Professional Documents
Culture Documents
19th
Edition
Analysis of
Financial
Statements
Intermediate
Accounting
James D. Stice
Earl K. Stice
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine
University
2014 Cengage Learning
23-1
23-4
23-5
DuPont Framework
23-7
DuPont Framework
Return on equity for Colesville Corporation for
the years 2013 and 2012 is computed as
follows:
2013
2012
Net income
$180,000
$205,000
Stockholders equity $1,468,000 $1,090,000
Return on equity
12.3%
18.8%
(continued)
23-8
DuPont Framework
23-9
$6,600,000
2012 =
($333,500
+ $375,000)/2
$354,250
= 18.6 times
(continued)
23-10
$5,700,000
2013 =
($375,000
+ $420,000)/2
$397,500
= 14.3 times
The
Thehigher
higherthe
theturnover,
turnover,the
themore
morerapid
rapidisisaa
firms
firmsaverage
averagecollection
collectionperiod
periodfor
forreceivables.
receivables.
23-11
($333,500
$354,250
+ $375,000)/2
$6,600,000/365
$18,082
= 19.6 days
(continued)
23-12
($375,000
+ $420,000)/2
$397,500
$5,700,000/365
$15,616
= 25.5 days
What
What constitutes
constitutesaareasonable
reasonableaverage
average collection
collection
period
periodvaries
varieswith
withindividual
individualbusinesses.
businesses.
23-13
Inventory Turnover
Colesville
ColesvilleCorporation
Corporation
(continued)
23-14
Inventory Turnover
Colesville
ColesvilleCorporation
Corporation
Number of Days
Sales in Inventory
Colesville
ColesvilleCorporation
Corporation
365
Inventory turnover
2012 =
365
21.1
= 17.3 days
(continued)
23-16
Number of Days
Sales in Inventory
Colesville
ColesvilleCorporation
Corporation
365
Inventory turnover
2013 =
365
14.4
= 25.3 days
Colesville
Colesville isis holding
holding aa 25-day
25-day supply
supply
of
of inventory
inventory in
in 2013
2013 compared
compared to
to aa
17-day
17-day supply
supply in
in 2012.
2012.
23-17
Sales
Average fixed assets
$6,600,000
2012 =
($330,000
$225,000)/2
$1,000,000
($925,000
++ $1,075,000)/2
= 6.60 times
(continued)
23-18
Sales
Average fixed assets
$5,700,000
2013 =
($330,000
++ $225,000)/2
($1,075,000
$1,275,000)/2
$1,175,000
= 4.85 times
The
The fixed
fixed asset
asset turnover
turnover measures
measures aa firms
firms
efficiency
efficiency in
in using
using fixed
fixed assets
assets to
to generate
generate sales.
sales.
23-19
Net income
ROAAverage
=
total assets
$205,000
2012 =
($2,191,000
++ $2,278,000)/2
$1,975,500
($1,760,000
$2,191,000)/2
= 10.4%
23-20
Net income
ROAAverage
=
total assets
$180,000
2013 =
($2,191,000
++ $2,278,000)/2
$2,234,500
($2,191,000
$2,278,000)/2
= 8.1%
(continued)
23-21
23-22
Leverage Ratios
Higher leverage increases return on equity
through the following chain of events:
Debt Ratio
Colesville
ColesvilleCorporation
Corporation
Total liabilities
Total assets
2012 =
$1,101,000
= 50.3%
$2,191,000
2013 =
$810,000
= 35.6%
$2,278,000
Debt
Debtratio
ratioisisaameasure
measureof
ofthe
thelevel
levelof
ofborrowing
borrowing
relative
relativeto
tofunds
fundsused
usedto
tofinance
financethe
thecompany.
company.
23-24
Debt-to-Equity Ratio
Colesville
ColesvilleCorporation
Corporation
Total liabilities
Stockholders equity
2012 =
$1,101,000
= 1.01
$1,090,000
2013 =
$810,000
= 0.55
$1,468,000
Another
Anothercommon
commonway
wayto
to measure
measure the
the level
level
of
ofleverage
leverageisisthe
thedebt-to-equity
debt-to-equityratio.
ratio.
23-25
$600,000
$600,000 xx
0.10
0.10
(continued)
23-26
$400,000
$400,000 xx
0.10
This
the
This isis aa measure
measure of
of0.10
the debt
debt position
position of
of aa
company
company in
in relation
relation to
to its
its earnings
earnings ability.
ability.
23-27
Current Ratio
Colesville
ColesvilleCorporation
Corporation
Current assets
Current liabilities
2012 =
2013 =
$955,500
= 1.91
$501,000
$855,000
= 2.09
$410,000
The
The current
current ratio
ratio isis aa test
test of
of liquidity,
liquidity,or
or the
the
firms
firms ability
ability to
to meet
meet its
its current
current obligations.
obligations.
23-28
23-29
2012 =
$424,500
= 1.13
$375,000
2013 =
$249,000
= 0.41
$602,000
Because
Becausethe
thecash
cashflow
flowadequacy
adequacyratio
ratioin
in2013
2013isisless
less
than
than1.0,
1.0,Colesville
Colesvillewas
wasnot
notable
ableto
tosatisfy
satisfyits
itsprimary
primary
cash
cashrequirements
requirementswith
withcash
cashgenerated
generatedby
byoperations.
operations.
23-30
Net income
Weighted shares outstanding
2012 =
$205,000
= 2.73
$75,000
2013 =
$180,000
= 2.00
$90,000
This
Thiswell-known
well-knownratio
ratioshows
showsthe
thesize
sizeof
of
the
thedividend
dividendper
pershare
shareof
ofcommon
commonstock
stock
ififall
allthe
thenet
netincome
incomeisisdistributed.
distributed.
23-31
Cash dividends
Net income
2012 =
$145,000
= 70.7%
$205,000
2013 =
$102,000 = 56.7%
$180,000
In
Ingeneral,
general,high-growth
high-growthstable
stablefirms
firms
have
havelow
lowdividend
dividendpayout
payoutratios.
ratios.
23-32
Price-Earnings Ratio
Colesville
ColesvilleCorporation
Corporation
$60.00
$2.73
= 22.0
2013 =
$29.00
$2.00
= 14.5
High
HighP/E
P/Eratios
ratiosare
aregenerally
generallyassociated
associatedwith
withfirms
firms
for
forwhich
whichstrong
strongfuture
futuregrowth
growthisispredicted.
predicted.
23-33
Book-to-Market Ratio
Colesville
ColesvilleCorporation
Corporation
$1,090,000
$4,200,000
= 0.26
2013 =
$1,468,000
$2,900,000
= 0.51
The
Thebook-to-market
book-to-marketratio
ratioreflects
reflectsthe
thedifference
difference
between
betweenaacompanys
companysbalance
balancesheet
sheetvalue
valueand
and
the
thecompanys
companysactual
actualmarket
marketvalue.
value.
23-34
Impact of Alternative
Accounting Methods
23-35
23-36
Price =
Dividends
Required rate of return on
equity capital
$2.05
= $13.67
0.15
23-37
Dividends
Required rate of return on equity
Expected future dividend growth rate
$2.05
Price =
0.150 0.12
= $68.33
23-38
Price-Earnings Multiple
An investor can value a companys share by
using the information in the P/E ratio as
follows:
Price = Earnings P/E ratio
(continued)
23-39
Price-Earnings Multiple
Using the average of these ratios (27.0), the
implied price per share 2009 for McDonalds is
computed as follows:
Price = Earnings P/E ratio
Price = $4.11 27.0 = $110.97
23-40
23-41
Comparison of the
Valuation Models
The computed prices for McDonalds shares at
the end of 2009, using each of the four models
are as follows:
Chapter 23
The
The End
End
$
23-43
23-44