Competitive Analysis n Competitor’s Profile n Product/Service Comparison n Market Niche and Share n Competitor Strategies

Marketing Analysis n Market Share n Size n Demographics n Advertising

Marketing - Mix Variables

Product Place Promotion Price Quality Channels Advertising List price Features Coverage Personal selling Discounts Options Locations Sales promotion Allowances Style Inventory Publicity Payment periods Brand name Transport Credit terms Packaging Sizes Services Warranties Returns Source: Philip Kotler, Marketing Management: Analysis, Planning, and Control, 4th ed. (Englewood Cliffs, N.J.: Prentice-Hall, 1980), p. 89. Copyright © 1980. Reprinted by permission of Prentice-Hall, Inc.

Human Resource Analysis n People and Staffing n Types of Skills n Organization Chart showing

n Number of Employees n Employee Skills

n Payroll n Union or Non-union n Training n Management Structure

Operations Analysis n Location n Facilities n Processes n Functional Chart of Organization n Capacity n Inventory n Distribution

Financial Analysis n Revenue n Expenses n Cash Flow n Break Even

n Ratio Analysis n Comparison to

Industry n Projections using

Current Strategy

Current-Year-Trends 3-Year Averages

Internal Analysis n Operations n Human Resources

n Organizational Structure n Marketing n Finance

n Note: SWOT n Identify Strengths and Weaknesses

Potential Internal Weaknesses n Below-average marketing skills n Unable to finance needed changes in

strategy n Higher overall unit costs relative to key

competitors n Other?

Potential Internal Weaknesses n Sub par profitability

because- Lack of managerial depth and talent/Missing some key skills or competence/Poor track record in implementing strategy/Plagued with internal operating problems

n No clear n Obsolete facilities n Falling behind in R & D n Too narrow a product

line n Weak market image n Weaker distribution

network

Potential Internal Strengths n Cost advantages n Better advertising

campaigns n Product innovation

skills n Proven management n Ahead on

experience curve

n Better manufacturing capability

n Superior technological skills

n Other?

Potential Internal Strengths n A distinctive

competence n Adequate financial

resources n Good competitive

skill n Well thought of by

buyers n An acknowledged

market leader

n Well-conceived functional area strategies

n Access to economies of scale

n Insulated(at least somewhat) from strong competitive pressures