ANALYZING A COMPANY

1
ANALYZING A COMPANY

• The Financial Statements

2
SIZE

• TOTAL ASSETS
• TOTAL SALES/REVENUES
• NET INCOME

3
LIQUIDITY

• WORKING CAPITAL
• CURRENT RATIO
• QUICK RATIO

4
WORKING CAPITAL

• Current assets - current liabilities
• Larger the better
• Can only be a positive number
• C/A 40,000,000
• C/L -20,000,000
• W/C 20,000,000

5
CURRENT RATIO

• CURRENT ASSETS
• CURRENT LIABILITIES
• LESS THAN 11 IS BAD
• MORE THAN 21 IS GOOD
• 40,000,000 ?
• 20,000,000

6
QUICK RATIO

• SAME AS CURRENT RATIO BUT EXCLUDES INVENTORY
  FROM CURRENT ASSETS

7
LEVERAGE

• HOW MUCH HAS COMPANY BORROWED RELATIVE TO ITS
  EQUITY?

8
LEVERAGE RATIOS

• DEBT-TO-EQUITY RATIO
• DEBT-TO-ASSETS RATIO

9
DEBT-TO-EQUITY RATIO

• TOTAL LIABILITIES/EQUITY
• 1.0 TO 2.0 NORMAL
• gt2.0 NOT SAFE

10
DEBT-TO-ASSETS RATIO

• TOTAL LIABILITIES/ASSETS
• 50 TO 66 NORMAL
• gt66 NOT SAFE

11
WHY BORROW AT ALL?!

• To Increase Profits!!

12
NO LEVERAGE

• Assume Assets 10,000,000
• Assume 10 Return on Assets (1,000,000)
• Assume Liabilities 0
• Return on equity ??
• 1,000,000 10
• 10,000,000

13
BORROW HALF OF CAPITAL

• Assume Assets 10,000,000
• Assume 10 Return on Assets (1,000,000)
• Assume Liabilities _at_ 7 5,000,000
• Assume Equity 5,000,000

14
BORROW HALF OF CAPITAL

• Interest expense 350,000
• Income before interest 1,000,000
• Less Interest expense 350,000
• Net Income 650,000
• Return on equity ??
• 650,000 13
• 5,000,000

15
BORROW 80 OF CAPITAL

• Assume Assets 10,000,000
• Assume 10 Return on Assets (1,000,000)
• Assume Liabilities _at_ 7 8,000,000
• Assume Equity 2,000,000

16
BORROW 80 OF CAPITAL

• Interest expense 560,000
• Income before interest 1,000,000
• Less Interest expense 560,000
• Net Income 440,000
• Return on equity ??
• 440,000 22
• 2,000,000

17
PROFITABILITY

• Net Income (Loss)
• Earnings per Share
• Return on Equity
• Return on Assets