Financial Statement Analysis

Case 13-2

Financial Statements
Balance Sheet Income Statement Statement of Cash Flows

Balance Sheet

A Financial Picture of what a company is worth as of a particular date.

LIABILITIES How much the company owes OWNERS EQUITY How much the company is worth

ASSETS
How much a company owns

Income Statement

A financial report which tells how well a company is performing during a specific period of time. (its profitability or net profit)
SERVICE BUSINESS

REVENUES OPERATING EXPENSE = NET INCOME

RETAIL BUSINESS

REVENUES COST OF GOODS SOLD = GROSS PROFIT OPERATING EXPENSE = NET PROFIT

Cash Flows Statement

Provides information about a companys investing and financing activities during the accounting period.

Business Objective

Create value for its shareholders, while maintaining a sound financial position.
Profitability. Return on investment

Profitability Sales/ Inventory/Expenses

Money Invested

Return on Investment

ROA/ ROE/ ROIC

Cash Flow

Operating/ Investing/ Financing Activities

Financial Ratios

Classification Overall measures Profitability Investment utilization Financial condition

Overall Measures

Return On Investments
Return on Assets Return on Invested Capital Return on Equity

Return On Investments
RETURN ON ASSETS- measures success in using assets to earn
profit.

ROA = Net Income + Interest (1- Tax rate) Total Assets

RETURN ON INVESTED CAPITAL-how effective the company

uses the money invested in its operations.

ROIC= Net Income + Interest (1- Tax rate)

Long-term liabilities + Shareholders Equity

RETURN ON EQUITY-shows relationship between net income and

common stockholders equity.

ROE=

Net Income . Shareholders Equity

Profitability
Gross Margin Percentage Profit Margin (ROS)

Profitability
GROSS MARGIN PERCENTAGE-measures the percentage of
each sales dollar a company earns before considering period costs.

Gross Margin Percentage=

Gross Margin . Net Sales Revenues

PROFIT MARGIN- shows the percentage of each sale earned as net

income.

ROS =

Net Income . Net Sales Revenues

Investment Utilization
Asset Turnover Days Cash Days Receivables Days Inventories Inventory Turnover Current Ratio Acid test Ratio

Investment Utilization
ASSET TURNOVER- a measure of how efficiently a company's assets
generate revenue.

Asset Turnover =

Sales Revenues Total Assets

Days Cash
Days Cash = Cash . Cash Expense / 365

Investment Utilization
Days Receivables- measures the ability to collect receivables.
Days Receivables = Account Receivables Sales / 365 .

Days Inventory
Days Inventory = Inventory . Cost of Sales / 365

Investment Utilization
INVENTORY TURNOVER- indicates how rapidly inventory is sold.
Asset Turnover = Cost of Sales Inventory .

CURRENT RATIO - measures ability to pay current liabilities with

current assets.

Current Ratio =

Current Assets . Current Liabilities

ACID-TEST RATIO- tells whether the entity can pay all its current
liabilities if they come due immediately.

Acid Test Ratio =

Monetary Current Assets Current Liabilities

Financial Condition
Debt/Capitalization Ratio Times Interest Earned Ratio

Financial Condition
DEBT/ CAPITALIZATION RATIO- this ratio computes the
proportion of a company's long-term debt relative to its available capital.

Debt / Capitalization =

Long-Term Liabilities . Long-Term Liabilities + Shareholders Equity

TIMES INTEREST EARNED RATIO- measures the number of

times that operating income can cover interest expense.

Times Interest Earned = Pretax Operating Profit + Interest Interest

CASE 13-2
Amerbran Company (B)

CASE 13-2 AMERBRAN COMPANY (B)

BACKGROUND
Amerbran Company was a diversified company that sold various consumer products, including food, tobacco, distilled products and personal care products and financial services.

Statement of the Problem

Calculate the ratios listed using the year end amounts for ratios that involve balance sheet data. Comment on Amerbrans treatment of excise taxes as part of the calculation for gross margin As an outside analyst, what questions would you want to ask Amerbrans management based on the ratios you have calculated?

Analysis
1 Return on Assets = 20x0 Net Income + Interest ( 1 - Tax Rate) Total Assets 378,782+[(105,165)(1-45%)] 4,433,448 9.84% Return on Assets = 20x1 Net Income + Interest ( 1 - Tax Rate) Total Assets 328773 + [(102791)(1-45%)] 4,826,512 7.98%

20x0 2 Return on Equity = Net Income Share Holders' Equity 378,782 2,182,869 17.35% Return on Equity =

20x1 Net Income Share Holders' Equity 328,773 2,320,620 14.17%

3 Gross Profit

20x0 Gross Profit Sales

Gross Profit

20x1 Gross Profit Sales

6,577,480 - 2,573,350 6,577,480 60.87%

7,622,677 - 2,803,623 7,622,677 63.22%

4 Return on Sales

20x0 Net Income Sales 378,782 6,577,480 5.76%

Return on Sales

20x1 Net Income Sales 328,773 7,622,677 4.31%

5 Asset Turnover

20x0 Sales Revenues Total Assets 6,577,480 4,433,448 1.483603732 x

Asset Turnover

20x1 Sales Revenues Total Assets 7,622,677 4,826,512 1.579334517 x

20x0 6 Days Cash = Cash Cash Expenses / 365 Days Cash =

20x1 Cash Cash Expenses / 365

23,952 (328,387/365) 27 days

28,912 (1,146,087/365) 9 days

*Cash Expenses Less:

974121 645734 328387

= Depreciation Write Off of PPE =

1328107 115974 66046 1146087

7 Days Recievables

20x0 Accounts Recievable Sales/365 687325 6,577,480/365 38 days

Days Recievables

20x1 Accounts Recievable Sales/365 756152 7,622,677/365 36 days

20x0 8 Days Inventory = Inventory Cost of Sales/365 1,225,402 2,573,350/ 365 174 days Days Inventory =

20x1 Inventory Cost of Sales/365 1,244,912 2,803,623/ 365 162 days

9 Inventory Turnover

20x0 Cost of Sales Inventory 2,573,350 1,225,402 2.10 x

Inventory Turnover

20x1 Cost of Sales Inventory 2,803,623 1,244,912 2.25 x

20x0 10 Current Ratio = Current Assets Current Liabilities 2013846 1317751 1.528 Current Ratio =

20x1 Current Assets Current Liabilities 2106116 1625218 1.296

20x0 11 Acid Test Ratio = Quick Assets Current Liabilities (23,952 + 687,325) 1,317,751 0.54 = Acid Test Ratio =

20x1 Quick Assets Current Liabilities (28,912 + 756,152) 1,625,218 0.48

20x0 12 Debt/ Capitalization Ratio= Long Term Liabilities Long Term Liabilities + Owners Equity 932,828 932,828 + 2,182,869 Debt/ Capitalization Ratio =

20x1 Long Term Liabilities Long Term Liabilities + Owners Equity 880,674 880674 + 2320620

29.94%

27.51%

13 Times Interest Earned

20x0 Pretax Operating Profit + Interest Interest (675,659 + 105,165) 105,165 7.42 X

Times Intereset Earned

20x1 Pretax Operating Profit + Interest Interest (603,331 + 102,791) 102,791 6.87 X

Questions
1.

Comment on Amerbrans treatment of excise taxes as part of the calculation for gross margin.
Excise tax should not be included in the calculation of gross margin as excise tax is a tax on the sale or production for sale of specific goods. Therefore, excise tax is a selling expense which shall be included in the selling, general & administrative expenses.

Questions
2.

As an outside analyst, what questions would you want to ask Amerbrans management based on the ratios you have calculated?

1. Return on Assets What is the reason for the decrease in ROA from 20x0 to 20x1? a. Lower Net Income in 20x1 and Higher Assets in 20x1 due to acquisition of additional PPE

b. Recommendation is to maximize the use of assets in generating revenue for the next years of the operation

2. Return on Equity What is the action plan to increase your ROE so as to attract more investors in your company? a. Increase net income by reducing unnecessary expenses, take advantage of discounts and reduce cost purchases. 3. Gross Profit What is the action plan to maintain the profitability of the company? a. Maintain the profitability of the company by taking advantage of discounts and reducing unnecessary expenses. 4. Return on Sales What is the action plan to increase the return on sales for the next years to come? a. Decrease in unnecessary operating expenses so as to increase the net income generated by the company.

5. Asset Turnover What is the action plan to maintain/ increase the asset turnover of the company? a. Maximize the sales of the products through price strategies while maximizing the use of the companys assets. 6. Days Cash What is the action plan of the company to increase the days cash? a. Decrease unnecessary expenses to be liquid. 7. Days Receivables How will the company maintain/ shorten the time that the receivables be collected? a. The company can either maintain their days receivable or shorten the collection period by providing a shorter date of receivables from their clients.

8. Days Inventory How can the company shorten their days inventory? a. The company can shorten their days inventory by maximizing the use of their fixed assets in hastening the production of their products. 9. Inventory Turnover How can the company maintain/ increase their inventory turnover? a. The company can maintain/ increase their inventory turnover by maximizing their assets by decreasing the decrease the amount of inventory through production while maintaining a low cost of sales. 10. Current Ratio How can the company increase their liquidity? a. The company can increase their liquidity by decreasing their current liabilities such as short term loans and decreasing their accounts payables

11. Acid Test Ratio How can the company increase their liquidity? a. The company can increase their liquidity by decreasing their current liabilities such as short term loans and decreasing their accounts payables and at the same time increase their cash on hand and other cash equivalents. 12. Debt to Capitalization Ratio How can the company decrease their long term liabilities? a. The company can decrease their long term liabilities by attracting more investors to invest in the company instead of borrowing money.

13. Times Interest Earned How can the company decrease the interest expense? a. The company can decrease their interest expenses by attracting more investors to invest in the company instead of borrowing money.

Alternative Action

We can use the Dupont Model in order to determine the profitability, and return on investments for the company.

Conclusion

Based on the numbers and ratios of the financial statements of Amerbran Company, it can be concluded that Amerbran Company is liquid and solvent to continue its operating process. It has a high profitability based on the gross margin percentage from 20x0 to 20x1 (60.87% to 63.22%). Its investment utilization has improved from 20x0 to 20x1. Based on the numbers given, they have improved their days receivable from 38 days to 36 days. They have also increased their inventory turnover by 0.15 (from 20.10 to 2.25) while decreasing their days inventory hold of 162 days from 174 days.

THANK YOU