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Course title

Financial Statement Analysis

Submitted to:
Mr. AHSAN MASOOD

Submitted by:
Mohsin Khan Naveed Asghar
BBA-S04-031/LHR BBA-S04-033/LHR
th
Semester: 7 Semester: 7th

Date of submission:
28th JUN, 2007

I
Ratios 2006 2005
Gross Profit 13.06 10.39
Net Profit Margin 5.07 3.82
Return on Assets 7.80 7.7
Debt-Equity Ratio .03 0.05
Current Ratio 1.32 1.42
Quick Ratio 0.35 0.31
Interest Coverage Ratio 148.29 67.64
Dividend Payment Ratio 39.6 30.60
Price Earning Ratio 5.81 8.58
Total Assets Turnover Ratio 1.54 2.01
Fixed Assets Turnover Ratio 7.38 7.66
Return on Capital Employed 18.32 15.90
Inventory Turnover Ratio 2.66 3.19
Average Age of Inventory (Days) 137 114
Debt Turnover Ratio 15.47 22.25
Number of Days (Debt) 24 16
Earning per Share 26.12 19.59
Market / Book Ratio 0.75 0.60
Operating Profit Margin 8.76% 6.83%
Average Collection Period 4.49 .371
Total Debt to Total Assets Ratio 0.58 0.53

Gross Receivables

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• Days Sales In Receivables = -----------------------------------------------
Net Sales / 365

Trade Debts+ Other Receivables=Gross Receivables

2006 2005

583015 329658
33.29 18.89
17513.10 17445.49

Day's Sales In Receivables Analysis:

The number of day’s sales in receivables relates the amount of the account receivables
to the average daily sales on account. This shows that how firm is efficient in
collection of receivables. While looking the ratio the firm shows about 76% increase
from 2005 (18.89 day’s) to 2006 (33.29 Day’s) which means the firm is trying to cover
its receivables and trying for the recollection of bad debts.

Net Sales
• Accounts Receivables Turnover = ----------------------------------------
Accounts Receivables

2006 2005

583015 329658
33.29 18.89
17513.10 17445.49

Account Receivables Turnover:

Computation of this ratio provides the liquidity of receivables. This ratio is calculated
for internal Analysis. There is a decreasing trend in the calculation from 2005 (17.029)
to 2006 (13.89). the firm should maintain a decreasing the bad debt ratio to liquidate

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the firm receivables more quickly. The firm should use such strategies that the firm
overstates its receivables turnover, thus overstating its liquidity.
Average Gross Receivables
• Accounts Receivables Turnover in Days = ------------------------------------------
Net Sales / 365

2006 2005

404127 304570.5
5616885 28.44 5186605 19.79
365 365
277409+253436/2 404127 253436+102269/2 304570.5

Account Receivables Turnover in Days Analysis:

This ratio indicates the receivable liquidity in terms of days per year. The computation
of this ratio shows an increase as compare to the previous data like in 2005 it is 19.79
days and 28.44 days in 2006 per year, the firm is facing an increasing trend which is
not fit for the organization health because the firm should maintain to have a good
collection system for it’s receivables so that the operating activity may generate more
sales and thus gives firm more profits in short term. Here the firm should provide
discounts on n/ 10, n/15 some specific discount so that the receivables collection
period is reduced.

Ending Inventory
• Day’s Sales In Inventory = ----------------------------------------
Cost of Goods Sold / 365

2006 2005 2004

1678938 1217900 917621


152 Days
3126363 196 Days 2922862 2536186 132 days
365 365 365

Day's Sales in Inventory:

The day’s sales in inventory estimate the number of days that it will take to sell the
current inventory. While analyzing the ratio it shows an increasing from 132 days in
2004 to 152 Days but in 2006 it is increased up to 196 days show that the firm has a
very lose in the management of its inventory to the sales therefore the firm should
provide more attention to its inventory management. There is also an indication that
with in the medical the inventory is very important because if there insufficient
amount in the account that would lead to the unavailability of any medical drug in the
market which will lead to the high demand and the prices would slightly increased by
the shortage. The firm might be having more product category there for the firm is
maintaining additional inventory for those products.

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Cost of Goods Sold
• Inventory Turnover = ------------------------------------------
Average Inventory
 Average inventory= Beginning 2006(Would be considered as ending) +balance
2005(would be considered as beginning) and would be divided by 2.
 Average inventory= Beginning 2005(Would be considered as ending) +balance
2004(would be considered as beginning) and would be divided by 2.

2006 2005

3126363 2922862
4.0297842 1.7432121
775814 1676710.5
166864+1217900/2= 775814 1217900+917621/2 = 1676710.5

Inventory Turnover Analysis:

It indicates the liquidity of the inventory. The calculation shows a slight increase in
2006 4.029 from 1.74 in 2005. The firm is facing ineffectiveness in the utilization of
its inventory management practices. The firm should plan for the nice perfection of the
inventory management practices.
Average Inventory
• Inventory Turnover in Days =-----------------------------------------
Cost of Goods Sold / 365

2006 2005

775814 1676710.5
3126363 90.58 2922862 209.38
365 365
166864+1217900/2= 775814 1217900+917621/2 = 1676710.5

Inventory Turnover in Days Analysis:


It shows the number of days instead of times per year. The computation of this ratio
shows a decreasing in inventory turnover in days which is almost opposite to the
previous computations the values show a decreasing effect in days which would also
reduce the operation time of receivables and inventory to complete operating cycle.
The effect is only because of increase in the COGS that why the ratio is indicating a
good result in the computations.

V
• Operating Cycle = Accounts Receivables Turnover + Inventory Turnover
In Days In Days

2006 2005
Accounts Accounts
Inventory
Receivables Inventory Operating Receivables Operating
Cycle
Turnover in Cycle
Turnover in Turnover in days Turnover in
days
days days
4.0297842 90.58 94.6097842 1.7432121 209.38 211.1232121

Analysis:
Operating Cycle helps the firm to compare its performance with different periods
and with similar companies that how much the firm is effective in its operations. Its
computations indicate that how long it will take to realize cash from the inventory. Here
the firm shows an increasing effect which means the firm is taking less time to complete
its period from previous period.

Current Assets
• Current Ratio =-------------------------------------
Current Liabilities

2006 2005

3262322 2320619
1.37 1.41
2374865 1639452

Analysis:
Shows a firm’s ability to cover its current liabilities with its current assets. Here the firm is
showing decreasing trend from 2005 to 2006 which means the firm’s ability to recover its
current liabilities from its current assets has slightly decreased.

Current Assets—Inventory or Stock in trade


• Quick Ratio = ----------------------------------------------------------------------
Current Liabilities

2006 2005

881036 529911
0.37 0.32
2374865 1639452

Analysis:
The ratio shows a firm’s ability to meet current liabilities with its most liquid assets. The
firm is showing an increased quick ratio in 2006.

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Quick ratio of less than 1 is clearly indicating that company is not much liquid to pay its
short term debts.

Cash Equivalents + Marketable Securities


• Cash Ratio =--------------------------------------------------------------
Current Liabilities
2006 2005

118297 57993
0.05 0.035
2374865 1639452

Analysis:
This ratio shows an immediate liquidity of firm. It is the extremely conservative
point of view that an analyst computes the liquidity from Cash ratio.

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Ratio Formulas, Calculations and Analysis

VIII
Operating Income
• Times Interest Earned =------------------------------------------------------
Interest Expense + Capitalized Interest

2006 2005 2004

1504766 1346545 1120862


428.48 429.52 320.43
3512 2734 3498

Analysis:
The time interest earned ratio indicates a firm’s long term debt paying ability from
the income statement view. If this ratio is high so it shows that the firm is in a good
position to pay the long term debt. In our case this ratio is very high because the firm is
totally equity financed and they have very low debt from the outside. So it shows that the
abbot laboratories in a position to pay their long term debt very easily. They can get the
fund from any where with a very reasonable interest rate because it has a good coverage of
the interest obligation.

Operating Income
• Fixed Charge Coverage =------------------------------------------------------
Interest Expense + Capitalized interest +
Interest Portion of Rentals

Notes: Capitalized interest and interest portion of rentals does not exist in the annual
report.

Total Liabilities
• Debt Ratio =-----------------------------------------
Total Assets

2006 2005 2004

780249 717211 579021


0.1622 0.1736 0.1718
4810514 4129055 3368603

Analysis:
The debt ratio indicates the percentage of assets financed by the creditors and it
helps to determine how well creditors are protected in case of insolvency. From the
perspective of long term debt paying ability the lower this ratio the better the company’s

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position. In our case we can easily see that our firm debt ratio is very low which indicates
that firm is in a good position. The main reason is that our firm is fully financed by equity.

Total Liabilities
• Debt / Equity Ratio =------------------------------------------
Shareholder’s Equity

2006 2005 2004

780249 717211 579021


0.1935 0.2102 0.2075
4030265 3411844 2789602

Analysis:
This ratio also indicates the firm long term debt paying ability. These computations
compare the total debt with the total shareholder equity. This ratio also determines that
how well the creditors are protected in case of insolvency. But in case of our firm there is
very low risk because it’s totally equity financed. The lower this ratio the better the firm
position. As in our case this ratio is very low which shows that the firm is in a very good
position.
Total Liabilities
• Debt To Tangible Net Worth =----------------------------------------------------------
Shareholder’s Equity – Intangible Assets

Notes: Intangible assets does not exist in financial statements that’s why we cant
calculate the debt to tangible net worth ratio.

X
Ratio Formulas, Calculations and Analysis

XI
Net Income before Minority Share
Of Earnings and Nonrecurring items
• Net Profit Margin =-----------------------------------------------------------------
Net sales

2006 2005 2004

1028313 927249 752238


18.23% 17.68% 16.30%
5616885 5245322 4616780

Analysis:
A commonly used profit measure is return on sale, often termed net profit margin. This
ratio gives a measure of net income dollars generated by each dollar of sales. The high the
better the firm position. Is in our case the firm is in good position to generate profit against
the each dollar sale. There are some factors which affect this ratio like competitive forces,
economic condition, use of debt etc.

Net sales
• Total Asset Turnover = -----------------------------------------
Average Total Assets

2006 2005

5638454 5186605
1.26 1.4
4469785 3748829

Analysis:
Total assets turnover measures the activity of the assets and the ability of the firm
to generate sales through the use of the assets. As in our case the ratio decreased from 1.4
to 1.26 which shows that the firm can not use their assets efficiently and effectively as
compare to the previous year.

Net Income before Minority share


of earnings and non recurring items
Return on Assets = ----------------------------------------------------------
Average Total Assets

2006 2005

1028313 927249
23.00% 24.73%
4469785 3748829

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Analysis:
Return on assets measures the firm’s ability to utilize its assets to create profits by
comparing profits with the assets that generate the profits. As in our case the firm utilizes
its assets properly. A little decreased observed as compared to the previous year but did
not affect the firm negatively.

Operating Income
• Operating Income Margin =-------------------------------------------
Net Sales

2006 2005 2004

1504766 1346545 1120862


26.68% 25.86% 24.47%
5616885 5186605 4560156

Analysis:
The operation income margin includes only operating income in the numerator. As
is in our case an increasing trend has been observed in the ratio which shows a good
indication for the firm.
Net Sales
• Operating Asset Turnover = --------------------------------------------
Average Operating Assets

2006 2005

5638454 5245322
6.85 6.39
822798 821475

Analysis:
The operating assets turnover ratio measures the ability of the operating assets to
generate the sales dollar. As in our case the firm mange the operating assets properly
because an increasing trend has been observed in the ratios which shows that the firm is in
a good position. The firm uses the operating assets effectively and will create a good
operating profit.
Operating Income
• Return on Operating Assets = -------------------------------------
Average Operating Assets

2006 2005

1504766 1344565
1.83 1.6367
822798 821475

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Analysis:
This ratio indicates the non-operating items contribution to generate profit. The firm ratio
show an increasing trend in the computation means that the operating and non-operating
both assets are used properly.

• Du Pont Return On = Operating Income * Operating Asset


Operating Assets Margin Turnover

2006 Ans 2005 Ans


0.2668 x 6.85 1.83 0.2586 x 6.39 1.6524

Net Sales
• Sales to Fixed Assets =---------------------------------------------------
Average Net Fixed Assets
(Exclude Construction in Progress)

2006 2005

5616885 5186605
1.7311 1.8557
3244716 2841844
Analysis:
This ratio measures the firm ability to make productive use of its property, plant,
and equipment by generating sales dollar. As in case of our firm a decreasing tren has been
observed. The lower this ratio the better the firm position.

Net Income before Minority Share


Of earnings and non recurring items +
[(Interest Expense) * (1—Tax Rate)]
• Return on Investment =--------------------------------------------------------------
Average (Long-Term Liabilities + Equity)

2006 2005

1030719 929138
0.2753 0.2974
3443255 3123336
Analysis:
The return on investment applies to ratios measuring the income earned on the
invested capital. This is type of ratio is used for the evolution of the firm. A little
decreasing trend has been observed as compare to the previous year. This ratio is basically

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attracting the fund providers. The high this ratio will lead to a fruitful result. This ratio
basically shows the earning performance of the abbot laboratories.

Net Income before Non recurring items --


Dividends on Redeemable Preferred Stock
• Return on Total Equity =-----------------------------------------------------------
Average Total Equity

2006 2005

1028313 927249
0.2763 0.299
3721055 3100723

Analysis:
This ratio basically shows the total return against the total equity. It shows the return to
both the common shareholder as well as to preferred stock holder. The abbot laboratories
will provide a lesser amount in the recent year as compare to the previous year

Net Income before Non recurring items --


Preferred Dividends
• Return on Common Equity = -----------------------------------------------------
Average Common Equity

2006 2005

1028313 927249
1.0283 0.9272
1000000 1000000

Analysis:
This ratio basically shows the return only to the common shareholders. The Abbot
provides more return to the shareholder in the recent year as compare to the last year. The
reason may be in this year the firm will get more profits.

Gross Profit
• Gross Profit Margin = ---------------------------------
Net Sales

2006 2005 2004

2512091 2322458 2080594


44.62% 44.67% 45.53%
5616885 5186605 4560156

Analysis:

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This ratio basically compare the gross profit with the net sales that how much sales
will generate how much gross profit. According to our firm a decreasing trend has been
observed from last three years.

Ratio Formulas, Calculations and Analysis

XVI
Earnings before Interest and Tax
• Degree of Financial leverage =----------------------------------------------------
Earnings before Tax

2006 2005 2004

1504766 1346545 1120862


1.002339 1.002035 1.003131
1501254 1343811 1117364

Analysis:
This ratio indicates financial leverage is in the multiplication factor by which the
net income changes as compare to the changes in EBIT. The financial leverage is slightly
declining which mean that a conservative investor would look favorable in Abbot’s low
financial leverage. This ratio reflects that as earning before interest charge, net income will
change by 1.0023 in 2006 which is two low effect and providing an attractive image for
the investor to the firm.

Earnings before interest, tax, Minority


Share of Earnings, Equity Income,
And Nonrecurring items
• All-Inclusive Degree of =-------------------------------------------------------------
Financial Leverage Earnings before Tax, Minority Share of
Share of Earnings, Equity Income, and
Nonrecurring items

Can’t be calculated because of non provided data in annual Reports

Net Income – Preferred Dividends


• Basic Earnings =-----------------------------------------------------------
Per Common Share Weighted Average Number of Common
Share Outstanding

Can’t be calculated because the firm has no such preferred Stock in owners
equity account.

Market Price per Share


• Price / Earnings Ration =-------------------------------------------

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Diluted Earnings per Share

Can’t be calculated because market value per share of the firm is not provided
data in annual Reports.

Net Income – All Dividends


• Percentage of Earnings Retained =----------------------------------------------------
Net Income

2006 2005 2004

1028313 927249 752238


10.28313 9.27249 7.52238
100000 100000 100000

Analysis:
This ratio indicates that how much cash company retained for the future investment
after paying dividends in other words the current earnings retained for internal growth. In
year 2006 company retained more then previous years because the firm is in stable
position but investments are made more in 2006 in both operating Assets and Capital
expenditure therefore the firm is having less amount in it’s general reserves and want to
maintain a proper reserve as previous but the percentage is not that much high in all
periods. This also indicates that the firm is having less positive NPV projects therefore
they don’t require any retained earnings.

Dividend per Common Share


• Dividend Payout =--------------------------------------------------
Diluted Earnings per Share

2006 2005 2004

1.69448 3.38172 2.81606


16.14% 35.71% 25.46%
10.5 9.47 11.06

Analysis:
The firm in 2006 shows a lower dividend percentage as discussed above the firm
is having more investments in year 2006 therefore they are paying lesser percentage of
dividend in year 2006. But in previous year the firm had paid a very handsome amount of
dividends which means the firm is having a regular dividend paying policies for their
share holders.
Dividend per Common Share
• Dividend Yield =-----------------------------------------------------
Market Price per Common Share

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Can’t be calculated because market value per share of the firm is not provided
data in annual Reports.

Total Stockholder’s Equity – Preferred Stock Equity


• Book Value per Share = -----------------------------------------------------------------
Number of Common Shares Outstanding

2006 2005 2004

4030265 3411844 2789602


40.30265 34.11844 27.89602
100000 100000 100000

Note: There is no preferred stock

Analysis:
The firm has more investment policies in both year 2006-05 for this reason the
sales has increased and which is reflecting more operating activity and generating more
resources for the firm so the book value per share in increasing in both years from its base
year.

Stock Options Outstanding


• Materiality of Options =---------------------------------------------------
Number of Shares of Common Stock
Outstanding
There is no such type of stock options for the employees or officers for the firm there for
this ratio can’t be calculated.

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Ratio Formulas, Calculations and Analysis

XX
• Operating cash flow / current Operating cash flow
Maturities of long term debt and =-----------------------------------------
Current notes payable . current maturities of long term
Debt and current notes payable

Note: The ration can not be solved because there is no portion of long term debts in
our current notes payables.

Operating cash flow


• Operating cash flow/ total debt = ----------------------------------------
Total debt

478909
2006 = ----------------------------- = 0.6137
780249

498624
2005 = ---------------------------- = 0.6952
717211

613385
2004 = --------------------------- = 1.0593
579001

Operating cash flow / total debt Analysis:

This ratio indicates that how much the firm ability to pay debt in a year. The
2006is low as compare to 2005and 2004from 73% to 93% which is a very good paying
ability of debt in these two years.

operating cash flow – preferred dividends


• Operating cash flow per share = ---------------------------------------------------------
Common shares outstanding

478909
2006 = ----------------------------- = 0.0047
100000000

498624

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2005 =- ------------------------ = 0.0049
100000000

613385
2004 = ------------------------ = 0.0061
100000000

Operating cash flow per shares Analysis:

This ratio tells us about the share that in one share how much cash receive against the
share. The computation of this ratio indicates low ratio in year 2006but high in 2005and
2004,which show positive cash against the share.
operating cash flow
• Operating cash flow / cash dividends = ------------------------------------
Cash dividends

478909
2006 = ------------------------ = 2.8262
169448

498624
2005 = ---------------------- = 1.4744
338172

613385
2004 = ----------------------- = 2.1781
281606

Operating cash flow / cash dividend Analysis:

This ratio tell us that how much cash dividend pay on cash flow, in 2006it has very good
paying ability of dividend with a very good amount as compare to year 2005 And same
situation of paying dividend in year 2004 as also good paying ability of dividend.

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