...Financial Ratios-Operating and Cash Conversion Cycle David S. O’Neal ITT Technical Institute July 8, 2014 Financial Ratios-Operating and Cash Conversion Cycle Table 1 Amazon.com Inc. (AMZN) Balance Sheet | | | Period Ending | Dec 31, 2013 | Dec 31, 2012 | Dec 31, 2011 | | Assets | Current Assets | | Cash And Cash Equivalents | 8,658,000 | 8,084,000 | 5,269,000 | | Short Term Investments | 3,789,000 | 3,364,000 | 4,307,000 | | Net Receivables | 4,767,000 | 3,817,000 | 2,922,000 | | Inventory | 7,411,000 | 6,031,000 | 4,992,000 | | Other Current Assets | - | - | - | | Total Current Assets | 24,625,000 | 21,296,000 | 17,490,000 | Long Term Investments | - | - | - | Property Plant and Equipment | 10,949,000 | 7,060,000 | 4,417,000 | Goodwill | 2,655,000 | 2,552,000 | 1,955,000 | Intangible Assets | - | - | - | Accumulated Amortization | - | - | - | Other Assets | 1,930,000 | 1,647,000 | 1,388,000 | Deferred Long Term Asset Charges | - | - | 28,000 | | Total Assets | 40,159,000 | 32,555,000 | 25,278,000 | | Liabilities | Current Liabilities | | Accounts Payable | 21,821,000 | 18,210,000 | 14,896,000 | | Short/Current Long Term Debt | - | - | - | | Other Current Liabilities | 1,159,000 | 792,000 | - | | Total Current Liabilities | 22,980,000 | 19,002,000 | 14,896,000 | Long Term Debt...
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...Ration- Also known as liquidity ratio and working capital ratio shows the proportion of current assets of a business in relation to its current liabilities. Current ratio expresses the extent to which the current liabilities of a business (i.e. liabilities due to be settled within 12 months) are covered by its current assets (i.e. assets expected to be realized within 12 months). A current ratio of 2 would mean that current assets are sufficient to cover for twice the amount of a company's short-term liabilities. It is calculated with the formula below. Current Ratio | = | Current Assets | | | Current Liabilities | | | | Acid test ration- also known as quick Ratio, shows the ratio of cash and other liquid resources of an organization in comparison to its current liabilities. Quick Ratio | = | Cash in hand + Cash at Bank + Receivables + Marketable Securities | | | Current Liabilities | Acid test ratio shows the extent of cash and other current assets that are readily convertible into cash in comparison to the short-term obligations of an organization. A quick ratio of 0.5 would suggest that a company is able to settle half of its current liabilities instantaneously. Acid test ratio differs from current ratio in that those current assets that are not readily convertible into cash are excluded from the calculation such as inventory and deferred tax credits since conversion of such assets into cash may take considerable time. Quick ratio may therefore alternatively be...
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...Overhead Ratio: An overhead ratio will show the cost of the office overhead. It is calculated by taking the total expenses, subtracting physician expenses, and then dividing by adjusting receipts. It is very important to monitor these figure every month and every year to year. This will help to make it easier to see any trends in the cost of an overhead. Cost Ratio: To calculate the cost of any performing procedure or service in the office, by dividing the total expense for the month by the number of procedures performed in the month. Revenue Ratio: Revenue Ratio is to calculate the revenue ratio, is divide the total revenue by the number of procedues that are performed in any given period. Profit Ratio: Profit ratio is the amount of the...
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...Officers tab to access the financial statements. Compute the eight ratios—as shown in Chapter 11—for Patton-Fuller Hospital based on its unaudited financial statements and critique its operating results and financial position. | | |2008 |2009 | |Liquidity | |Unaudited |Unaudited |Audited | | |Current Ratio |Current Assets | | $128,867 + $23,807| | | | $130,028 + Current |Current Assets |= 5.3709833 or | | | |Liabilities $8,380 = |$128,867 + Current |5.371 (15 to 1) | | | |15.516229 or 15.516 (15|Liabilities $23,807| | | | |to 1) |= 5.4129877 or | | | | | |5.413 (5 to 1) | | | |Quick Ratio | Cash and Cash | Cash and Cash | $22,995 + $59,767| | | ...
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...in part. Outline Relationship between financial plans and statements. Prepare a personal balance sheet Generate a personal income and expense statement. Develop a good record-keeping system and use ratios to evaluate personal financial statements. • Construct a cash budget and use it to monitor and control spending. • Apply time vale of money concepts to put a monetary value on financial goals. • • • • © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Mapping Out Your Financial Future Financial planning facilitates: • Greater Wealth • Financial Security • Attainment of Financial Goals © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Interlocking Network of Financial Plans and Statements © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet A statement of your financial position at a given point in time Balance Sheet Equation Assets: Things You Own • Liquid assets – low-risk, cash or investments that can be converted to cash with little or no loss in value • Investments – acquired to earn a return • Real property – immovable property including land or a house • Personal Property – movable property such as autos and home furnishings ...
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...more of their assets to meet these fixed obligations. Another advantage is that the company has a short-term liquidity ratio. This ratio indicates whether the company will have the resources to pay its current and maturing obligations. Since the company has no long-term debt, it has more resources to pay obligations. A disadvantage is that if the company has no long-term debt, it does not have any long-term investments. When a company invests in securities, such as bonds, common stock, or long-term notes, the company is anticipating its long-term life. For example, bonds are a long term debt that are cashable at a certain point in time; if a company has bonds, the company will have expected cash in the future. b) What are some advantages to Chieftain from having this large cash balance? What is the disadvantage? b. One of the advantages is that the company has a high liquidity, and does not necessarily need to pay on account when pursuing transactions. Having a large cash balance indicates that the company has the ability to handle more cash transactions than a company that does not. It also indicates that the company is financially flexible, since it has the ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. A disadvantage of having a big cash balance is that the company does not get many things on account, and could mean...
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...* This assignment is to compute and a write a summary (max. 250 words) interpreting selected liquidity ratios. 1. Companies Last name begins with the letters A through M: CVS N through Z: Eli Lilly You can work individually or in a group of not more than 2. If you work in a group, you must choose the members, and both must send the Academic Coach, Ms. Linda Anderson, a message stating so, AND the name of the member who would submit the assignment. THE SUBMISSION FROM THE DESIGNATED MEMBER ALONE WILL BE GRADED. If your last names fall in both categories (eg. Anderson and Surysekar), your message to Ms. Anderson should also include your choice of the company (CVS or Eli Lilly). If group work, both members will get the same score for this assignment. 2. Ratios to compute and interpret (only the following 4 liquidity ratios, defined in page 704 of the text): Current ratio Current cash debt coverage ratio Inventory turnover Accounts receivable turnover 3. Time period: Years 2009, 2010, 2011 4. Source: Company annual report CVS http://media.corporate-ir.net/media_files/IROL/99/99533/CVSCaremark2011_AR.pdf http://media.corporate-ir.net/media_files/irol/99/99533/2010_Annual_Report.pdf http://investors.cvscaremark.com/~/media/Files/C/CVS-IR/reports/cvs-ar-2009.pdf Eli Lilly http://files.shareholder.com/downloads/LLY/2732114219x0x548541/E8FFDA89-5EC1-4D08-AB37-CD85F4C0863D/English.PDF http://files.shareholder.com/down...
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...but projections of future operations and cash flows indicated that this capacity was on the rise. For Marriott, excess debt capacity was viewed as comparable to unused plant capacity because the existing equity base could support additional productive assets. Management was therefore faced with two problems. First, it needed to determine the amount of funds that would be available if Marriott's full debt capacity were utilized. Second, management needed to decide whether to invest excess funds in new or existing businesses, or to return them to the companies shareholders by paying higher cash dividends or repurchasing stock. To resolve the first issue, it is recommended that the Marriott corporation calculates several coverage ratios so that it can evaluate it's ability to cover the costs associated with varying levels of debt. There are three coverage ratios, corresponding to the costs associated with increased debt leverage, recommended by Higgins n his book. These ratios are times interest covered, times burden covered, and times common covered. To calculate these ratios EBIT is divided by a specific cost, or sum of costs, to determine how well profits are able to support them. Alternatively, “percentage EBIT can fall” could be calculated with regards to each type of cost, to determine the percentage amount that EBIT could decline from its expected level before the corresponding coverage ratio drops to 1.0. A coverage ratio of 1.0 is critical because any lower coverage...
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...for the years and amounts presented in the originally filed 10-K and for years and amounts presented in the 10-K/A i.e., for all years affected by the restatement. What key accounts did the restatement affect? Use changes in the vertical statement amounts to respond to this question. b. What key categories of ratios were affected by the restatement i.e., liquidity, solvency, profitability, efficiency. For each of the categories affected, choose 1 or 2 key ratios, compute the ratio, and discuss changes in the ratio from pre- to post-restatement. Compute and compare these ratios for each year affected by the restatement. c. Graph net income and cash flows from operations for the years and amounts presented in the original 10-K on the same graph. Did the company originally report positive (net income > cash flows) or negative (net income < cash flows) accruals? What does the pattern of net income relative to cash flows suggest about the company’s earnings quality prior to the restatement? Next, graph net income and cash flows from operations for the years and amounts presented in the 10-K/A. Does the pattern of net income relative to cash flows look any different? Why or why not? 2. [10 points] Based on a review of the financial statements of your company and any articles appearing in the financial press (e.g., Business Week, Wall Street Journal etc.) about your company, is there any reason to believe that the misstatements were perpetrated intentionally...
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...performance of Lowe's. Students examine a financial-ratio analysis for Home Depot that acts as a template for generating a comparable ratio analysis for Lowe's. The student ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio interrelationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet they project sustained improvements for Lowe's. Students are invited to scrutinize the analyst's five-year income-statement and asset-side balance-sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe's. Finally, the strong-growth assumptions for Home Depot relative to the modest-growth forecast for the industry suggest that the company can be expected to capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottom-up business forecasting with top-down industry forecasts. The case may be used to develop any of the following teaching objectives: (1) exploring financial-statement and financial-ratio analysis; (2) reviewing the basics of financial...
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...10.2308/acch-50434 Capital Structure, Earnings Management, and Sarbanes-Oxley: Evidence from Canadian and U.S. Firms Kelly E. Carter SYNOPSIS: I examine Sarbanes-Oxley’s (SOX) effect on capital structure. I find that SOX is associated with higher long-term debt ratios, as firms listed in the U.S. raise their long-term debt ratios by 2 to 3 percentage points. This finding is consistent with the idea that, although the reduction in information asymmetry associated with SOX could prompt managers to increase equity financing, debt is still safer and less costly than equity in the SOX era. Further analysis shows that the increase in debt occurs in the two quarters prior to SOX, suggesting that firms anticipate a higher cost of debt after SOX and acquire debt while it is relatively cheap. Also, firms that heavily (lightly) manage earnings prior to SOX use less (more) debt after SOX. This result is consistent with the view that firms that aggressively manage earnings before SOX reveal intrinsically weaker earnings after SOX, casting doubt on those firms’ ability to repay debt and relegating those firms to issue equity for financing purposes. Keywords: capital structure; earnings management; debt ratio; Sarbanes-Oxley. JEL Classifications: G32; G38. Data Availability: Data available upon request. Kelly E. Carter is an Assistant Professor at Morgan State University. I particularly thank Terry Shevlin (co-editor) and an anonymous referee for their detailed, excellent...
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...Profitability – how profitable the firm is in relation to sales and assets. Liquidity – ability of a company to pay its creditors and meet its debts. (ideal current ratio is 1.5-2.0 If more, then firm shud aim at reducing some asset. Much of it cud have been tied up in stocks ) Efficiency – how well the firm is using its resources. gearing ratio - expresses the ratio between borrowed capital and total capital employed. It is a measure of efficiency to help interpret the degree to which the activities of the firm are too tied up in loans that have to be financed and returned Both profit margins have improved, indicating an improvement in performance of Gadgets2u.com. This has been caused by both cost of goods sold and overheads falling as a proportion of turnover. This may have been caused by • better prices negotiated with suppliers as sales have grown enabling them to cut the cost of goods sold (purchasing economies of scale) • overheads being spread over a greater level of sales, hence reducing the unit cost • improved systems being developed to help improve productivity and therefore lower costs • any other relevant point. However, the net margin has improved by considerably more than the gross margin and this may indicate: • overheads being spread over a higher level of turnover. Overheads associated with the new e-commerce system may have stayed fairly steady as the system has spare capacity for growth. This would help reduce...
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...applies the concepts of strategy analysis, ratio analysis and valuation in the context of two competing businesses. This case will demonstrate how corporate strategy is reflected in financial statements and ratios, and will require you to compare performance over time and against a competitor. In addition, this case will help you to see how different operating and financing strategies will affect ratios. Your primary sources of information in this case should be the most recent 10-K’s issued by the two companies (TGT, filed 3.15.2012; WMT, filed 3.27.12). Case Questions: 1. What is the generic strategy for each of the two companies? 2. What is each company’s source of competitive advantage, and what will be important to maintaining that advantage? 3. How do their business models differ? For purposes of this question you should consider the following: a. Composition of the business from a segment perspective b. Composition of sales - % of sales in various categories c. Financing of the assets used in the business 4. From an accounting analysis perspective, are there any major differences between the two companies? 5. Calculate the following ratios for both companies for the years ended January 2012 and 2011 (Please note that the two companies refer to their fiscal years in different ways): d. ROE and a DuPont Analysis e. Common Size Income Statement f. Fixed Asset Turnover g. Cash Cycle (show and analyze each component...
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...identify the fit between business, market, and opportunity. • TCO B o Differentiate among the various legal forms of organization o Apply tax, liability, and other characteristics of legal form to analyzing business decisions o Discuss GAAP principles such as accrual accounting and its implications on the financials and for entrepreneurial decisions. o The differences between profits, cash, and cash flow o Discuss the specific links among the financial statements – how accounts on one statement influence what happens on the other financials • • TCO C o Use the financial statements to perform ratio analysis o Utilize the Balance Sheet Equation to solve for variables o Build financial statements (such as a Balance Sheet and Income Statement) o Perform EBDAT Breakeven/Survival Revenue calculations and discuss the results o Calculate cash burn, cash conversion, and its components o Perform margin analysis o Explain and calculate contribution margin o Analyze financial statements and explain performance • TCO D o Building multi-year revenue projections o Build complete cash projections o Calculate sustainable growth rate, maximum sustainable growth rate, and use these to differentiate among alternatives and make recommendations o Discuss external capital raising/additional funds needed o Explain and apply such key concepts as internally generated funds, retention rates, and dividend payout...
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...Financial Analysis: The Big Picture ACC/300 10 September 2012 Connie Poynter University of Phoenix Financial Analysis: The Big Picture When looking at the big picture in referring to financial analysis, there are four tools to consider, sustainable income, comparative analysis, ratio analysis and quality of earnings. While each of these tools is equally important I will provide an overview of two of these concepts to consider while deciding on a company’s financial health. Sustainable income is a level of income which is a realistic expectation of income to achieve in the future. Of course it would be very easy to call a company’s net income a realistic expectation until you consider items that can and will drastically change a company’s bottom line. Irregular items, changes in accounting principles and comprehensive income are all factors when considering a sustainable income. Irregular items are further broken down into discontinued operations and extraordinary items. Discontinued operations refer directly to the closing or disposal of a significant portion or component of a company. Extraordinary items cover extreme and rare acts such as volcano eruptions and hostile government takeovers. A change in accounting principles would take into account a company choosing to go with a more up to date or efficient form of accounting related to its business. If this happens, the changes must be made retroactive to cover the previous period. The last...
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