Wheelen/Hunger

1
Chapter 14

• Suggestions for Case Analysis
• PowerPoint Slides
• Anthony F. Chelte
• Western New England College

2
Case Analysis

• Research
• Go beyond information in the case
• Research environmental setting
• Check decision date of case
• Use information services
• COMPUSTAT, Compact Disclosure, CD/International
• www.hoovers.com
• www.sec.gov

3
Case Analysis

• Research
• Annual reports
• 10K form
• Income statements
• Balance sheets
• Cash flow statements
• Economic conditions
• Industry information

4
Case Analysis

• Resources for Case Library Research
• Company Information
• Moodys Manuals on Investment
• Standard Poors Register of Corporations,
  Directors, and Executives
• Value Lines Investment Survey
• Findex The Directory of Market Research Reports,
  Studies and Surveys

5
Case Analysis

• Resources for Case Library Research
• Economic Information
• Business Cycle Development
• U.S. Census Bureau
• Current Business Reports
• Economic Indicators
• Long-Term Economic Growth
• Monthly Labor Review
• U.S. Industrial Outlook
• Overseas Business Reports

6
Case Analysis

• Resources for Case Library Research
• Industry Information
• Business Week
• Fortune
• Industry Survey
• Industry Week
• Forbes
• Inc.

7
Case Analysis

• Resources for Case Library Research
• Directory and Index Information
• Business Periodical Index
• Directory of National Trade Associations
• Encyclopedia of Associations
• Funk and Scotts Index of Corporations and
  Industries
• Thomass Register of American Manufacturers
• Wall Street Journal Index

8
Case Analysis

• Resources for Case Library Research
• Ratio Analysis Information
• Almanac of Business and Industrial Financial
  Ratios
• Annual Statement Studies
• Duns Review
• Industry Norms and Key Business Ratios

9
Case Analysis

• Resources for Case Library Research
• Online Information
• www.hoovers.com
• www.sec.gov
• www.pathfinder.com
• www.dbisna.com/dnb/dnbhome.htm
• www.fuld.com
• www.economist.com
• www.w100.com
• www.bloomberg.com

10
Case Analysis

• Financial Analysis
• Ratio analysis
• Liquidity ratios
• Profitability ratios
• Activity ratios
• Leverage ratios

11
Financial Ratio Analysis Liquidity
How Formula Expressed Meaning
1. Liquidity Ratios Current ratio Quick (acid
test) ratio Inventory to net working
capital Cash ratio
Current assets Current liabilities
Decimal Decimal Decimal Decimal
A short-term indicator of the companys ability
to pay its short-term liabilities from short-term
assets how much of current assets are available
to cover each dollar of current
liabilities. Measures the companys ability to
pay off its short-term obligations from current
assets, excluding inventories. A measure of
inventory balance measures the extent to which
the cushion of excess current assets over current
liabilities may be threatened by unfavorable
changes in inventory. Measures the extent to
which the companys capital is in cash or cash
equivalents shows how much of the current
obligations can be paid from cash or near-cash
assets.
Current assets Inventory Current
liabilities
Inventory Current assets
Current liabilities
Cash Cash equivalents Current
liabilities
12
Financial Ratio Analysis Profitability
How Formula Expressed Meaning
2. Profitability Ratios Net profit margin Gross
profit margin Return on investment
(ROI) Return on equity (ROE) Earnings per
share (EPS)
Net profit after taxes Net sales
Percentage Percentage Percentage Percentag
e Dollars per share
Shows how much after-tax profits are generated by
each dollar of sales. Indicates the total margin
available to cover other expenses beyond cost of
goods sold, and still yield a profit. Measures
the rate of return on the total assets utilized
in the company a measure of managements
efficiency, it shows the return on all the assets
under its control regardless of source of
financing. Measures the rate of return on the
book value of shareholders total investment in
the company. Shows the after-tax earnings
generated for each share of common stock.
Sales Cost of goods sold Net sales
Net profit after taxes Total assets
Net profit after taxes Shareholders
equity
Net profit after taxes preferred stock
dividends Average number ofcommon
shares
13
Financial Ratio Analysis Activity
How Formula Expressed Meaning
Net sales Inventory
3. Activity Ratios Inventory turnover Days of
inventory Net working capital turnover Asset
turnover Fixed asset turnover Average
collection period Accounts receivable
turnover Accounts payable period Days of cash
Decimal Days Decimal Decimal Decimal Days
Decimal Days Days
Measures the number of times that average
inventory of finished goods was turned over or
sold during a period of time, usually a
year. Measures the number of one days worth of
inventory that a company has on hand at any given
time. Measures how effectively the net working
capital is used to generate sales. Measures the
utilization of all the companys assets measures
how many sales are generated by each dollar of
assets. Measures the utilization of the companys
fixed assets (i.e., plant and equipment)
measures how many sales are generated by each
dollar of fixed assets. Indicates the average
length of time in days that a company must wait
to collect a sale after making it may be
compared to the credit terms offered by the
company to its customers. Indicates the number of
times that accounts receivable are cycled during
the period (usually a year). Indicates the
average length of time in days that the company
takes to pay its credit purchases. Indicates the
number of days of cash on hand, at present sales
levels.
Inventory Cost of goods sold 365
Net sales Net working capital
Sales Total assets
Sales Fixed assets
Accounts receivable Sales for year 365
Annual credit sales Accounts receivable
Accounts payable Purchases for year
365
Cash Net sales for year 365
14
Financial Ratio Analysis Leverage
How Formula Expressed Meaning
4. Leverage Ratios Debt to asset ratio Debt to
equity ratio Long-term debt to capital
structure Times interest earned Coverage of
fixed charges Current liabilities to equity
Total debt Total assets
Percentage Percentage Percentage Decimal
Decimal Percentage
Measures the extent to which borrowed funds have
been used to finance the companys
assets. Measures the funds provided by creditors
versus the funds provided by owners. Measures
the long-term component of capital
structure. Indicates the ability of the company
to meet its annual interest costs. A measure of
the companys ability to meet all of its
fixed-charge obligations. Measures the
short-term financing portion versus that provided
by owners.
Total debt Shareholders equity
Long-term debt Shareholders equity
Profit before taxes Interest charges
Interest charges
Profit before taxes Interest charges Lease
charges Interest charges Lease
obligations
Current liabilities Shareholders equity
15
Financial Ratio Analysis Other
How Formula Expressed Meaning
5. Other Ratios Price/earning ratio Dividend
payout ratio Dividend yield on common stock
Market price per share Earnings per
share
Decimal Percentage Percentage
Shows the current markets evaluation of a stock,
based on its earnings shows how much the
investor is willing to pay for each dollar of
earnings. Indicates the percentage of profit
that is paid out as dividends. Indicates the
dividend rate of return to common shareholders at
the current market price.
Annual dividends per share Annual
earnings per share
Annual dividends per share Current
market price per share
Note  In using ratios for analysis, calculate
ratios for the corporation and compare them to
the average and quartile ratios for the
particular industry. Refer to Standard and Poors
and Robert Morris Associates for average industry
data. Special thanks to Dr. Moustafa H.
Abdelsamad, Dean, Business School, Texas AM
UniversityCorpus Christi, Corpus Christi, Texas,
for his definitions of these ratios.
16
Case Analysis

• Analyzing Financial Statements
• Scrutinize historical statements
• Compare historical statements over time
• Calculate changes in categories from year to year
• Determine the change as a percentage
• Adjust for inflation

17
Case Analysis

• Common Size Statements
• Income statements and balance sheets in which the
  dollar figures have been converted into
  percentages.

18
Altmans Bankruptcy Formula
Z 1.2x1 1.4x2 3.3x3 0.6x4
1.0x5 where x1 Working capital divided by
total assets. x2 Retained earnings divided by
total assets. x3 Earnings before interest and
taxes divided by total assets. x4 Market
value of equity divided by total liabilities. x
5 Sales divided by total assets. Z Overall
index of corporate fiscal health.
19
Index of Sustainable Growth
g p (1 D) (1 L) / T P (1 D)
(1L) where P Net profit before taxes/net
sales x 100 D Target dividends/profit after
tax L Total liabilities/net worth T Total
assets/net sales x 100
20
Case Analysis

• Operating cash flow
• Amount of money generated by a company before the
  cost of financing and taxes.
• Net income depletion, amortization, interest
  expense, and income tax expense

21
Case Analysis

• Economic Measures
• Constant dollars
• Dollars adjusted for inflation to make them
  comparable over various years.
• CPI
• Prime interest rate
• Rate of interest banks charge on their lowest
  risk loans.
• Gross Domestic Product (GDP)
• Total output of goods and services within a
  countrys borders.

22
Strategic Audit Worksheet Part 1
23
Strategic Audit Worksheet Part 2
24
Convert the following two years of income
statements from the Maytag Corporation into
common-size statements. The dollar figures are in
thousands. What does converting to a common size
reveal? 1992 1991 Net sales 3,041,223 2,97
0,626 Cost of sales 2,339,406 2,254,221
Gross profits 701,817 716,405 Sel
ling, general, and admin. 528,250 524,898
expenses Reorganization expenses 95,000
Operating
income 78,567 191,507 Interest
expense (75,004) (75,159) Othernet 3,983 7,069
Income before taxes and
  accounting changes 7,546 123,417 Income
taxes (15,900) (44,400) Income
before   accounting changes (8,354) 79,017 Effec
ts of accounting changes for   post-retirement
benefits (307,000) Net
income (loss) (315,354) 79,017

25
Case Analysis

• Case Analysis Method
• Read case
• Read case with strategic audit
• Do outside research
• Begin SWOT analysis
• EFAS
• IFAS

26
Case Analysis

• Case Analysis Method
• Write Strategic Audit
• Parts I IV
• Write Strategic Audit
• Part V
• SFAS

27
Case Analysis

• Write Strategic Audit
• Part VI
• Alternatives
• Recommendations
• Write Strategic Audit
• Part VII
• Implementation
• Write Strategic Audit
• Part VIII
• Evaluation Control
• Proof Fine-Tune Audit
• Final Draft