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Financial

Statement
Analysis

K R Subramanyam
John J Wild

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2

EXCELL CORPORATION
Income Statements
For Years Ended December 31, Year 8, Year 9
($ thousands) Year 8 Year 9

Sales $ 1,636,298 $ 1,782,254


Cost of goods sold and operating
expenses $ 1,473,293 $ 1,598,679

Operating profit $ 163,005 $ 183,575

Interest expense $ 21,825 $ 20,843

Pretax profit $ 141,180 $ 162,732

Tax expense $ 52,237 $ 58,584

Net income $ 88,943 $ 104,148


8-3
EXCELL CORPORATION
Balance Sheets
At December 31, Year 8, Year 9
($ thousands) Year 8 Year 9
Assets

Cash $ 115,397 $ 71,546

Marketable securities $ 38,008 $ 43,854

Accounts receivable, net $ 177,538 $ 182,859

Inventories $ 204,362 $ 256,838

Total current assets $ 535,305 $ 555,097

Investment in unconsolidated
subsidiaries $ 33,728 $ 62,390

Marketable securities $ 5,931 $ 56,997

Property, palant & equipment, net $ 1,539,221 $ 1,633,458

Goodwill $ 6,550 $ 6,550

Total long-term assets $ 1,585,430 $ 1,759,395

Total assets $ 2,120,735 $ 2,314,492


8-4
Year 8 Year 9
Liabilities ($ thousands) ($ thousands)
Notes payable $ 7,850 $ 13,734
Accounts payable $ 138,662 $ 155,482
Taxes payable $ 24,370 $ 13,256
Current maturities of long-term debt $ 30,440 $ 33,822
Total current liabilities $ 201,322 $ 216,294

Long-term debt $ 507,329 $ 473,507


Pension and OPEB liabilities $ 743,779 $ 852,237
Total long-term liabilities $ 1,251,108 $ 1,325,744

Equity
Common stock $ 413,783 $ 413,783
Additional paid-in capital $ 19,208 $ 19,208
Retained earnings $ 436,752 $ 540,901
Treasury stock $ (201,438) $ (201,438)
Total stockholders' equity $ 668,305 $ 772,454
Total liabilities and equity $ 2,120,735 $ 2,314,492
8-5

Net Operating Assets


Year 8 Year 9
Cash $ 115,397 $ 71,546
Accounts receivable, net $ 177,538 $ 182,859
Inventories $ 204,362 $ 256,838
Investment in unconsolidated subsidiaries $ 33,728 $ 62,390
Property, palant & equipment, net $ 1,539,221 $ 1,633,458
Goodwill $ 6,550 $ 6,550
Total operating assets $ 2,076,796 $ 2,213,641
Accounts payable $ 138,662 $ 155,482
Taxes payable $ 24,370 $ 13,256
Pension and OPEB liabilities $ 743,779 $ 852,237
Total operating liabilities $ 906,811 $ 1,020,975
Net operating assets $ 1,169,985 $ 1,192,666
8-6

Net Financial Obligations


Year 8 Year 9

Notes payable $ 7,850 $ 13,734

Current maturities of long-term debt $ 30,440 $ 33,822

Long-term debt $ 507,329 $ 473,507

Total financial liabilities $ 545,619 $ 521,063

Marketable securities – current $ 38,008 $ 43,854

Marketable securities – noncurrent $ 5,931 $ 56,997

Total financial assets $ 43,939 $ 100,851

Net financial obligations $ 501,680 $ 420,212


8-7

NOA and NFO

NOA = NFO + SE

Year 8 $ 1,169,985 = $ 501,680 + $ 668,305

Year 9 $ 1,192,666 = $ 420,212 + $ 772,454

Remember,
Assets = Liabilities + Equity
8-8

Return on Net Operating Assets


(RNOA)
Tax expense ÷ Pretax profit = Effective tax rate
Year 8 $ 52.237 ÷ 141180 = 37%
Year 9 $ 58.584 ÷ 162732 = 36%
(Sales - Operating expenses) x (1 - Effective tax rate) = NOPAT
Year 8 $ 163.005 x (1 - 37%) = $ 102.693
Year 9 $ 183.575 x (1 - 36%) = $ 117.488
RNOA = NOPAT / Average NOA
= $117,488 / [($1,169,985 + $1,192,666) / 2]
= 9.95%
8-9

Components of ROI
Return on Common Equity -- ROCE

Net income - Preferred dividends


(Beginning equity + Ending equity) / 2

Where
• Equity is stockholder’s equity less preferred
stock
8-10

Components of ROI
Return on Common Equity -- ROCE

Net income - Preferred dividends


(Beginning equity + Ending equity) / 2
8-11

Analyzing Return on Assets-ROA


Disaggregating RNOA

Return on operating assets =


Operating Profit margin x Operating Asset turnover

NOPAT NOPAT Sales


 
Avg. NOA Sales Avg. NOA

Operating Profit margin: measures operating profitability


relative to sales
Operating Asset turnover (utilization): measures effectiveness
in generating sales from operating assets
8-12

Profit Margin and Asset Turnover


• Profit margin and asset turnover are
interdependent
– Profit margin is a function of sales and operating
expenses
• (selling price x units sold)
– Turnover is also a function of sales
• (sales/assets)
Analysis of Return on Net Operating Assets
Sales $5,000,000 $10,000,000 $10,000,000
NOPAT $500,000 $500,000 $100,000
NOA $5,000,000 $5,000,000 $1,000,000
NOPAT margin 10% 5% 1%
NOA turnover 1 2 10
Return on net operating assets 10% 10% 10%
8-13

Profit Margin and Asset Turnover


Relation between NOPAT Margin, NOA Turnover, and
Return on Net Operating Assets
8-14

Profit Margin and Asset Turnover


Net operating Asset Turnover v/s
Net operating Profit Margin for Selected Industries