NON-FINANCIAL MANAGERS
DR. KHALED FOUAD SHERIF
SECTOR MANAGER
EASTERN EUROPE & CENTRAL
ASIA DEPARTMENT
THE WORLD BANK
WASHINGTON DC
Web: http:\\www.ksherif.com
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Income Statements:
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EXHIBIT 1
SAMPLE INCOME STATEMENT
Company X
For year ending December 31, 1989
(In LE)
Revenues
Net Sales
Other Income
Total Revenues
3,787,248
42,579
Expenses
Cost of Goods Sold
Administrative & Selling Expenses
Interest Expenses
Total Expenses
2,796,459
637,509
47,516
3,829,827
3,503,545
326,282
Income Taxes
152,039
Net Earnings
174,243
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Cash.
Marketable securities: Temporary investments (generally 90 days)
of excess or idle cash; listed at cost, or market value since they are
converted into cash within one year.
Accounts Receivable: Money owned to the company by debtors,
generally for the purchase of goods and services.
Inventories: The value of products that have been completed and
are in storage waiting to be sold (finished goods), products that
have been partially completed (work in process), and raw materials.
Prepaid Expenses: The value of items that the company has paid
for in advance, such as insurance premiums.
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Assets
Current Assets:
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid Expenses
Total Current Assets
Fixed Assets:
Land
Buildings
Machinery & Equipment
Less allowances for depreciation
Total Fixed Assets
Total Assets
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59,770
87,466
559,144
618,120
49,986
1,374,486
25,807
716,076
1,010,770
800,103
952,550
2,327,036
Liabilities:
Current Liabilities
Notes Payable
Trade accounts payable
Payrolls & other accurables
Income taxes
Total Current Liabilities
Long-Term Liabilities
Total Liabilties
48,563
207,887
411,362
124,684
792,496
431,350
1,223,846
Shareholders Equity
1,103,190
2,327,036
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Liquidity Ratios
Generally, the first concern of the financial analyst is
liquidity. they measures the short-run solvency of a
company its ability to meet current debts.
Current
Ratio
The current ratio indicates whether there are enough
current assets to meet current liabilities.
Current ratio = Current assets
Current liabilities
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Leverage Ratios
Leverage ratios measure the funds supplied
by owners as compared with the financing
provided by the firms creditors.
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Debt ratio:
The debt ratio is the ratio of total debt to total
assets and measures the percentage of total
funds provided by creditors.
The debt ratio is: Total debts
Total assets
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Formula
Example for
Calculation
Industry
Average
Evaluation
Current Assets
Current Liabilities
Quick Assets
Current Liabilities
700,000 = 2.3
300,000
400,000 = 1.3
300,000
2.5
Satisfactory
1 time
Good
Total Debt
Total Assets
Total Equity
Total Assets
100,000 = 50%
200,000
1,000,000 = 50%
2,000,000
33%
Poor
33%
Poor
Net Earnings
Total Assets
120,000 = 6%
2,000,000
10%
Poor
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Formula
Example for
Calculation
Industry
Average
Evaluation
ProfitMargin
Return
on Equity
Net Earnings
Net Sales
Net Earnings
Shareholders Inv.
120,000 = 4%
3,000,000
120,000 = 12%
3,000,000
5%
Fair
15%
Fair
Sales
Inventory
Accounts Receivables
Sales/365 days
3,000,000 = 10
300,000
times
2,00,000 = 24
8,333
Days
9 times
Satisfactory
20 Days
Satisfactory
Activity
Inventory
Turnover
Average
Collection
Period
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FINANCIAL RATIOS
I. Ratios Indicating Current position or Relating to Analysis of Short-Term Solvency
Ratio
Formula
Significance
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FINANCIAL RATIOS
2.
Acid-Test ratio or
quick ratio
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FINANCIAL RATIOS
3.
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FINANCIAL RATIOS
B. Ratios indicating movement of current assets (turnover)
4. - Receivable turnover
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Velocity of collection of
trade accounts and notes.
Test of efficiency of
collection
FINANCIAL RATIOS
- Number of days
receivables
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365 (days)
Receivable turnover
(computed as above)
Velocity of collection of
trade accounts and notes.
Test of efficiency of
collection.
FINANCIAL RATIOS
5. Inventory turnover
a. merchancise turnover
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Indicates liquidity of
inventory and will exhibit
tendency to over-stock.
Cost of Goods Sold
Average Mdse. Inventory
FINANCIAL RATIOS
Ratio
b. Finished goods turnover
(Manufcturing firm)
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Formula
Cost of Goods Sold
Ave. Finished Goods Invty.
Significnce
As as (a).
FINANCIAL RATIOS
c.
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FINANCIAL RATIOS
d. Days supply in Inventory
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365 (6 days)
Inventory turnover
(computed per (a),
(b) or (c).
FINANCIAL RATIOS
6.
Average Age of
Payables
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FINANCIAL RATIOS
7.
Working capital
turnover
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Net Sales
Working Capital
Indicates adequacy of
working capital and cash
cycle of firm.
FINANCIAL RATIOS
II. Ratios indicating asset relations and capital set-up or relating to analysis of long-term
solvency
A. Equities related to profits and sales
1. Sales to owners equity
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Net Sales
Owners Equity
FINANCIAL RATIOS
3.
Earning rate of
market value per
share
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FINANCIAL RATIOS
4.
Times Bond
Interest Earned
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FINANCIAL RATIOS
5.
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FINANCIAL RATIOS
6.
Operating expense
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Indicates effectively of
mnagement in controlling
operating expenses.
FINANCIAL RATIOS
IV.
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FINANCIAL RATIOS
2. Total Debt to Total
Assets
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FINANCIAL RATIOS
3. Long-term Debt to
Equity Ratio
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Long-term Debt
Total Common Equity
FINANCIAL RATIOS
VI.
Asset-relation Ratios
1.
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FINANCIAL RATIOS
2. Inventory to Total
Assets
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Average Inventory
Total Assets
FINANCIAL RATIOS
3.
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FINANCIAL RATIOS
4. Fixed Assets to Total
Equity
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Proportion of owners
equity to fixed assets.
Indicative of over or underinvestment by owners;
also weakness in trading
on the equity.
FINANCIAL RATIOS
5.
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Net Sales
Fixed Assets (net)
FINANCIAL RATIOS
6. Approximate Average
Asset Life
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FINANCIAL RATIOS
II.
1.
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Retained earnings
Total assets
X 1.4
Sales
X 0.999
Total assets
N.B. Operating income = Net sales - cost of goods sold
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Score
Probability of illiquidity or failure
1.80 or less
Very high
1.81- 2.99
Not sure
3.0 or greater
Unlikely
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EXAMPLE
A company presents the following information
Working capital
280,000
Total assets
875,000
Total liabilities
320,000
Retained earnings
215,000
Sales
950,000
Operating income
130,000
Common stock
Book Value
220,000
Market Value
310,000
Preferred stock
Book value
115,000
Market value
170,000
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Z-score equals
280,000
875,000
480,000
320,000
X 1.2 +
X 0.6 +
215,000
875,000
950,000
875,000
X 1.4 +
130,000
875,000
X 3.3 +
X 0.999 =
QUANTITATIVE FACTORS IN
PREDICTING CORPORATE FAILURE
QUANTITATIVE FACTORS IN
PREDICTING CORPORATE FAILURE
QUANTITATIVE FACTORS IN
PREDICTING FAILURE
New company
Declining industry
Inability to obtain adequate financing, and when
obtained there are significant loan restrictions
A lack in management quality
WORLD BANK
1993
Assets
9,150,210
6,952,700
5,755,040
897,670
22,755,620
304,710
7,679,800
6,411,470
5,293,910
895,760
20,280,940
174,640
336,780
4,940,740
8,791,660
14,069,180
5,475,040
8,594,140
1,934,650
362,990
292,480
4,277,040
7,783,080
12,352,600
4,656,370
7,696,230
1,828,510
468,980
33,952,110
30,449,300
588,600
6,030,420
6,619,020
4,415,510
616,040
5,267,770
5,883,810
3,679,650
Shareholders Equity
Total Shareholders Equity
22,917,580
20,885,840
33,952,110
30,449,300
Cash
Accounts receivable less allowances
Inventories
Other current assets
Total current assets
Investments
Property, plant and equipment
Land
Buildings
Machinery & Equipment
Total Property, Plant & Equipment
Less accumulated depreciation
Property plant & Equipment net of depreciation
Intangibles
Other assets
Total Assets
Liabilities
Loans payable to Banks
Accounts payable & Accrued Expenses
Total current liabilities
Long term Debt
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1992
CONSOLIDATED STATEMENTS OF
INCOME
December 31,
1993
1992
47,443,200
18,371,190
16,959,630
35,330,820
12,112,380
1,136,970
45,684,060
17,995,370
15,944,040
33,939,410
11,744,650
1,243,780
10,975,410
3,804,010
10,500,870
3,942,590
7,171,400
6,558,280
Net Sales
Cost of goods sold
Selling, Admin. & General Expense
Net profit
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1988
0.9
1989
0.8
1990
0.6
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1989
1990
High
9.0
5.0
6.0
Low
7.0
4.0
3.0
Average 8.0
4.5
4.5
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1988
1989
1990
8.9
5.6
7.5
P/E
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Item
ROA
ROE
CR
DR
D/E
Z Score
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94
95
96
12.3% 7.3%
8.7%
39.0% 26.8% 29.5%
.994
1.02
.947
68%
72.7% 70.3%
217% 260% 236%
1.65
1.38
1.35
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ROA
ROE
PM
CR
QR
DR
1992
1993
21.5%
31.4%
14.3%
3.4
2.5
12%
21%
31.2%
15%
3.4
2.6
13%
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1992
D/E
18%
IT
5.2
Z Score 6.25
1993
19%
5.9
5.94
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