.

13 Framework forFramework for Financial AnalysisFinancial Analysis A

Financial Manager must consider all three jointly when determining the
financing needs of the firm. DeterminingDetermining thethe
financingfinancing needs ofneeds of the firm.the firm. 1. Analysis of the
funds1. Analysis of the funds needs of the firm.needs of the firm. 2.
Analysis of the financial2. Analysis of the financial condition and
profitabilitycondition and profitability of the firm.of the firm. 3.
Analysis of the business3. Analysis of the business risk of the firm.risk of
the firm.
. 14. 14 Framework forFramework for Financial AnalysisFinancial
Analysis NegotiationsNegotiations withwith suppliers ofsuppliers of
capital.capital. DeterminingDetermining thethe financingfinancing
needs ofneeds of the firm.the firm. 1. Analysis of the funds1. Analysis of
the funds needs of the firm.needs of the firm. 2. Analysis of the
financial2. Analysis of the financial condition and profitabilitycondition
and profitability of the firm.of the firm. 3. Analysis of the business3.
Analysis of the business risk of the firm.risk of the firm.
. 15. 15 Use of Financial RatiosUse of Financial Ratios Types ofTypes of
ComparisonsComparisons InternalInternal ComparisonsComparisons
ExternalExternal ComparisonsComparisons A Financial Ratio is an index
that relates two accounting numbers and is obtained by dividing one
number by the other.
. 16. 16 External Comparisons andExternal Comparisons and Sources of
Industry RatiosSources of Industry Ratios Examples: Risk
ManagementRisk Management AssociationAssociation Dun &
BradstreetDun & Bradstreet Almanac ofAlmanac of Business
andBusiness and IndustrialIndustrial Financial RatiosFinancial Ratios
This involves comparing the ratios of one firm with those of
similarsimilar firms or with industry averages. SimilaritySimilarity is
important as one should compare “apples to apples.”
. 17. 17 Liquidity RatiosLiquidity Ratios CurrentCurrent Current
AssetsCurrent Assets Current LiabilitiesCurrent Liabilities For Basket
Wonders December 31, 2007 Shows a firm’s ability to cover its current
liabilities with its current assets. Balance Sheet Ratios Liquidity Ratios
$1,195$1,195 $500$500 = 2.392.39
. 18. 18 Liquidity RatioLiquidity Ratio ComparisonsComparisons BW
Industry 2.39 2.15 2.26 2.09 1.91 2.01 Year 2007 2006 2005
CurrentCurrent RatioRatio Ratio is stronger than the industry average.
. 19. 19 Liquidity RatiosLiquidity Ratios Acid-Test (Quick)Acid-Test
(Quick) Current Assets - InvCurrent Assets - Inv Current
LiabilitiesCurrent Liabilities For Basket Wonders December 31, 2007
Shows a firm’s ability to meet current liabilities with its most liquid
assets. Balance Sheet Ratios Liquidity Ratios $1,195 - $696$1,195 -
$696 $500$500 = 1.001.00
. 20. 20 Liquidity RatioLiquidity Ratio ComparisonsComparisons BW
Industry 1.00 1.25 1.04 1.23 1.11 1.25 Year 2007 2006 2005
Acid-Test RatioAcid-Test Ratio Ratio is weaker than the industry
average.
. 21. 21 Summary of the LiquiditySummary of the Liquidity Ratio
ComparisonsRatio Comparisons Strong current ratio and weak
acid-test ratio indicates a potential problem in the inventories account.
Note that this industry has a relatively high level of inventories.
RatioRatio BWBW IndustryIndustry Current 2.39 2.15 Acid-Test 1.00
1.25
. 22. 22 Current Ratio -- TrendCurrent Ratio -- Trend Analysis
ComparisonAnalysis Comparison Trend Analysis of Current Ratio 1.5
1.7 1.9 2.1 2.3 2.5 2005 2006 2007 Analysis Year RatioValue BW
Industry
. 23. 23 Acid-Test Ratio -- TrendAcid-Test Ratio -- Trend Analysis
ComparisonAnalysis Comparison Trend Analysis of Acid-Test Ratio 0.5
0.8 1.0 1.3 1.5 2005 2006 2007 Analysis Year RatioValue BW
Industry
. 24. 24 Summary of the LiquiditySummary of the Liquidity Trend
AnalysesTrend Analyses The current ratio for the industryindustry has
been rising slowly at the same time the acid-test ratio has been
relatively stable. This indicates that inventoriesinventories are a
significant problem for BWBW. The current ratio for BWBW has been
rising at the same time the acid-test ratio has been declining.
. 25. 25 Financial Leverage RatiosFinancial Leverage Ratios
Debt-to-EquityDebt-to-Equity Total DebtTotal Debt Shareholders’
EquityShareholders’ Equity For Basket Wonders December 31, 2007
Shows the extent to which the firm is financed by debt. Balance Sheet
 Ratios Financial Leverage Ratios $1,030$1,030 $1,139$1,139
= .90.90
. 26. 26 Financial LeverageFinancial Leverage Ratio ComparisonsRatio
Comparisons BW Industry .90 .90 .88 .90 .81 .89 Year 2007 2006
2005 Debt-to-Equity RatioDebt-to-Equity Ratio BW has average debt
utilization relative to the industry average.
. 27. 27 Financial Leverage RatiosFinancial Leverage Ratios
Debt-to-Total-AssetsDebt-to-Total-Assets Total DebtTotal Debt Total
AssetsTotal Assets For Basket Wonders December 31, 2007Shows the
percentage of the firm’s assets that are supported by debt financing.
Balance Sheet Ratios Financial Leverage Ratios $1,030$1,030
$2,169$2,169 = .47.47
. 28. 28 Financial LeverageFinancial Leverage Ratio ComparisonsRatio
Comparisons BW Industry .47 .47 .47 .47 .45 .47 Year 2007 2006
2005 Debt-to-Total-Asset RatioDebt-to-Total-Asset Ratio BW has
average debt utilization relative to the industry average.
. 29. 29 Financial Leverage RatiosFinancial Leverage Ratios Total
CapitalizationTotal Capitalization Long-term DebtLong-term Debt
Total CapitalizationTotal Capitalization For Basket Wonders December
31, 2007 Shows the relative importance of long-term debt to the
long-term financing of the firm. Balance Sheet Ratios Financial
Leverage Ratios $530$530 $1,669$1,669 = .32.32 (i.e., LT-Debt +
Equity)
. 30. 30 Financial LeverageFinancial Leverage Ratio ComparisonsRatio
Comparisons BW Industry .32 .30 .32 .31 .37 .32 Year 2007 2006
2005 Total Capitalization RatioTotal Capitalization Ratio BW has
average long-term debt utilization relative to the industry average.
. 31. 31 Coverage RatiosCoverage Ratios Interest CoverageInterest
Coverage EBITEBIT Interest ChargesInterest Charges For Basket
Wonders December 31, 2007Indicates a firm’s ability to cover interest
charges. Income Statement Ratios Coverage Ratios $210$210 $59$59
= 3.563.56
. 32. 32 CoverageCoverage Ratio ComparisonsRatio Comparisons BW
Industry 3.56 5.19 4.35 5.02 10.30 4.66 Year 2007 2006 2005
Interest Coverage RatioInterest Coverage Ratio BW has below average
interest coverage relative to the industry average.
. 33. 33 Coverage Ratio -- TrendCoverage Ratio -- Trend Analysis
ComparisonAnalysis Comparison Trend Analysis of Interest Coverage
Ratio 3.0 5.0 7.0 9.0 11.0 2005 2006 2007 Analysis Year RatioValue
BW Industry
. 34. 34 Summary of the CoverageSummary of the Coverage Trend
AnalysisTrend Analysis This indicates that low earningslow earnings
(EBIT) may be a potential problem for BWBW. Note, we know that debt
levelsdebt levels are in line with the industryindustry averages. The
interest coverage ratio for BWBW has been falling since 2005. It has
been below industryindustry averages for the past two years.