Cambridge Business Publishers, 2013 0 Financial Performance Decisions Credit-granting decisions Involve judgment about a firms ability to make timely payments towards Existing debt Pending credit obligations Investment decisions Involve determining an appropriate intrinsic value for a security based on a firms ability to generate future payoffs that exceed the resources used to generate those payoffs Cambridge Business Publishers, 2013 1 Trend Analysis on the Income Statement Examining a firms financial statement to observe any trends in account balances Sometimes called longitudinal analysis or ocular regression Examine key performance indicators such as Revenue Income from operations Net income Watch for one time charges
Cambridge Business Publishers, 2013 2 Avis Budget Groups Income Statement Trends Trend Analysis Operating revenues and expenses decreased proportionately, while one-time charges decreased significantly causing a decrease in net loss. Cambridge Business Publishers, 2013 3 Avis Budget Group, Inc. (in $millions) Year Ending Dec. 31 Consolidated Statements of Operations 2009 2008 Revenues $5,131 $5,984 Expenses Operating expenses 2,636 3,147 Depreciation and lease charges, net 1,521 1,785 Selling, general and administrative 551 655 Interest expense 447 450 Restructuring charges 20 28 Impairment 33 1,262 Total expenses 5,208 7,327 Loss before income taxes (77) (1,343) Benefit from income taxes (30) (219) Net income (loss) $ (47) $ (1,124) Trend Analysis on the Balance Sheet Examine key performance indicators Total assets Property, plant, and equipment Current portion of long-term debt Long-term debt Debt compared to equity Capital intensive business Requires a large investment in property, plant, and equipment and/or intangible assets Impaired assets are written down with a loss reported on the income statement Cambridge Business Publishers, 2013 4 Avis Budget Groups Balance Sheet Trends Trend Analysis Though current assets increased, a large decrease in plant assets caused total assets to decline. Both current debt and long-term debt increased. Shareholders equity also increased. Cambridge Business Publishers, 2013 5 Assets December 31 Current Assets 2009 2008 Cash And Cash Equivalents $ 482 $ 258 Net Receivables 290 360 Other Current Assets 958 455 Total Current Assets 1,730 1,073 Long Term Investments 398 650 Property Plant and Equipment 6,409 7,649 Intangible Assets 554 542 Other Assets 1,002 1,404 Total Assets $10,093 $11,318 Liabilities Current Liabilities Accounts Payable $ 1,272 $ 901 Short/Current Long Term Debt 12 10 Total Current Liabilities 1,284 911 Long Term Debt 2,833 2,671 Other Liabilities 5,754 7,643 Total Liabilities 9,871 11,225 Stockholders' Equity Common Stock 9,099 9,198 Retained Earnings (2,691) (2,644) Treasury Stock (6,149) (6,267) Other Stockholders Equity (37) (194) Total Stockholders Equity 222 93 Total liabilities & Stockholders' Equity $10,093 $11,318 (in $millions) Trend Analysis on the Statement of Cash Flow Key performance indicators Primary source of cash for the period should be from operating cash flow Net increase in cash from all activities for the period Discretionary cash flow availability Cambridge Business Publishers, 2013 6 Avis Budget Groups Cash Flow Trends Avis Budget Group, Inc. Year Ending Dec. 31 Consolidated Statements of Cash Flows 2009 2008 Cash Flows From Operating Activities Net Income ($ 47) ($1,124) Depreciation 1,487 1,727 Adjustments To Net Income (27) 1,021 Changes In Accounts Receivables 52 50 Changes In Liabilities (9) (33) Changes In Other Operating Activities 35 63 Net Cash Flow from Operating Activities 1,491 1,704 Cash Flows From Investing Activities Capital Expenditures (6,814) (8,691) Other Cash flows from Investing Activities 6,980 6,595 Net Cash Flows From(for) Investing Activities 166 (2,096) Cash Flows From Financing Activities Sale/ Purchase of Stock - (33) Net Borrowings (1,393) 558 Other Cash Flows from Financing Activities (72) (62) Net Cash Flows from(for) Financing Activities (1,465) 463 Effect Of Exchange Rate Changes 32 (27) Change In Cash and Cash Equivalents $ 224 $ 44 Cambridge Business Publishers, 2013 7 (in $millions) Although less than prior year, the company had a positive cash flow from operating activities. Cash flow from investing activities increased dramatically from prior year. These cash flows were used to pay off debt in the current year. Common-Size Financial Statements A widely used technique for analyzing financial performance Allows the financial statement user to readily compare Different size firms or Performance of the same firm that changes size over time All income statement items are expressed as a percentage of net revenues All balance sheet items are expressed as a percentage of total assets
Cambridge Business Publishers, 2013 8 Revenue, Returns, and Discounts Gross revenue Sales Discounts Sales Returns = Net revenue
Cambridge Business Publishers, 2013 9 Sales Discounts Price reductions that are incentives for quick payment Sales returns The value of goods allowed to be returned by customers who are dissatisfied with a product Avis Budget Groups Common-Size Income Statement Avis Budget Group, Inc. Year Ending Dec. 31 Consolidated Statements of Operations 2009 2008 Revenues 100.0% 100.0% Expenses: Operating expenses 51.4% 52.6% Depreciation and lease charges, net 29.7% 29.8% Selling, general and administrative 10.7% 10.9% Interest expense 8.7% 7.5% Restructuring charges 0.4% 0.5% Goodwill impairment 0.6% 21.1% Total expenses 101.5% 122.4% Loss before income taxes -1.5% -22.4% Benefit from income taxes 0.6% 3.6% Net income (loss) -0.9% -18.8% Cambridge Business Publishers, 2013 10 Selling, general and administrative expense declined, but the non- recurring items caused the most impact on the substantial change in net loss for the year. Avis Budget Groups Common-Size Balance Sheet Assets Year Ending Dec. 31 Current Assets 2009 2008 Cash And Cash Equivalents 4.8% 2.3% Net Receivables 2.9% 3.2% Other Current Assets 9.5% 4.0% Total Current Assets 17.2% 9.5% Long Term Investments 3.9% 5.7% Property Plant and Equipment 63.5% 67.6% Intangible Assets 5.5% 4.8% Other Assets 9.9% 12.4% Total Assets 100.0% 100.0% Liabilities Current Liabilities Accounts Payable 12.6% 8.0% Short/Current Long Term Debt 0.1% 0.1% Total Current Liabilities 12.7% 8.1% Long Term Debt 28.1% 23.6% Other Liabilities 57.0% 67.5% Total Liabilities 97.8% 99.2% Stockholders' Equity Common Stock 90.2% 81.3% Retained Earnings -26.7% -23.4% Treasury Stock -60.9% -55.4% Other Stockholder Equity -0.4% -1.7% Total Stockholder Equity 2.2% 0.8% Total liabilities & Stockholders' Equity 100.0% 100.0% Cambridge Business Publishers, 2013 11 While cash and other current assets increased significantly, PP&E and other non- current assets decreased. Accounts payable and debt increased while other liabilities increased. The equity accounts increased as a percentage of total assets. Key Financial Ratios Ratios have no generally accepted definitions Variations often based on personal preference Key issue is to use consistent components Enhance comparability Global application of ratios Executed exactly the same worldwide Some ratios are not relevant in all countries Such as countries without credit systems
Cambridge Business Publishers, 2013 12 How Well is Google, Inc. Doing? December 31 2012 2011 Assets Current Assets Cash and cash equivalents $14,778 $9,983 Short term investments 33,310 34,643 Net receivables 9,729 6,387 Inventory 505 35 Other current assets 2,132 1,710 Total Current Assets 60,454 52,758 Long term investments 1,469 790 Property, plant and equipment 11,854 9,603 Intangible assets 18,010 8,924 Other long term assets 2,011 499 Total Assets $93,798 $72,574 Liabilities Current Liabilities Accounts payable $ 10,893 $7,148 Current portion of long-term debt 2,549 1,218 Other current liabilities 895 547 Total Current Liabilities 14,337 8,913 Long-term debt 2,988 2,986 Other long-term liabilities 4,758 2,530 Total Liabilities 22,083 14,429 Stockholders' Equity Common stock 23,373 20,540 Retained earnings 48,342 37,605 Total Stockholders' Equity 71,715 58,145 Total Liabilities & Stockholders' Equity $93,798 $72,574 13 Years Ending December 31 2012 2011 Total Revenue $50.175 $37,905 Cost of Revenue 20,634 13,188 Gross Profit 29,541 24,717 Operating Expenses Research Development 6,793 5,162 Selling General and Administrative 9,988 7,813 Total Operating Expenses 16,781 12,975 Income from Continuing Operations 12,760 11,742 Total Other Income /(Expense) 710 642 Earnings Before Interest and Taxes 13,470 12,384 Interest Expense 84 58 Income Before Tax 13,386 12,326 Income Tax Expense 2,598 2,589 Income from continuing operations 10,788 9,737 Discontinued operation (51) Net Income $10,737 $9,737 Years Ending December 31 2012 2011 Operating Activities Net Income $ 10,737 $ 9,737 Adjustments To Net Income 5,882 4,828 Net Cash Flow From Operating Activities 16,619 14,565 Investing Activities Capital Expenditures (3,273) (3,438) Investments 785 (13,703) Other Cash flows from Investing Activities (10,568) (1,900) Net Cash Flow From Investing Activities (13,056) (19,041) Financing Activities Net borrowings 1,328 726 Other Cash Flows from Financing Activities (99) 81 Net Cash Flow From Financing Activities 1,229 807 Effect of Exchange Rate Changes 3 22 Change In Cash and Cash Equivalents $ 4,795 $(3,647) Using ratios to analyze financial data is helpful. All numbers in millions Analyzing Profitability Refers to how much income was generated by a business Particularly relative to the amount of total assets invested Key ratios Return on shareholders equity (ROE) Return on assets (ROA) Return on sales (ROS) Gross profit margin ratio Cambridge Business Publishers, 2013 14 Profitability Analysis Cambridge Business Publishers, 2013 15 Return on Shareholders Equity Net Income Preferred Stock Dividends Shareholders Equity = Indicates the rate of return generated by a business for its common shareholders. Google, Inc. 2012: $9,737 $0 $58,145 = 16.7% $10,737 $0 $71,715 = 15.0% Google, Inc. 2011: Google generated an decrease in its return on equity, an unfavorable change. Profitability Analysis Cambridge Business Publishers, 2013 16 Return on Assets Net Income + Interest Expense (1- Tax rate) Total Assets = Indicates the rate of return generated on a companys investment in assets from all sources. Google, Inc. 2012: $10,737 + $84(1 0.190*) $93,798 = 11.5% Google, Inc. 2011: Google generated 11.5 cents of profit for every dollar invested in assets in 2012, an unfavorable change from 2011. *2012 tax rate = $2,598/$13,689= 19.0% 2011 tax rate = $2,589/$12,326 = 21.0% $9,737 + $58(1 0.210*) $72,574 = 13.5% Profitability Analysis Cambridge Business Publishers, 2013 17 Return on Sales Net Income Net Sales = Indicates the percentage of net income remaining from a dollar of sales after subtracting all expenses. Google, Inc. 2012: $9,737 $37,905 = 25.7% $10,737 $50,175 = 21.4% Google, Inc. 2011: Google generated 21.4 cents of profit per dollar of sales in 2012 compared to 25.7 cents in 2011. Profitability Analysis Cambridge Business Publishers, 2013 18 Gross Profit Margin Ratio Net Sales Cost of Goods Sold Net Sales = Indicates the percentage of income generated from sales after deducting the cost of goods sold. Google, Inc. 2012: $50,175 $20,634 $50,175 = 58.9% Google, Inc. 2011: Google generated 58.9 cents of gross profits from each sales dollar in 2012 compared to 65.2 cents in 2011. $37,905 $13,188 $37,908 = 65.2% Analysis of Asset Management Refers to how well management uses a companys assets to generate profits Common ratios used to calculate Receivable turnover Receivable collection period Inventory turnover Inventory-on-hand period Asset turnover Desired effects Collect receivables as quickly as possible Sell inventory as quickly as possible Generate large amounts of sales using assets Cambridge Business Publishers, 2013 19 Asset Management Cambridge Business Publishers, 2013 20 Receivable Turnover Net Sales Accounts Receivable = Indicates the number of sales/collection cycles experienced by a firm. Google, Inc. 2012: $50,175 $9,729 = 5.16 times Google, Inc. 2011: Googles sales/collections cycles numbered 5.16 in 2012, down from 5.94 times in 2011. $37,905 $6,387 = 5.94 times Asset Management Cambridge Business Publishers, 2013 21 Receivable Collection Period 365 Net Sales / Accounts Receivable = Indicates the number of days required, on average, to collect an outstanding account receivable Google, Inc. 2012: 365 $50,175 / $9,729 = 70.8 days Google, Inc. 2011: Google required 70.8 days on average to collect an outstanding receivable in 2012, an unfavorable increase from 61.5 days in 2011. 365 $37,905 / $6,387 = 61.5 days Asset Management Cambridge Business Publishers, 2013 22 Inventory Turnover Cost of Goods Sold Inventory = Indicates the number of production/sales cycles experienced by a firm Googles inventory turnover numbered 40.9 in 2012, down from 376.8 times in 2011. These numbers are not really relevant since Google maintains so small a level of inventory. Google, Inc. 2012: 20,634 $505 = 40.9 days Google, Inc. 2011: 13,188 $35 = 376.8 days Asset Management Cambridge Business Publishers, 2013 23 Inventory-on- Hand Period 365 Cost of Goods Sold / Inventory = Indicates the number of days, on average, required to sell the inventory currently on hand Google required 8.9 days on average to sell its inventory in 2012, an unfavorable increase from 1.0 days in 2011, however these numbers are not really relevant since Google maintains so small a level of inventory. . Google, Inc. 2012: 365 $20,634 / $505 = 8.9 days Google, Inc. 2011: 365 $13,188 / $35 = 1.0 days Asset Management Cambridge Business Publishers, 2013 24 Asset Turnover Net Sales Total Assets = Amount of sales generated from each dollar invested in assets. Google, Inc. 2012: $50,175 $93,798 = 0.54 Google, Inc. 2011: Every dollar invested in Googles assets generated $0.54 of sales revenue during 2012, up from $0.52 in 2011. $37,905 $72,574 = 0.52 Analysis of Liquidity Refers to the amount of liquid resources available to pay current obligations as they come due Common liquidity measures Cash and marketable securities to total assets Quick ratio Current ratio Accounts payable turnover Days payable period Goal is to maintain an adequate but not excessive liquidity Cambridge Business Publishers, 2013 25 Liquidity Cambridge Business Publishers, 2013 26 Cash and Marketable Securities to Total Assets Cash + Marketable Securities Total Assets = Percentage of total assets held as highly liquid assets. Google, Inc. 2012: $14,778 + $33,310 $93,798 = 0.51 Google, Inc. 2011: About half of Googles assets are highly liquid at the end of 2012, down from 62% at the end of 2011. $9,983 + $34,643 $72,574 = 0.62 Liquidity Cambridge Business Publishers, 2013 27 Quick Ratio Cash + Marketable Securities + Accounts Receivable Current Liabilities = Amount of liquid assets available to pay short-term liabilities. Google, Inc. 2012: $14,778 + $33,310 + $9,729 $14,337 = 4.0 Google, Inc. 2011: Googles liquid assets are 4.0 times as large its current obligations at the end of 2012, down from 5.7 at the end of 2011, indicating lower, but still high liquidity. $9,983 + $34,643 + $6,387 $8,913 = 5.7 Liquidity Cambridge Business Publishers, 2013 28 Current Ratio Current Assets Current Liabilities = Amount of current assets available to service current liabilities. Google, Inc. 2012: $60,454 $14,337 = 4.2 Google, Inc. 2011: Googles current assets are 4.2 times as large as its current obligations at the end of 2012, down from 5.9 at the end of 2011, indicating lower, but still high liquidity. $52,758 $8,913 = 5.9 Liquidity Cambridge Business Publishers, 2013 29 Accounts Payable Turnover Cost of Goods Sold Accounts Payable = Number of account payable cycles experienced by a firm. Google, Inc. 2012: $20,634 $10,893 = 1.9 times Google, Inc. 2011: Googles experienced 1.9 payment cycles in 2012, a slight increase from 1.8 during 2011. $13,188 $7,148 = 1.8 times Liquidity Cambridge Business Publishers, 2013 30 Days Payable Period 365 Cost of Goods Sold Accounts Payable = Number of days, on average, required to pay an outstanding account payable. Google, Inc. 2012: 365 $20,634 $10,893 = 192.7 days Google, Inc. 2011: On average, it took Google 192.7 days to pay an outstanding account payable during 2012, a little quicker than the 197.8 days during 2011. 365 $13,188 $7,148 = 197.8 days Credit Risk Analysis What are creditors concerned about? Downside risk The risk of not getting paid interest and principal Common measures Long-term debt to total assets Long-term debt to shareholders equity Interest coverage ratio
Cambridge Business Publishers, 2013 31 Solvency Cambridge Business Publishers, 2013 32 Long-term Debt to Total Assets Ratio Long-term Debt + Current Portion of Long-Term Debt Total Assets = Percentage of total assets provided by creditors. Google, Inc. 2012: $2,988 + $2,549 $93,798 = 5.9% Google, Inc. 2011: Google financed 5.9% of its assets with debt as of the end of 2012 up slightly from 5.8% at the end of 2011, but still a very low debt financing amount. $2,986 + $1,218 $72,574 = 5.8% Solvency Cambridge Business Publishers, 2013 33 Long-term Debt to Shareholders Equity Ratio Long-term Debt + Current Portion of Long-Term Debt Shareholders Equity = Relative investment of long-term creditors versus shareholders in a business. Google, Inc. 2012: $2,988 + $2,549 $71,715 = 7.7% Google, Inc. 2011: Googles debt-to-equity ratio is 7.7% in 2012, up slightly from 7.2% in 2011, but still very low. $2,986 + $1,218 $58,145 = 7.2% Solvency Cambridge Business Publishers, 2013 34 Interest Coverage Ratio Net Income Before Taxes + Interest Expense Interest Expense = Extent to which current operating income covers current debt service charges. Google had relatively no interest expense in 2012 or 2011, so this ratio is not really relevant. Google, Inc. 2012: Google, Inc. 2011: $13,386 + $84 $84 $12,326 + $58 $58 = = 160.4 213.5 Off-Balance Sheet Liabilities Liabilities not reported on the balance sheet Such as operating leases Exist due to certain complex accounting standards Can be found in notes to financial statements Investors must exercise due diligence i.e. read the entire set of financial statements including notes
Cambridge Business Publishers, 2013 35 Benchmarking What is benchmarking? Comparing with similar companies Also known as cross-sectional analysis Ratios of companies in the same industry are compared North American Industry Classification System A system for classifying companies into common industry groups Makes it easy for companies to benchmark against their competitors Cambridge Business Publishers, 2013 36 ROE Model Framework Used to evaluate a firms overall enterprise performance Shows that a business can increase its overall performance by increasing any of the following ratios:
Cambridge Business Publishers, 2013 37 Return on Equity (ROE) Return on Sales (ROS) Asset Turnover (AT) Financial Leverage (LEV) ROE Analysis of Google, Inc. Cambridge Business Publishers, 2013 38 The decrease in ROE was due to an decrease in ROS to 21.4% in 2012 down from 25.7% in 2011. Google, Inc. 2012 2011 Total revenues $50,175 $37,905 Net income
10,737 9,737 Total assets 93,798 72,574 Shareholders' equity 71,715 58,145 ROE Analysis ROE = Net income Shareholders' Equity 15.0%* 16.7% ROS = Net income Revenues 21.4% 25.7% AT = Revenues Total Assets 0.54 0.52 LEV = Total Assets Shareholders' Equity 1.31 1.25 * Difference due to rounding Financial Statement Analysis Limitations Measurement concerns Market value can be subjective Historical cost is reliable, but not current Incomplete data Some assets and liability values are omitted from the balance sheet due to conservatism, such as Trained workforces Management talent Internal processes Brand recognition
Cambridge Business Publishers, 2013 39 Cambridge Business Publishers, 2013 40 Thank you & Feel Free to Call me anytime at: 607 759-0918 END OF CHAPTER 4