Chat with us, powered by LiveChat Conduct a Financial assessment on a typical organizatio | Coms Paper
+1(978)310-4246 credencewriters@gmail.com
  

Conduct a Financial assessment on a typical organization of your choice.  Attempt to obtain a copy of their balance sheet, income statement, and any other pertinent information you can obtain.  If obtaining the information becomes a difficult challenge, try another organization.  If all else fails, use the attached form and fill in representative, best-guess numerical values for each line item.  If you feel that a line item is not pertinent, or can be eliminated, do so. Worst-case and as a final resort, contact me.  Don’t wait until the last minute. Start early.  Using the model in Chapter 4 of Known, Martin, and Petty, for the elements of your assessment, put together an APA paper assessing the organization’s financial health.  Conform to APA standards.  The paper should identify at least six issues on to base your assessment.  Obviously more is better.

Sheet1

TABLE 21-1 Financial Ratio Analysis
Ratio Value Less Than 1 Value = 1 Value More Than 1
Current ratio = current assets/current liabilities Debts greater than assets; potentially major problems Debts and assets are equal Assets greater than debts; current ratio of 2 is desirable
Acid-test ratio = quick current assets / current liabilities Cash flow could be a problem Business is in satisfactory condition Business is in good financial condition
Operating ratio = (COGS+OPERATING EXPENSES)/NET SALES Desirable Marginal Undesirable
Gross profit margin ratio = (Gross profit from sales)/net sales 0.25 to 0.40 is industry average Uncommon except for businesses with low turnover and high investment Undesirable
Asset turnover ratio = net sales / average total assets 0.40 to 1.0 is industry average Uncommon Uncommon
Total debt to total assets ratio = total liabilities / total assets 0.05 to 0.75 is industry average Debt ratio is too high Debt ratio is dangerously high

XYZ Balance sheet

https://formswift.com/sem/static-non-state/balance-sheet?utm_source=google&utm_medium=cpc&utm_campaign=static__balance_sheet__search&u_adgroup=balance_sheet__b&u_device=c&u_country=us&u_producttype=formswiftdotcom&u_product=balance_sheet&u_landingpage=2019aa9&headline=Create%20A%20Free%20Balance%20Sheet%20Online&u_sitelinkid=53908&gclid=CjwKCAiA6seQBhAfEiwAvPqu1_O0V5Bqq1LaSdiEDNly0A1-TCu5KAGyXcThOUkccE2vSJrdXu46fhoCCJUQAvD_BwE FormSwift
Balance Sheet for
Assets
Current Assets
Cash
Accounts Receivable
Inventory
Prepaid expenses
Notes receivable
Other current assets
Total current assets
Fixed assets
Long-term investments
Land
Building
Machinery and fixtures
Other fixed assets
Net fixed assets
Other assets
Goodwill
Total assets
Liabilities and equity
Current liabilities
Accounts payable
Accrued wages
Accrued payroll taxes
Accrued employee benefits
Interest payable
Short-term notes
Current portion of long-term debt
Total current liabilities
Long term liability
Mortgage
Other long-term liabilities
Total long-term liabilities
Owners equity
Paid in capital
Net income
Total equity
Total liabilities and equity
Please make sure that total assets equals total liabilities and equity in your balance sheet.
If the difference. The two size of the balance sheet is greater than zero, please review the values entered.

https://formswift.com/sem/static-non-state/balance-sheet?utm_source=google&utm_medium=cpc&utm_campaign=static__balance_sheet__search&u_adgroup=balance_sheet__b&u_device=c&u_country=us&u_producttype=formswiftdotcom&u_product=balance_sheet&u_landingpage=2019aa9&headline=Create%20A%20Free%20Balance%20Sheet%20Online&u_sitelinkid=53908&gclid=CjwKCAiA6seQBhAfEiwAvPqu1_O0V5Bqq1LaSdiEDNly0A1-TCu5KAGyXcThOUkccE2vSJrdXu46fhoCCJUQAvD_BwE

XYZ Income

https://formswift.com/builder.php?documentType=income-statement&ses=02e40e6f0896d5eee72a23f4035164fb&key=267998070&utm_source=google&utm_medium=cpc&utm_campaign=static__income_statement__b&u_adgroup=income_statement&u_device=c&u_country=us&u_producttype=formfindrdotcom&u_product=income_statement&u_landingpage=2018aa2&headline=Create+A+Free+Income+Statement+Online&u_sitelinkid=88292&gclid=CjwKCAiA6seQBhAfEiwAvPqu12OkzuJGHgFIr0e0p1k4QSP7P48IxMk7ZbGKkIoxS78FimeAIbqC6xoCyvYQAvD_BwE#0 FormSwift
Income statement
For the period Ended
Revenues
Products
Less returns and allowances
Services
Other
Total revenue
Costs
Products
Services
Other
Total cost
Gross profit
Operating expenses
Gen. and administrative
Insurance
Non-recurring
Payroll taxes
Rent
Research and development
Salaries and wages
Sales and marketing
Utilities
Other
Total operating expenses
Operating income
Not operating, or other
Interest revenue
Interest expenses
Gain on sale of assets
Loss on sales of assets
Gain from legal action
Loss from legal action
Depreciation and amortization
Other game
Other loss
Total not operating other
Pretax income
Taxes
Income tax expense
Net income

Sheet3

Sheet4

Sheet5

Sheet6

Sheet7

Sheet8

Foundations of Finance

Tenth Edition

Chapter 4

Evaluating a Firm’s Financial Performance

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed:

1) Math Type Plugin

2) Math Player (free versions available)

3) NVDA Reader (free versions available)

1

Learning Objectives

4.1 Explain the purpose and importance of financial analysis.

4.2 Calculate and use a comprehensive set of measurements to evaluate a company’s performance.

4.3 Describe the limitations of financial ratio analysis.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

2

The Purpose of Financial Analysis

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

The Purpose of Financial Analysis

Financial analysis using ratios

A popular way to analyze the financial statements is by computing ratios. A ratio is a relationship between two numbers, e.g., a given ratio of A:B = 30:10 means A is 3 times B.

A ratio by itself may have no meaning. Hence, a given ratio is compared to

ratios from previous years

ratios of other firms or leaders in the same industry

See Figure 4.1 for a financial analysis example.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Figure 4.1 Financial Statement Data by Industry Norms for Software Publishers

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Uses of Financial Ratios: Within the Firm (1 of 3)

Identify deficiencies in a firm’s performance and take corrective action.

Evaluate employee performance and determine incentive compensation.

Compare the financial performance of the firm’s different divisions.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Uses of Financial Ratios: Within the Firm (2 of 3)

Prepare, at both firm and division levels, financial projections.

Understand the financial performance of the firm’s competitors.

Evaluate the financial condition of a major supplier.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Uses of Financial Ratios: Within the Firm (3 of 3)

Financial ratios are used by

Lenders in deciding whether or not to lend to a company.

Credit-rating agencies in determining a firm’s credit worthiness.

Investors (shareholders and bondholders) in deciding whether or not to invest in a company.

Major suppliers in deciding to whether or not to extend credit to a company or in designing the specific credit terms.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Measuring Key Financial Relationships

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Question 1: How Liquid Is the Firm? Can It Pay Its Bills?

A liquid asset is one that can be converted quickly and routinely into cash at the current market price.

Liquidity measures the firm’s ability to pay its bills on time. It indicates the ease with which noncash assets can be converted to cash to meet the financial obligations.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

How Liquid Is the Firm?

Liquidity is measured by two approaches:

Comparing the firm’s current assets and current liabilities

Examining the firm’s ability to convert accounts receivables and inventory into cash on a timely basis

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Measuring Liquidity: Perspective 1

Compare a firm’s current assets with current liabilities using:

Current Ratio

Acid Test or Quick Ratio

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Table 4.1 Walmart Income Statement for the Year Ending January 31, 2018 (expressed in millions, except per share data) (1 of 2)

Sales $ 500,343
Cost of goods sold (373,396)
Gross profit $ 126,947
Operating expenses: Blank
Selling, general and administrative expenses $ (95,981)
Depreciation expenses (10,529)
Total operating expenses $(106,510)
Operating income (earning before interest and taxes) $ 20,437
Interest expense (2,178)
Non-operating losses (3,136)
Earnings before taxes (taxable income) $ 15,123
Income taxes (5,261)
Net income (earnings available to common shareholders) $ 9,862

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Table 4.1 Walmart Income Statement for the Year Ending January 31, 2018 (expressed in millions, except per share data) (2 of 2)

Additional information: Blank
Number of shares outstanding (millions) 3,007
Earnings per share $ 3.28
Dividends paid to stockholders $ 6,124
Dividends per share $ 2.04

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Table 4.2 Walmart’s Balance Sheet for the Year Ending January 31, 2018 (expressed in millions) (1 of 2)

Cash and cash equivalents $ 6,756
Accounts receivable 5,614
Inventories 43,783
Prepaid expenses and other current assets 3,511
Total current assets $ 59,664
Gross plant and equipment $202,298
Less accumulated depreciation (87,480)
Net plant and equipment $114,818
Goodwill and other intangible assets 30,040
Total assets $ 204,522

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Table 4.2 Walmart’s Balance Sheet for the Year Ending January 31, 2018 (expressed in millions) (2 of 2)

Liabilities and Equity Blank
Accounts payable $ 46,510
Accrued liabilities 24,031
Short-term notes 9,662
Total current liabilities $ 80,203
Long-term debt 45,179
Total debt $125,382
Stockholders’ equity Blank
Common stock (par value) $ 295
Paid-in capital 2,648
Retained earnings 76,197
Total equity $ 79,140
Total liabilities and equity $ 204,522

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Current Ratio

Current ratio compares a firm’s current assets to its current liabilities.

Walmart has $0.74 in current assets for every $1 in current liabilities. Walmart’s liquidity is slightly less than that of Target, which has a current ratio of 0.95.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

17

Acid Test or Quick Ratio

Quick ratio compares cash and current assets (minus inventory) that can be converted into cash during the year with the liabilities that should be paid within the year.

Walmart has 15 cents in quick assets for every $1 in current debt. Walmart is slightly less liquid than Target, which has 20 cents for every $1 in current debt.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

18

Measuring Liquidity: Perspective 2

Measures a firm’s ability to convert accounts receivable and inventory into cash:

Days in Receivables or Average Collection Period

Inventory Turnover

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Days in Receivables (Average Collection Period)

How long does it take to collect the firm’s receivables?

Walmart (at 10.24 days) is slightly slower than Target (at 9.56 days) in collecting accounts receivable.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

20

Accounts Receivable Turnover

How many times are the accounts receivable “rolled-over” each year?

The conclusion is the same — Walmart (35.65X) is slightly slower than Target (38X) in collecting accounts receivable.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

21

Days in Inventory

How long is the inventory held before being sold?

Walmart carries inventory for a shorter time (42.80 days) than Target (61.81 days).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

22

Inventory Turnover

How many times are the firm’s inventories sold and replaced during the year?

The conclusion is the same—Walmart moves inventory much quicker (8.53X) than Target (5.91X).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

23

Question 2: Are the Firm’s Managers Generating Adequate Operating Profits from the Company’s Assets?

This question focuses on the profitability of the assets in which the firm has invested. We consider the following ratios to answer the question:

Operating Return on Assets

Operating Profit Margin

Total Asset Turnover

Fixed Assets Turnover

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Figure 4.2 Walmart Operating Profits Resulting from Asset Investments

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Operating Return on Assets (ORA)

O R A indicates the level of operating profits relative to the firm’s total assets.

Thus Walmart managers are generating 10 cents of
operating profit for every $1 of assets, which is less than Target (11.1%).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

26

Disaggregation of Operating Return on Assets

Calculated as follows:

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

27

Managing Operations: Operating Profit Margin (O P M)

O P M examines how effective the company is in managing its cost of goods sold and operating expenses that determine the operating profit.

Target managers are better than Walmart in managing the cost of goods sold and operating expenses, as the Operating Profit Margin for Target is 6.0% compared to Walmart at 4.1%.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

28

Managing Assets: Total Asset Turnover

This ratio measures how efficiently a firm is using its assets in generating sales.

Walmart is generating $2.45 cents in sales for every $1 invested in assets, which is higher than Target (1.84X).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

29

Managing Assets: Fixed Asset Turnover

Examines efficiency in generating sales from investment in “fixed assets.”

Walmart generates $4.36 in sales for every $1 invested in fixed assets, which is much higher than Target (2.87X).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

30

Figure 4.3 Analysis of Walmart’s Operating Return on Assets

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Question 3: How Is the Firm Financing Its Assets?

Here we examine the question: Does the firm finance its assets by debt or equity or both? We use the following two ratios to answer the question:

Debt Ratio

Times Interest Earned

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Debt Ratio

This ratio indicates the percentage of the firm’s assets that are financed by debt (implying that the balance is financed by equity).

Walmart finances 61% of its assets by debt and 39% by equity compared to Target financing 70% of its assets by debt.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

33

Times Interest Earned (1 of 2)

This ratio indicates the amount of operating income available to service interest payments.

Walmart’s operating income is 9 times the annual interest expense and higher than Target (6.47X) due to its relatively higher operating profits.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

34

Times Interest Earned (2 of 2)

Note

Interest is not paid with income but with cash.

Oftentimes, firms are required to repay part of the principal annually.

Thus, times interest earned is only a crude measure of the firm’s capacity to service its debt.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

35

Question 4: Are the Firm’s Managers Providing a Good Return on the Capital Provided by the Company’s Shareholders?

This is analyzed by computing the firm’s accounting return on common stockholder’s investment or return on equity (R O E).

Note: Common equity includes both common stock and retained earnings.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

36

Return On Equity (ROE)

Owners of Walmart are receiving a 12.5% return compared to Target’s 25%.

One of the reasons for lower ROE is the lower operating return on assets (10.0% for Walmart v. 11.1% for Target).

A lower return on the firm’s assets will always result in a lower return on equity and vice versa.

Also, Walmart uses less debt (61% for Walmart v. 70% for Target).

Higher debt translates to higher ROE under favorable business conditions.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

37

Figure 4.4 Return on Equity Relationships for the Walmart Company

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Question 5: Are the Firm’s Managers Creating Shareholder Value?

We can use two approaches to answer this question:

Market value ratios (P/E)

Economic Value Added (E V A)

These ratios indicate what investors think of management’s past performance and future prospects.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Price/Earnings Ratio

Measures how much investors are willing to pay for $1 of reported earnings.

Investors are willing pay more for Walmart for every dollar of earnings per share compared to Target ($26.22 for Walmart versus $14.07 for Target).

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

40

Price/Book Ratio

Compares the market value of a share of stock to the book value per share of the reported equity on the balance sheet.

A ratio greater than 1 indicates that the shares are more valuable than what the shareholders originally paid. The Walmart ratio of 3.27X is lower than Target ratio of 3.53X, suggesting that Target is perceived as having better growth prospects relative to its risk.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

41

Summary of Ratios

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Table 4.3 Walmart and Target: Financial Ratio Analysis

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

The Limitations of Financial Ratio Analysis

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

The Limitations of Financial Ratio Analysis

It is sometimes difficult to identify industry categories or comparable peers.

The published peer group or industry averages are only approximations.

Industry averages may not provide a desirable target ratio.

Accounting practices differ widely among firms.

A high or low ratio does not automatically lead to a specific conclusion.

Seasons may bias the numbers in the financial statements.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Key Terms (1 of 2)

Accounts receivable turnover ratio

Acid-test (quick) ratio

Asset management

Current ratio

Days in inventory

Days in receivables (average collection period)

Debt ratio

Financial ratios

Fixed asset turnover

Inventory turnover

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Key Terms (2 of 2)

Liquidity

Operating profit margin

Operating return on assets (OROA)

Operations management

Price/book ratio

Price/earnings ratio

Return on equity

Times interest earned

Total asset turnover

Total common equity (total stockholder equity)

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Copyright

This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

48

÷

ø

ö

ç

è

æ

shares

of

number

income

net

current assets59,664

Current ratio===.74

current liabilities80,203

M

M

cash+accounts receivable12,370

Acid-test ratio===0.15

current liabilities80,203

M

M

accounts receivableaccounts receivable

Days in receivables==

annual credit sales

daily credit sales

365

æö

ç÷

èø

5,6145,614

===10.24 days

500,343×.40

548

360

MM

M

M

annual credit sales

Accounts receivable turnover=

accounts receivable

$500,343*.40

==35.65

$5,614

M

X

M

inventory

Days in inventory=

annual cost of goods sold

365

$43,783$43,783

42.80days

$373,396

$1,023

365

M

M

M

===

cost of goods sold

Inventory turnover

inven

=

tory

373,396

Inventory turnover==8.53X

43,783

M

M

operating profits

Operating return on assets=

total assets

20,437

0.1010%

204,522

M

M

===

Operating return on assetsoperating prof

it margin total asset turnover

operating profitssales

Operating return on assets=×

salestotal assets

operating profits$20,437

Operating profit margin==0.04=4.1%

sales$500,343

M

M

=

sales$500,343

Total asset turnover==2.45X

total assets$204,522

M

M

=

sales$500,343

Fixed assets turnover==4.36X

net fixed assets$114,818

M

M

=

total debt$125,382

Debt ratio==0.61=61%

total assets$204,522

M

M

=

operating profits20,437

Times interest earned==9.38X

interest expense2,178

M

M

=

net income

Return on equity=

total common equity

net income$9,862

Return on equity = ==0.125=12.5%

total common equity$79,140

M

M

market price per share$86.00

Price/earnings ratio==26.22X

earnings per share$3.28

=

market price per share86

Price/book ratio==3.27X

equity book value per share26.3

=

.MsftOfcThm_Text1_Fill {
fill:#000000;
}
.MsftOfcThm_MainDark1_Stroke {
stroke:#000000;
}

error: Content is protected !!