Financial Ratios Worksheet - Student Version - 2018 r PDF

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With professor Cheryl Larabee. I received a 100% on this. Mandatory Assignment...

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Equivalent Terms (see also Table 14.2 in the textbook p. 267) Revenue = Sales Profit = Earnings or Income Expense = Cost

RATIOS LIQUIDITY RATIOS: Liquidity ratios measure the speed with which a company can turn its assets into cash to meet short term debt obligations. The higher the ratio the “more liquid” a company is and the more easily they can meet their short term debt obligations. But beware, higher is not always better. Too high a ratio may mean that a business is not using its assets efficiently; too many assets are either idle or generating an insufficient return. RATIO Current Ratio

FORMULA Current Assets/Current Liabilities

RATIO Quick Ratio (“Acid Test”)

FORMULA (Current Assets-Inventory)/Current Liabilities

PROFITABILITY RATIOS: Profitability ratios associate the amount of income earned with the resources used to generate it (e.g. assets, sales, equity). RATIO Gross Margin Return on Assets (ROA)

FORMULA Gross Profit/Sales Net Income/Total Assets

RATIO Profit Margin Return on Equity (ROE)

FORMULA Net Income/Sales Net Income/Owner’s Equity

Both Return on Equity and Return on Assets are sometimes referred to as Return on Investment (ROI). I will not use ROI.

DEBT/LEVERAGE RATIOS: Provides information on how much debt an organization has relative to other sources of capital, such as equity and income. RATIO Debt to Total Assets Times Interest Earned (TIE)

FORMULA Total Liabilities/Total Assets Operating Income/Interest Expense

RATIO Debt to Equity

FORMULA Total Non-Current Liabilities/Equity

Debt to total Assets and Debt to Equity measure QUANTITY of debt or leverage. A Debt to Total Assets ratio greater than .5 or 50% means the majority of your assets are financed through debt. A Debt to Equity ratio greater than 1 means that the majority of your long term financing comes via debt – as an example if you have a Debt to Equity Ratio of 1.2 then you have $1.20 of long term debt for every $1.00 of equity. Times Interest Earned starts to get at QUALITY of leverage, or how well a company employs leverage.

ASSET UTILIZATION (Activity) RATIOS: Measures how well a firm uses its assets to generate each $1 of sales or cash. Answers the following questions: 1) How quickly am I converting receivables to cash, 2) How quickly am I converting inventory to sales, and 3) How productive am I with my assets in generating sales. RATIO FORMULA RATIO FORMULA Receivables Turnover Sales/Accounts Receivable Inventory Turnover Sales/Total Inventory Total Asset Turnover Sales/Total Assets

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SHARE DATA Measures value based on shares of stock. RATIO Earnings per Share (EPS) Market Capitalization

FORMULA Net Income / # of Shares Outstanding # of shares outstanding * share price

RATIO Price Earnings Ratio (P/E ratio)

FORMULA Share Price / EPS

The higher the EPS the greater the value or wealth per unit of ownership (i.e. share). The P/E ratio is used as a loose gauge on whether a firm is “undervalued” or “overvalued” – relative to the industry and/or the market as a whole. Historically the PE ratio of the S&P 500 has been around 16:1 – so an 8:1 ratio for a firm might be a sign that a firm is undervalued – a 30:1 might be a sign that a firm is overvalued. Market Capitalization or “market cap” gives an aggregate sense of the current value placed on a company by the market. Differs from “book value” which is a value derived from the balance sheet (we won’t go into this).

LEVERAGE – QUANTITY VS. QUALITY Debt to Equity and Debt to Total Assets measure how leveraged (quantity) an organization is – Time Interest Earned (TIE) starts to get at how well an organization uses leverage (quality). As an example the Debt to Total Asset ratio of Starbucks and McDonalds is similar 42.3% for Starbucks and 54.23% for McDonalds, meaning that for both organizations about half of their assets are financed by debt.

BUT….. Starbuck’s TIE is 43.4 (in other words every dollar in interest expense is generating $43.40 in operating income) and McDonalds is 16.57 (in other words every dollar in interest expense is generating only $16.57 in operating income). Starbucks is using their leverage much more effectively. What accounts for this? It could be one or a combination of the below: ● Make up of debt (interest bearing vs. noninterest bearing or short term/current vs. long term). ● Cost of Capital – maybe Starbuck’s pays a lower rate of interest on debts. ● Better investment of capital (higher return).

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APPLE INCOME STATEMENT

52 Weeks Ending 2018-09-29

A Revenue B Cost of Goods Sold C Gross Profit Selling/General/Admin. Expenses (SG&A) Research & Development D Depreciation Unusual Expense (Income) Other Operating Expenses, Total Total Operating Expense E Operating Income Interest Expense/Income Gain (Loss) on Sale of Assets Other, Net Income Before Tax Income Tax Income After Tax Accounting Change Discontinued Operations Extraordinary Item F Net Income

265,595 163,756 101,839 16,705 14,236

30,941 70,898

2,005 72,903 13,372 59,531

59,531

52 Weeks Ending 2017-09-30

52 weeks Ending 2016-09-24

229,234 215,639 141,048 131,376 88,186 84,263 15,261 14,194 11,581 10,045 26,842 24,239 61,344 60,024 2,745 1,348 64,089 61,372 15,738 15,685 48,351 45,687 48,351 45,687.00

See Table 14.3 in the book for income statement terms and definitions (p. 267). A B

Total dollar amount of sales The cost of producing the goods and services. Sometimes referred to as the “cost of sales” or “cost of revenue”.

D E

Spreading costs of a long lived asset over it’s expected useful life. Income leftover after all operating expenses have been deducted. Sometimes referred to as EBIT (Earnings Before Interest and Taxes).

C

Income available after paying all expenses of production. 1st measure of efficiency.

F

Income left after taxes.

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APPLE BALANCE SHEET

*In millions of dollars

A

Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable Total Inventory Other Current Assets, Total

Total Current Assets Property/Plant/Equipment, Total - Net Goodwill, Net Intangibles, Net Long Term Investments Other Long Term Assets, Total

Total Assets LIABILITIES & STOCKHOLDER EQUITY

E F

Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Other Current liabilities, Total

Total Current Liabilities Long Term Debt Deferred Income Tax Other Liabilities, Total

Total Liabilities

H I

As of 2017-09-30

As of 2016-09-24

25,913 40,388 66,301 23,186 3,956 37,896 131,339 41,304

20,289 53,892 74,181 17,874 4,855 13,936 128,645 33,783 5,717 2,298 194,714 10,162 375,319

20,484 46,671 67,155 15,754 2,132 21,828 106,869 27,010 5,414 3,206 170,430 8,757 321,686

49,049 25,744 18,473 7,548 100,814 97,207 2,836 40,415 241,272 35,867 98,330 (150) 134,047 375,319

37,294 22,027 11,605 8,080 79,006 75,427 2,930 36,074 193,437 31,251 96,364 634 128,249 321,686

ASSETS

B C

G

As of 2018-09-29

Redeemable Preferred Stock, Total Preferred Stock - Non Redeemable, Net Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock - Common Other Equity, Total

Total Equity Total Liabilities & Shareholders Equity

170,799 22,283 365,725 55,888

60,978 116,866 93,735 2,797 45,180 258,578

40,201 70,400 (3,454) 107,147 365,725

See table 14.5 in the book for balance sheet terms and definitions (pp. 271). A B C D

Economic resources of the company. Cash due from customers in payment for goods received. Finished goods, WIP, or raw materials used in producing goods. Assets that are cash or are expected to be turned into cash in the next 12 months.

E Sources of financing for assets. F Money owed to suppliers for goods and services. G All short term debt expected to be paid in the next 12 months. H The total amount of earnings a company has made during its life and not I

paid out to its stockholders in dividends (e.g. “retained” in the company). Represents the owner’s total investment in the company.

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Financial Statement Geography and Ratio Analysis A) GEOGRAPHY: How much Cash and Short Term Investments did Apple have on hand on 9/29/2018? $___66,301________________ How much Income Tax did Apple pay in 2018?. $_13,372_______________ What was Apple’s Total Equity in 2017?. $___134037_____________ In 2018? __107,147_________________ How much did they spend on R&D in 2018? $_14,236___________________ Formula for following questions = (# 2018 - #2017) / #2017 What % did Revenue increase by between 2017 & 2018 ___15.8________% (revenue 2018-revenue 2017)/revenue 2017 What % did SG&A increase by between 2017 & 2018? ______1_________% What % did Net Profits increase by between 2017 & 2018? _________23________% What % did Cash & Short Term Investments increase by between 2017 & 2018? _____-1____________% What % did Long Term Investments increase by between 2017 & 2018? _____-1__________%

B) RATIO ANALYSIS: Use the equations found on pages 1 & 2. 3 Easy Steps 1. Find the ratio and identify the parts to the equation. 2. Look up the parts. 3. Do the math. What was Apple’s current ratio in the 2018 balance sheet? ______1.1______:1 What was Apple’s current ratio in the 2017 balance sheet? _____1.3_______:1 In which balance sheet were they more liquid? ___2017____ What was Apple’s profit margin in 2018? ____22_______% What was Apple’s profit margin in 2017? _____21________% In which year were they more profitable? ____2018_________ What was Apple’s debt to equity ratio (you need to subtract current liabilities from total liabilities to get long term debt) from the 2018 balance sheet? __________1.3_____:1 What was Apple’s debt to equity ratio (you need to subtract current liabilities from total liabilities to get long term debt) from the 2017 balance sheet? _____1__________:1 In which balance sheet were they more leveraged? ________2018_______

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Calculate the market cap of Apple. On 1/22/2019 by taking the closing stock price of $154.15 (Apple Stock, NASDAQ AAPL ticker symbol) and multiplying that share price by the number of shares outstanding at 1/22/2019 (4.7 BILLION) to obtain the market cap of Apple. Your answer:__$

724,505,000,000

on 1/22/19.

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