14-1 financial statement analysis chapter 14 electronic presentation by douglas cloud pepperdine...
TRANSCRIPT
14-1
Financial Statement Analysis
Chapter 14
Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
14-2
1. Construct and interpret horizontal and vertical analyses.
2. Calculate and interpret the rate earned on stockholders’ equity and the rate earned on total assets.
3. Analyze the rate earned on total assets by evaluating the profit margin and the asset efficiency of a business.Anal
Learning GoalsLearning GoalsLearning GoalsLearning Goals
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
14-3
4. Determine and interpret leverage.5. Calculate and interpret shareholder ratios: earnings per share,
price-earnings ratio, and dividend yield.6. Summarize the uses and limitations of analytical measures.7. Describe the contents of corporate annual reports.
Learning GoalsLearning GoalsLearning GoalsLearning Goals
14-4
Your Need to Know Value investing is an attempt to discover stocks with
an intrinsic value that are greater than the stock prices.
In growth investing, the investor tries to identify companies that are growing sales and earnings through new products, markets, or opportunities.
Income investing is where investors purchase common stocks for their dividend stream.
Technical investing involves investors using technical analysis to find clues about future performance from past performance.
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1Learning GoalLearning GoalLearning GoalLearning Goal
Construct and interpret horizontal and vertical analyses.
14-6
Horizontal AnalysisHorizontal AnalysisHorizontal AnalysisHorizontal Analysis
What is horizontal analysis?
What is horizontal analysis?
It’s an analysis of the percentage increases and decreases of related items
in comparative financial statements.
It’s an analysis of the percentage increases and decreases of related items
in comparative financial statements.
14-7HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
AssetsCurrent assets $10,361 $ 7,777 $2,584 33.2%Property and equipment, net 15,375 13,068 2,307 17.7Other assets 658 540 118 21.9Total assets $26,394 $21,385 $5,009 23.4
LiabilitiesCurrent liabilities $ 6,501 $ 4,385 $2,116 48.3Long-term debt, excluding current installment 1,250 1,545 (295) (19.1)Other long-term liabilities 372 256 116 45.3Deferred income taxes 189 195 (6) (3.1)Total long-term liabilities $ 1,811 $ 1,996 $ (185) (9.3)Total liabilities $ 8,312 $ 6,381 $1,931 30.3
Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent
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CondensedCondensed
The stockholders’ equity section is not displayed.The stockholders’ equity section is not displayed.The stockholders’ equity section is not displayed.The stockholders’ equity section is not displayed.
14-8HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
AssetsCurrent assets $10,361 $ 7,777 $2,584 33.2%Property and equipment, net 15,375 13,068 2,307 17.7Other assets 658 540 118 21.9Total assets $26,394 $21,385 $5,009 23.4
LiabilitiesCurrent liabilities $ 6,501 $ 4,385 $2,116 48.3Long-term debt, excluding current installment 1,250 1,545 (295) (19.1)Other long-term liabilities 372 256 116 45.3Deferred income taxes 189 195 (6) (3.1)Total long-term liabilities $ 1,811 $ 1,996 $ (185) (9.3)Total liabilities $ 8,312 $ 6,381 $1,931 30.3
Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent
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CondensedCondensed
Horizontal Analysis: Horizontal Analysis:
Difference $2,584
Base year $7,777= 33.2%
33.2%
14-9HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent
14-9
CondensedCondensed
33.2% AssetsCurrent assets $10,361 $ 7,777 $2,584 33.2%Property and equipment, net 15,375 13,068 2,307 17.7Other assets 658 540 118 21.9Total assets $26,394 $21,385 $5,009 23.4
LiabilitiesCurrent liabilities $ 6,501 $ 4,385 $2,116 48.3Long-term debt, excluding current installment 1,250 1,545 (295) (19.1)Other long-term liabilities 372 256 116 45.3Deferred income taxes 189 195 (6) (3.1)Total long-term liabilities $ 1,811 $ 1,996 $ (185) (9.3)Total liabilities $ 8,312 $ 6,381 $1,931 30.3
17.733.2%
Horizontal Analysis: Horizontal Analysis:
Difference $2,307
Base year $13,068= 17.7%
14-10HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
Increase (Decrease) Feb. 3, 2002 Jan. 28, 2001 Amount Percent
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CondensedCondensed
AssetsCurrent assets $10,361 $ 7,777 $2,584 33.2%Property and equipment, net 15,375 13,068 2,307 17.7Other assets 658 540 118 21.9Total assets $26,394 $21,385 $5,009 23.4
LiabilitiesCurrent liabilities $ 6,501 $ 4,385 $2,116 48.3Long-term debt, excluding current installment 1,250 1,545 (295) (19.1)Other long-term liabilities 372 256 116 45.3Deferred income taxes 189 195 (6) (3.1)Total long-term liabilities $ 1,811 $ 1,996 $ (185) (9.3)Total liabilities $ 8,312 $ 6,381 $1,931 30.3
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HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 $45,738 $7,815Cost of merchandise sold 37,406 32,057 5,349 Gross profit $16,147 $13,681 $2,466 Selling and store operating exp. 10,280 8,655 1,625General and administrative exp. 935 835 100 Total operating expenses $11,215 $ 9,490 $1,725Income from operations $ 4,932 $ 4,191 $ 741Other income and expenses:
Interest and investment inc. 53 47 6 Interest expense (28) (21) (7)Income before income tax $ 4,957 $ 4,217 $ 740 Income taxes 1,913 1,636 277 Net income $ 3,044 $ 2,581 $ 463
Horizontal Analysis: Horizontal Analysis:
Difference $7,815
Base year $45,738= 17.1%
17.1%
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Increase (Decrease) 2002 2001 Amount Percent
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HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 $45,738 $7,815Cost of merchandise sold 37,406 32,057 5,349 Gross profit $16,147 $13,681 $2,466 Selling and store operating exp. 10,280 8,655 1,625General and administrative exp. 935 835 100 Total operating expenses $11,215 $ 9,490 $1,725Income from operations $ 4,932 $ 4,191 $ 741Other income and expenses:
Interest and investment inc. 53 47 6 Interest expense (28) (21) (7)Income before income tax $ 4,957 $ 4,217 $ 740 Income taxes 1,913 1,636 277 Net income $ 3,044 $ 2,581 $ 463
Horizontal Analysis: Horizontal Analysis:
Difference $5,349
Base year $32,057= 16.7
17.1%16.7
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Increase (Decrease) 2002 2001 Amount Percent
14-13
HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 $45,738 $7,815Cost of merchandise sold 37,406 32,057 5,349 Gross profit $16,147 $13,681 $2,466 Selling and store operating exp. 10,280 8,655 1,625General and administrative exp. 935 835 100 Total operating expenses $11,215 $ 9,490 $1,725Income from operations $ 4,932 $ 4,191 $ 741Other income and expenses:
Interest and investment inc. 53 47 6 Interest expense (28) (21) (7)Income before income tax $ 4,957 $ 4,217 $ 740 Income taxes 1,913 1,636 277 Net income $ 3,044 $ 2,581 $ 463
Increase (Decrease) 2002 2001 Amount Percent
17.1%16.7
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18.018.812.018.217.7
12.833.317.516.917.9
14-14
HOME DEPOT INC. Comparative Retained Earnings Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Retained earnings, beginning $10,151 $ 7,941 $2,210Net income for the year 3,044 2,581 463Total $13,195 $10,522 $2,673Dividends:
On common stock 396 371 25Retained earnings, ending $12,799 $10,151 $2,648
Increase (Decrease) 2002 2001 Amount Percent
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Horizontal Analysis: Horizontal Analysis:
Difference $2,210
Base year $7,941= 27.8%
27.8%
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HOME DEPOT INC. Comparative Retained Earnings Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Retained earnings, beginning $10,151 $ 7,941 $2,210Net income for the year 3,044 2,581 463Total $13,195 $10,522 $2,673Dividends:
On common stock 396 371 25Retained earnings, ending $12,799 $10,151 $2,648
Increase (Decrease) 2002 2001 Amount Percent
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27.8%17.925.4
6.726.1
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Vertical AnalysisVertical AnalysisVertical AnalysisVertical Analysis
A percentage analysis can be used to show the relationship of each component to a total
within a single statement.
A percentage analysis can be used to show the relationship of each component to a total
within a single statement.
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The total, or 100% item, on the balance sheet is
“total assets.”
The total, or 100% item, on the balance sheet is
“total assets.”
Vertical AnalysisVertical AnalysisVertical AnalysisVertical Analysis
14-1814-18
AssetsCurrent assets $10,361 $ 7,777Property and equipment, net 15,375 13,068Other assets 58 540Total assets $26,394 $21,385
LiabilitiesCurrent liabilities $ 6,501 $ 4,385Long-term liabilities 1,811 1,996Total liabilities $ 8,312 $ 6,381 Stockholders’ EquityCommon stock/paid-in capital $ 5,529 $ 4,926RE & accumulated comp. loss 12,553 10,078Total stockholders’ equity $18,082 $15,004Total liabilities and SE $26,394 $21,385
Total assets is 100.0%
Total assets is 100.0%
100.0%
HOME DEPOTComparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent
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CondensedCondensed
14-19HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent
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CondensedCondensed
AssetsCurrent assets $10,361 $ 7,777Property and equipment, net 15,375 13,068Other assets 58 540Total assets $26,394 $21,385
LiabilitiesCurrent liabilities $ 6,501 $ 4,385Long-term liabilities 1,811 1,996Total liabilities $ 8,312 $ 6,381 Stockholders’ EquityCommon stock/paid-in capital $ 5,529 $ 4,926RE & accumulated comp. loss 12,553 10,078Total stockholders’ equity $18,082 $15,004Total liabilities and SE $26,394 $21,385
39.3%
100.0%
Vertical Analysis: Vertical Analysis:
Current assets $10,361
Total assets $26,394= 39.3%
14-20HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent
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CondensedCondensed
AssetsCurrent assets $10,361 $ 7,777Property and equipment, net 15,375 13,068Other assets 58 540Total assets $26,394 $21,385
LiabilitiesCurrent liabilities $ 6,501 $ 4,385Long-term liabilities 1,811 1,996Total liabilities $ 8,312 $ 6,381 Stockholders’ EquityCommon stock/paid-in capital $ 5,529 $ 4,926RE & accumulated comp. loss 12,553 10,078Total stockholders’ equity $18,082 $15,004Total liabilities and SE $26,394 $21,385
39.3%58.2
2.5100.0%
24.6% 6.9
31.5%
20.9% 47.6 68.5%100.0%
14-21HOME DEPOT
Comparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent
14-21
CondensedCondensed
39.3%58.2
2.5100.0%
24.6% 6.9
31.5%
20.9% 47.6 68.5%100.0%
100.0%
AssetsCurrent assets $10,361 $ 7,777Property and equipment, net 15,375 13,068Other assets 58 540Total assets $26,394 $21,385
LiabilitiesCurrent liabilities $ 6,501 $ 4,385Long-term liabilities 1,811 1,996Total liabilities $ 8,312 $ 6,381 Stockholders’ EquityCommon stock/paid-in capital $ 5,529 $ 4,926RE & accumulated comp. loss 12,553 10,078Total stockholders’ equity $18,082 $15,004Total liabilities and SE $26,394 $21,385
Total assets is 100.0%
Total assets is 100.0%
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Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent
CondensedCondensed
AssetsCurrent assets $10,361 $ 7,777Property and equipment, net 15,375 13,068Other assets 58 540Total assets $26,394 $21,385
LiabilitiesCurrent liabilities $ 6,501 $ 4,385Long-term liabilities 1,811 1,996Total liabilities $ 8,312 $ 6,381 Stockholders’ EquityCommon stock/paid-in capital $ 5,529 $ 4,926RE & accumulated comp. loss 12,553 10,078Total stockholders’ equity $18,082 $15,004Total liabilities and SE $26,394 $21,385
39.3%58.2
2.5100.0%
24.6% 6.9
31.5%
20.9% 47.6 68.5%100.0%
100.0%
36.4%
Vertical Analysis: Vertical Analysis:
Current assets $7,777
Total assets $21,385= 36.4%
HOME DEPOTComparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
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Feb. 3, 2002 Jan. 28, 2001 Amount Percent Amount Percent
CondensedCondensed
AssetsCurrent assets $10,361 $ 7,777Property and equipment, net 15,375 13,068Other assets 58 540Total assets $26,394 $21,385
LiabilitiesCurrent liabilities $ 6,501 $ 4,385Long-term liabilities 1,811 1,996Total liabilities $ 8,312 $ 6,381 Stockholders’ EquityCommon stock/paid-in capital $ 5,529 $ 4,926RE & accumulated comp. loss 12,553 10,078Total stockholders’ equity $18,082 $15,004Total liabilities and SE $26,394 $21,385
39.3%58.2
2.5100.0%
24.6% 6.9
31.5%
20.9% 47.6 68.5%100.0%
100.0%
36.4%61.1
2.5
HOME DEPOTComparative Balance Sheets (in Millions)February 3, 2002 and January 28, 2001
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20.5% 9.3 29.8%
23.0% 47.1 70.2%100.0%
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HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 100.0% $45,738 100.0%Cost of merchandise sold 37,406 32,057Gross profit $16,147 $13,681Selling and store operating exp. 10,280 8,655General and administrative exp. 935 835Total operating expenses $11,215 $ 9,490Income from operations $ 4,932 $ 4,191Other income and expenses:
Interest and investment inc. 53 47 Interest expense (28) (21) Income before income tax $ 4,957 $ 4,217Income taxes 1,913 1,636Net income $ 3,044 $ 2,581
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Amount Percent Amount Percent
2002 2001
Net sales is 100.0%
Net sales is 100.0%
Net sales is 100.0%
Net sales is 100.0%
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HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 100.0% $45,738 100.0%Cost of merchandise sold 37,406 32,057Gross profit $16,147 $13,681Selling and store operating exp. 10,280 8,655General and administrative exp. 935 835Total operating expenses $11,215 $ 9,490Income from operations $ 4,932 $ 4,191Other income and expenses:
Interest and investment inc. 53 47 Interest expense (28) (21) Income before income tax $ 4,957 $ 4,217Income taxes 1,913 1,636Net income $ 3,044 $ 2,581
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Amount Percent Amount Percent
2002 2001
Vertical Analysis: Vertical Analysis:
Cost of Merchandise Sold $32,057
Net Sales $45,738
= 70.1%
2001
70.1
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Sales (net) $53,553 100.0% $45,738 100.0%Cost of merchandise sold 37,406 32,057Gross profit $16,147 $13,681Selling and store operating exp. 10,280 8,655General and administrative exp. 935 835Total operating expenses $11,215 $ 9,490Income from operations $ 4,932 $ 4,191Other income and expenses:
Interest and investment inc. 53 47 Interest expense (28) (21) Income before income tax $ 4,957 $ 4,217Income taxes 1,913 1,636Net income $ 3,044 $ 2,581
Vertical Analysis: Vertical Analysis:
Cost of Merchandise Sold $37,406
Net Sales $53,553
= 69.9%
2002
HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
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Amount Percent Amount Percent
2002 2001
69.9 70.1
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HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 100.0% $45,738 100.0%Cost of merchandise sold 37,406 32,057Gross profit $16,147 $13,681Selling and store operating exp. 10,280 8,655General and administrative exp. 935 835Total operating expenses $11,215 $ 9,490Income from operations $ 4,932 $ 4,191Other income and expenses:
Interest and investment inc. 53 47 Interest expense (28) (21) Income before income tax $ 4,957 $ 4,217Income taxes 1,913 1,636Net income $ 3,044 $ 2,581
14-27
Amount Percent Amount Percent
2002 2001
69.9 29.9%
18.9% 1.8
20.7%9.2%
0.1 (0.1)
9.2% 3.6
5.6%
70.1
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HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 100.0% $45,738 100.0%Cost of merchandise sold 37,406 32,057Gross profit $16,147 $13,681Selling and store operating exp. 10,280 8,655General and administrative exp. 935 835Total operating expenses $11,215 $ 9,490Income from operations $ 4,932 $ 4,191Other income and expenses:
Interest and investment inc. 53 47 Interest expense (28) (21) Income before income tax $ 4,957 $ 4,217Income taxes 1,913 1,636Net income $ 3,044 $ 2,581
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Amount Percent Amount Percent
2002 2001
70.1 30.1%
19.2% 1.7 20.9%
9.2%
0.1 (0.0)
9.3% 3.6
5.7%
29.9%18.9%
1.8 20.7%
9.2%
0.1 (0.1)
9.2% 3.6
5.6%
69.9
14-29
HOME DEPOT INC. Income Statement (in millions)
For Periods Ended February 3, 2002 and January 28, 2001
Sales (net) $53,553 100.0% $45,738 100.0%Cost of merchandise sold 37,406 32,057Gross profit $16,147 $13,681Selling and store operating exp. 10,280 8,655General and administrative exp. 935 835Total operating expenses $11,215 $ 9,490Income from operations $ 4,932 $ 4,191Other income and expenses:
Interest and investment inc. 53 47 Interest expense (28) (21) Income before income tax $ 4,957 $ 4,217Income taxes 1,913 1,636Net income $ 3,044 $ 2,581
14-29
Amount Percent Amount Percent
2002 2001
70.1 69.9 30.1%
19.2% 1.7 20.9%
9.2%
0.1 (0.0)
9.3% 3.6
5.7%
29.9%18.9%
1.8 20.7%
9.2%
0.1 (0.1)
9.2% 3.6
5.6%
14-30
Calculate and interpret the rate earned on stockholders’ equity and the rate earned on total assets.
2Learning GoalLearning GoalLearning GoalLearning Goal
14-31
Rate Earned on Rate Earned on Stockholders’ EquityStockholders’ Equity
Rate Earned on Rate Earned on Stockholders’ EquityStockholders’ Equity
The stockholder desires a return on his or her investment. One
measure of this return is the rate earned on stockholders’ equity.
The stockholder desires a return on his or her investment. One
measure of this return is the rate earned on stockholders’ equity.
14-32
Rate Earned on Rate Earned on Stockholders’ EquityStockholders’ Equity
Rate Earned on Rate Earned on Stockholders’ EquityStockholders’ Equity
Net income
Average stockholders’ equity
$3,044,000,000
($15,004,000,000 + $18,082,000,000)/2
= 18.4%
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Rate Earned on Rate Earned on Stockholders’ EquityStockholders’ Equity
Rate Earned on Rate Earned on Stockholders’ EquityStockholders’ Equity
Net income
Average stockholders’ equity
$1,023,000,000
($5,494,000,000 + $6,674,000,000)/2
= 16.8%
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Another ratio to measure the relative profitability of a firm is
rate earned on total assets.
Another ratio to measure the relative profitability of a firm is
rate earned on total assets.
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
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Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
Net income
Average total assets
$3,044,000,000
($21,385,000,000 + $26,394,000,000)/2
= 12.8%
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Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
Net income
Average total assets
$1,023,000,000
($11,358,000,000 + $13,736,000,000)/2
= 8.1%
14-37
Comprehensive Comprehensive Profitability AnalysisProfitability Analysis
Comprehensive Comprehensive Profitability AnalysisProfitability Analysis
The exhibit on the next slide diagrams the comprehensive ratio
relationship that can be used to analyze the rate earned on
stockholders’ equity.
The exhibit on the next slide diagrams the comprehensive ratio
relationship that can be used to analyze the rate earned on
stockholders’ equity.
14-38
14-39
Comprehensive Comprehensive Profitability AnalysisProfitability Analysis
Comprehensive Comprehensive Profitability AnalysisProfitability Analysis
The rate earned on stockholders’ equity is normally higher
than the rate earned on total assets when
a company uses debt, or leverage.
The rate earned on stockholders’ equity is normally higher
than the rate earned on total assets when
a company uses debt, or leverage.
14-40
Comprehensive Comprehensive Profitability AnalysisProfitability Analysis
Comprehensive Comprehensive Profitability AnalysisProfitability Analysis
Leverage FormulaLeverage Formula
Rate earned on stockholders’ equity =
Rate earned on total assets × leverage
Net incomeAverage Stockholders’ Equity
=
Net incomeAverage Total Assets
×Average Total Assets
Average Stockholders’ Equity
14-41
Analyze the rate earned on total assets by evaluating the profit margin and the asset efficiency of a business.
3Learning GoalLearning GoalLearning GoalLearning Goal
14-42
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
Profit Margin × Asset Turnover
Net Income
Net Sales
Net Sales
Average Total Assets×
14-43
14-44
Margin AnalysisMargin AnalysisMargin AnalysisMargin Analysis
Why is the profit margin of Home Depot over one
percentage point stronger than Lowe’s?
Why is the profit margin of Home Depot over one
percentage point stronger than Lowe’s?
14-45
Home Depot and Lowe’s Condensed Common-Size Income Statement For the Year Ended February 3 and February 1, 2002
Sales (net) 100.0% 100.0%Cost of merchandise sold 69.9 71.2Gross profit 30.1% 28.8%
Selling expenses 19.2% 18.3%Administrative expenses 1.7 2.4
Total operating expenses 20.9% 20.7%Income from operations 9.2% 8.1%Other income 0.1 0.0Interest expense (0.0) (0.8) Income before income taxes 9.3% 7.3%Income tax expense 3.6 2.7Net income 5.7% 4.6%
Home Depot Lowe’s
Home Depot Home Depot has a higher has a higher gross profit gross profit
percentage than percentage than Lowe’s.Lowe’s.
Home Depot Home Depot has a higher has a higher gross profit gross profit
percentage than percentage than Lowe’s.Lowe’s.
Although Home Depot pays Although Home Depot pays more income taxes more income taxes
(percentage-wise), the (percentage-wise), the overall profit percentage is overall profit percentage is
higher than Lowe’s.higher than Lowe’s.
Although Home Depot pays Although Home Depot pays more income taxes more income taxes
(percentage-wise), the (percentage-wise), the overall profit percentage is overall profit percentage is
higher than Lowe’s.higher than Lowe’s.
Home Depot’s Home Depot’s higher selling higher selling expenses are expenses are
somewhat somewhat offset by lower offset by lower administrative administrative
expenses.expenses.
Home Depot’s Home Depot’s higher selling higher selling expenses are expenses are
somewhat somewhat offset by lower offset by lower administrative administrative
expenses.expenses.
14-46
Asset EfficiencyAsset EfficiencyAsset EfficiencyAsset Efficiency
14-47
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Net sales $53,553 $22,111Accounts receivable (net):
Beginning of year $ 835 $ 161End of year 820 166Total $ 1,755 $ 327
Average $ 878 $ 164
Home Depot Lowe’s
Accounts Receivable AnalysisAccounts Receivable Analysis
61.0 134.8 Net sales on account
Average accounts receivable
Net sales on account
Average accounts receivable
(all dollar amounts in millions)
14-48
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Net sales $53,553 $22,111Accounts receivable (net):
Beginning of year $ 835 $ 161End of year 820 166Total $ 1,755 $ 327
Average $ 878 $ 164
Home Depot Lowe’s
Accounts Receivable AnalysisAccounts Receivable Analysis
Net sales on account
Average accounts receivable
Net sales on account
Average accounts receivable61.0 134.8
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
(all amounts except ratios in millions)
14-49
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Accounts receivable (net)end of year $920 $166
Net sales on account $53,553 $22,111Average daily sales on
on account (net sales ÷ 365) $147 $61
Accounts Receivable AnalysisAccounts Receivable Analysis
Accounts receivable, end of year
Average daily sales on account
Accounts receivable, end of year
Average daily sales on account
Home Depot Lowe’s
6.3 2.7
(all dollar amounts in millions)
14-50
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Accounts receivable (net)end of year $920 $166
Net sales on account $53,553 $22,111Average daily sales on
on account (net sales ÷ 365) $147 $61
Accounts Receivable AnalysisAccounts Receivable Analysis
Accounts receivable, end of year
Average daily sales on account
Accounts receivable, end of year
Average daily sales on account
(all amounts except ratios in millions)
6.3 2.7
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
Home Depot Lowe’s
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Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
Cost of merchandise sold $37,406 $15,743Inventories:
Beginning of year $ 6,556 $ 3,285End of year 6,725 3,611Total $13,281 $ 6,896
Average $ 6,641 $ 3,448
Inventory AnalysisInventory Analysis
Cost of merchandise sold
Average inventory
Cost of merchandise sold
Average inventory
Home Depot Lowe’s
5.6 4.6
(all dollar amounts in millions)
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Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
Cost of merchandise sold $37,406 $15,743Inventories:
Beginning of year $ 6,556 $ 3,285End of year 6,725 3,611Total $13,281 $ 6,896
Average $ 6,641 $ 3,448
Inventory AnalysisInventory Analysis
Cost of merchandise sold
Average inventory
Cost of merchandise sold
Average inventory
Home Depot Lowe’s
5.6 4.6
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
(all dollar amounts in millions)
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Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory
Inventories, end of year $6,725 $3,611Cost of merchandise sold $37,406 $15,743Average daily cost of
merchandise sold (COGS ÷ 365) $102 $43
Inventory AnalysisInventory Analysis
Inventories, end of year
Average daily cost of goods sold
Inventories, end of year
Average daily cost of goods sold
Home Depot Lowe’s
(all dollar amounts in millions)
65.9 84.0
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Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory
Inventories, end of year $6,725 $3,611Cost of merchandise sold $37,406 $15,743Average daily cost of
merchandise sold (COGS ÷ 365) $102 $43
Inventory AnalysisInventory Analysis
Inventories, end of year
Average daily cost of goods sold
Inventories, end of year
Average daily cost of goods sold
Home Depot Lowe’s
65.9 84.0
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
(all dollar amounts in millions)
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Fixed Asset TurnoverFixed Asset TurnoverFixed Asset TurnoverFixed Asset Turnover
Net sales $53,553 $22,111Fixed assets (net):
Beginning of year $13,068 $ 7,035 End of year 15,375 8,663 Total $28,443 $15,688
Average $14,222 $ 7,844
Fixed Asset AnalysisFixed Asset Analysis
Net sales
Average net fixed assets
Net sales
Average net fixed assets
Home Depot Lowe’s
(all dollar amounts in millions)
3.77 2.82
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Fixed Asset TurnoverFixed Asset TurnoverFixed Asset TurnoverFixed Asset Turnover
Net sales $53,553 $22,111Fixed assets (net):
Beginning of year $13,068 $ 7,035 End of year 15,375 8,663 Total $28,443 $15,688
Average $14,222 $ 7,844
Fixed Asset AnalysisFixed Asset Analysis
Net sales
Average net fixed assets
Net sales
Average net fixed assets
Home Depot Lowe’s
(all dollar amounts in millions)
3.77 2.82
Use: To measure how many dollars of sales are being made from investments in stores and fixtures.
Use: To measure how many dollars of sales are being made from investments in stores and fixtures.
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Determine and interpret leverage.4
Learning GoalLearning GoalLearning GoalLearning Goal
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LeverageLeverage
× LeverageRate earned on total assets
= Rate earned on stockholders’ equity
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LeverageLeverage
20%
10%
0%
Rate earned on total assets
Rate earned on stockholders’ equity
12.8%Leverage
Home Depot
8.1%
16.7%
Leverage
Lowe’s
18.4%
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(All dollar amounts in millions)
Current Balance Sheet RelationshipsCurrent Balance Sheet Relationships
Current assets $550,000 $533,000Current liabilities 210,000 243,000Working capital $340,000 $290,000
Current ratioCurrent ratio 2.6 2.6 2.2 2.2
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
Use: To indicate the ability to meet currently maturing obligations.
Lincoln Co. Jefferson Corp.
Divide current
assets by current
liabilities
Divide current
assets by current
liabilities
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Quick RatioQuick RatioQuick RatioQuick Ratio
Use: To indicate instant debt-paying ability.Use: To indicate instant debt-paying ability.
Home Depot Lowe’sQuick assets:
Cash $ 2,477 $ 799Temporary investments 69 54Accounts receivable (net) 920 166Total quick assets $ 3,466 $ 1,019
Current liabilities ÷6,501 ÷3,017Quick ratio 0.53 0.34
Current Balance Sheet RelationshipsCurrent Balance Sheet Relationships
(All dollar amounts in millions)
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Use: To indicate the margin of safety to long-term creditors.
Use: To indicate the margin of safety to long-term creditors.
Home Depot Lowe’s
Fixed assets (net) $15,375 $ 8,653Long-term liabilities ÷ 1,811 ÷ 3,734Ratio of fixed assets to
long-term liabilities 8.5 2.3
Ratio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term Liabilities
Long-Term Balance Sheet RelationshipsLong-Term Balance Sheet Relationships
(All dollar amounts in millions)
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Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity
Use: To indicate the margin of safety to creditors.Use: To indicate the margin of safety to creditors.
Total liabilities $ 8,312 $ 7,062Total stockholders’ equity ÷18,082 ÷ 6,674Ratio of liabilities to
stockholders’ equity 0.46 1.06
Long-Term Balance Sheet RelationshipsLong-Term Balance Sheet Relationships
Home Depot Lowe’s
(All dollar amounts in millions)
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Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned
Net income $3,044 $1,023 Add income tax 1,913 601 Add interest expense 28 174Amount available for interest $4,985 $1,798Number of times interest charges earned 178.0 10.3
Long-Term Balance Sheet RelationshipsLong-Term Balance Sheet Relationships
(All dollar amounts in millions)
Home Depot Lowe’s
Use: To measure the relative risk of debtholders.Use: To measure the relative risk of debtholders.
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5Learning GoalLearning GoalLearning GoalLearning Goal
Calculate and interpret shareholder ratios: earnings per share, price-earnings ratio, and dividend yield.
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Net income $3,044 $1,023Shares of common stock ÷2,335 ÷ 769Earnings per share on common
stock $1.30 $1.33
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
Earning per ShareEarning per Share
Home Depot Lowe’s
(All amounts except EPS in millions)
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Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
Market price per share of common $50.00 $46.15Earnings per share on common ÷ 1.30 ÷ 1.33Price-earnings ratio on common
stock 38 35
Price-Earnings RatioPrice-Earnings Ratio
Home Depot Lowe’s
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Use: To indicate the rate of return to common stockholders in terms of dividends.
Use: To indicate the rate of return to common stockholders in terms of dividends.
Dividends per share of common $ 0.20 $ 0.08Market price per share of common ÷ 50.00 ÷ 46.15Dividend yield on common stock 0.4% 0.2%
Dividend YieldDividend Yield
Home Depot Lowe’s
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Summarize the uses and limitations of analytical measures.
6Learning GoalLearning GoalLearning GoalLearning Goal
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Use Exhibit 9 of this chapter as a handy
reference tool.
Use Exhibit 9 of this chapter as a handy
reference tool.
Keep in mind that these measures are not a
substitute for sound judgment.
Keep in mind that these measures are not a
substitute for sound judgment.
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Describe the contents of corporate annual reports.7
Learning GoalLearning GoalLearning GoalLearning Goal
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Financial HighlightsFinancial HighlightsFinancial HighlightsFinancial Highlights
The financial highlights section summarizes the operating results
for the last year or two. It’s usually on the first few pages of
the annual report.
The financial highlights section summarizes the operating results
for the last year or two. It’s usually on the first few pages of
the annual report.
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President’s Letter to President’s Letter to StockholdersStockholders
President’s Letter to President’s Letter to StockholdersStockholders
This letter usually
discusses reasons for
actions taken by the company during the year.
This letter usually
discusses reasons for
actions taken by the company during the year.
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Management Discussion Management Discussion and Analysis (MDA)and Analysis (MDA)
Management Discussion Management Discussion and Analysis (MDA)and Analysis (MDA)
A required disclosure in the annual report
Includes an analysis of the results of operations
Discusses management’s opinion about future performance
An analysis of the company’s financial condition
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Independent Auditor’s ReportIndependent Auditor’s ReportIndependent Auditor’s ReportIndependent Auditor’s Report
Before issuing annual statements, all publicly held corporations are
required to have an independent audit of
their financial statements.
Before issuing annual statements, all publicly held corporations are
required to have an independent audit of
their financial statements.
The CPAs who conduct the audit
render an opinion on the fairness of the
statement.
The CPAs who conduct the audit
render an opinion on the fairness of the
statement.
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Historical SummaryHistorical SummaryHistorical SummaryHistorical Summary
This summary reports selected
financial and operating data of past periods, usually for
five or ten years.
This summary reports selected
financial and operating data of past periods, usually for
five or ten years.
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The EndThe End
Chapter 14Chapter 14
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