Chapter 14

Suggestions for Case

Analysis
 Case Analysis

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

Resources for Case Library Research:

– Company Information:
• Moody’s Manuals on Investment
• Standard & Poor’s Register of
Corporations, Directors, and Executives
• Value Line’s Investment Survey
• Findex: The Directory of Market Research
Reports, Studies and Surveys
 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
 Case Analysis

Resources for Case Library Research:

– Industry Information:
• Business Week
• Fortune
• Industry Survey
• Industry Week
• Forbes
• Inc.
 Case Analysis

Resources for Case Library Research:

– Directory and Index Information:
• Business Periodical Index
• Directory of National Trade Associations
• Encyclopedia of Associations
• Funk and Scott’s Index of Corporations
and Industries
• Thomas’s Register of American
Manufacturers
• Wall Street Journal Index
 Case Analysis

Resources for Case Library Research:

– Ratio Analysis Information:
• Almanac of Business and Industrial
Financial Ratios
• Annual Statement Studies
• Dun’s Review
• Industry Norms and Key Business Ratios
 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
 Case Analysis

Financial Analysis:
– Ratio analysis
• Liquidity ratios- examines firm cash
generation levels & cash convertibility
• Profitability ratios- show extent to which
firm activities generate profits
• Activity ratios- explores cycles of cash
and product turnover in firms
• Leverage ratios- demonstrates firm debt
levels & interest responsibilities
 Financial Ratio Analysis — Liquidity
How
Formula Expressed Meaning

1. Liquidity Ratios
Current assets
—————————
Current ratio Current liabilities Decimal A short-term indicator of the company’s
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.
Current assets – Inventory
Quick (acid test) ratio ———————————— Decimal Measures the company’s ability to pay
Current liabilities off its short-term obligations from
current assets, excluding inventories.
Inventory to net Inventory Decimal A measure of inventory balance;
———————————————
working capital Current assets – Current liabilities measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.
Cash + Cash equivalents Decimal Measures the extent to which the
Cash ratio ———————————
Current liabilities company’s capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.
 Financial Ratio Analysis —
Profitability
Formula Expressed
2. Profitability Ratios
Net profit after taxes
—————————
Net profit margin Net sales
Sales – Cost of goods sold
Gross profit margin —————————————
Net sales
Net profit after taxes
—————————
Return on investment Total assets
(ROI)
Net profit after taxes
Return on equity —————————
Shareholders’ equity
(ROE)
Net profit after taxes –
Earnings per share preferred stock dividends
————————————
(EPS) Average number of
common shares
How
Meaning
Percentage Shows how much after-tax profits are
generated by each dollar of sales.
Percentage Indicates the total margin available to
cover other expenses beyond cost of
goods sold, and still yield a profit.
Percentage Measures the rate of return on the total
assets utilized in the company; a
measure of management’s efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.
Percentage Measures the rate of return on the
book value of shareholders’ total
investment in the company.
Dollars per Shows the after-tax earnings
share generated for each share of common
stock.
 Financial Ratio Analysis — Activity
How
Formula Expressed Meaning

Net sales
3. Activity Ratios ———————
Inventory turnover Inventory Decimal Measures the number of times that average inventory of
finished goods was turned over or sold during a period of
Inventory time, usually a year.
———————————
Days of inventory Cost of goods sold ÷ 365 Days Measures the number of one day’s worth of inventory that
a company has on hand at any given time.
Net sales
Net working capital ————————— Decimal Measures how effectively the net working capital is used
turnover Net working capital to generate sales.
Asset turnover Sales
————————— Decimal Measures the utilization of all the company’s assets;
Total assets measures how many sales are generated by each dollar
of assets.
Sales Measures the utilization of the company’s fixed assets
Fixed asset turnover ——————— Decimal
Fixed assets (i.e., plant and equipment); measures how many sales
are generated by each dollar of fixed assets.
Average collection Accounts receivable
————————— Days Indicates the average length of time in days that a
period Sales for year ÷ 365 company must wait to collect a sale after making it; may
be compared to the credit terms offered by the company
Annual credit sales to its customers.
Accounts receivable ————————— Decimal Indicates the number of times that accounts receivable
turnover Accounts receivable
are cycled during the period (usually a year).
Accounts payable Accounts payable Days Indicates the average length of time in days that the
————————————
period Purchases for year ÷ 365 company takes to pay its credit purchases.
Days of cash Cash Days Indicates the number of days of cash on hand, at present
——————————— sales levels.
Net sales for year ÷ 365
 Financial Ratio Analysis — Leverage
How
Formula Expressed Meaning

4. Leverage Ratios
Total debt
Debt to asset ratio ——————— Percentage Measures the extent to which borrowed
Total assets funds have been used to finance the
company’s assets.

Debt to equity ratio Total debt Percentage Measures the funds provided by creditors
—————————
Shareholders’ equity versus the funds provided by owners.

Long-term debt to Long-term debt Percentage Measures the long-term component of

—————————
capital structure Shareholders’ equity capital structure.

Times interest earned Profit before taxes + Interest charges Decimal Indicates the ability of the company to
————————————————
Interest charges meet its annual interest costs.
Coverage of fixed
charges Profit before taxes + Decimal A measure of the company’s ability to
Interest charges + Lease charges meet all of its fixed-charge obligations.
————————————————
Interest charges + Lease obligations
Current liabilities to
equity Current liabilities Percentage Measures the short-term financing
—————————
Shareholders’ equity portion versus that provided by owners.
 Financial Ratio Analysis — Other
How
Formula Expressed Meaning

5. Other Ratios
Market price per share
—————————
Price/earning ratio Earnings per share Decimal Shows the current market’s evaluation
of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.

Dividend payout ratio Annual dividends per share Percentage Indicates the percentage of profit that
————————————
Annual earnings per share is paid out as dividends.

Dividend yield on Annual dividends per share Percentage Indicates the dividend rate of return to
———————————————
common stock Current market price per share common shareholders at the current
market price.

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 Poor’s and Robert Morris Associates for average industry data. Special thanks
to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M University–Corpus Christi, Corpus Christi, Texas, for
his definitions of these ratios.
 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
 Case Analysis
Analyzing Financial Statements (cont.):
Use Financial Statements To:
– Compare historical statements of one
firm over time (explore trends)
– Examine performance relative to direct
competitors
– Examine performance relative to
industry averages
 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
country’s borders.
 Strategic Audit Worksheet: Part 1
Strategic Audit Heading Analysis Com m ents

(+) Factors (-) Factors

I. Current Situation

A. Past Corporate Performance Indexes

B. Strategic Posture
Current Mission
Current Objectives
Current Strategies
Current Policies

SW OT Analysis Begins:
II. Corporate Governance
A. Board of Directors
B. Top Management
III. External Environment (EFAS):
Opportunities and Threats(SW OT)
A. Societal Environment
B. Task Environment Industry Analysis
IV. Internal Environment (IFAS):
Strengths and Weaknesses(SWOT)
A. Corporate Structure
B. Corporate Culture
C. Corporate Resources
 Strategic Audit Worksheet: Part 2
S trategic Aud it Heading Analysis Com m ents

(+) Factors (-) Factors

1. M arketing
2. Finance
3. Research and Developm ent
4. Operations and Logistics
5. Hum an Resources
6. Inform ation System s
V. Analysis of Strategic Factors
(SFAS)
A. Key Internal and External
Strategic Factors (SW OT)
B. Review of Mission and Objectives
SW OT Analysis Ends. Recom m endation Begins:
V I. Alternatives and Recom m endations
A. Strategic Alternatives
B. Recomm ended Strategy
V II. Im ple m entation
V III. E valuation and Control
 Case Analysis

Case Analysis Method:

• Read case
• Read case with strategic audit
• Begin SWOT analysis
• EFAS
• IFAS
 Case Analysis

Case Analysis Method:

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

• Write Strategic Audit

• Part VI
• Alternatives
• Recommendations
• Write Strategic Audit
• Part VII
• Implementation
• Write Strategic Audit
• Part VIII
• Evaluation & Control
 14.1a Financial Ratio Analysis — Liquidity (Table 14.1)

Financial Ratio Analysis — Liquidity

How
Formula Expressed Meaning

1. Liquidity Ratios
Current assets
—————————
Current ratio Current liabilities Decimal A short-term indicator of the company’s
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.
Current assets – Inventory
Quick (acid test) ratio ———————————— Decimal Measures the company’s ability to pay
Current liabilities off its short-term obligations from
current assets, excluding inventories.
Inventory to net Inventory Decimal A measure of inventory balance;
———————————————
working capital Current assets – Current liabilities measures the extent to which the
cushion of excess current assets over
current liabilities may be threatened by
unfavorable changes in inventory.
Cash + Cash equivalents Decimal Measures the extent to which the
Cash ratio ———————————
Current liabilities company’s capital is in cash or cash
equivalents; shows how much of the
current obligations can be paid from
cash or near-cash assets.

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 14.1b Financial Ratio Analysis — Profitability (Table 14.1)

Financial Ratio Analysis —

Profitability
Formula
How
Expressed Meaning

2. Profitability Ratios
Net profit after taxes
—————————
Net profit margin Net sales Percentage Shows how much after-tax profits are
generated by each dollar of sales.
Sales – Cost of goods sold
Gross profit margin ————————————— Percentage Indicates the total margin available to
Net sales cover other expenses beyond cost of
goods sold, and still yield a profit.
Net profit after taxes
—————————
Return on investment Total assets Percentage Measures the rate of return on the total
(ROI) assets utilized in the company; a
measure of management’s efficiency, it
shows the return on all the assets
under its control regardless of source
of financing.
Net profit after taxes
Return on equity ————————— Percentage Measures the rate of return on the
Shareholders’ equity
(ROE) book value of shareholders’ total
investment in the company.
Net profit after taxes –
Earnings per share preferred stock dividends Dollars per Shows the after-tax earnings
————————————
(EPS) Average number of share generated for each share of common
common shares stock.

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2000Prentice Hall, Wheelen/Hunger 197
 14.1c Financial Ratio Analysis — Activity (Table 14.1)

Financial Ratio Analysis — Activity

How
Formula Expressed Meaning

Net sales
3. Activity Ratios ———————
Inventory turnover Inventory Decimal Measures the number of times that average inventory of
finished goods was turned over or sold during a period of
Inventory time, usually a year.
———————————
Days of inventory Cost of goods sold ÷ 365 Days Measures the number of one day’s worth of inventory that
a company has on hand at any given time.
Net sales
Net working capital ————————— Decimal Measures how effectively the net working capital is used
turnover Net working capital to generate sales.
Asset turnover Sales
————————— Decimal Measures the utilization of all the company’s assets;
Total assets measures how many sales are generated by each dollar
of assets.
Sales Measures the utilization of the company’s fixed assets
Fixed asset turnover ——————— Decimal
Fixed assets (i.e., plant and equipment); measures how many sales
are generated by each dollar of fixed assets.
Average collection Accounts receivable
————————— Days Indicates the average length of time in days that a
period Sales for year ÷ 365 company must wait to collect a sale after making it; may
be compared to the credit terms offered by the company
Annual credit sales to its customers.
Accounts receivable ————————— Decimal Indicates the number of times that accounts receivable
turnover Accounts receivable
are cycled during the period (usually a year).
Accounts payable Accounts payable Days Indicates the average length of time in days that the
————————————
period Purchases for year ÷ 365 company takes to pay its credit purchases.
Days of cash Cash Days Indicates the number of days of cash on hand, at present
——————————— sales levels.
Net sales for year ÷ 365

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2000Prentice Hall, Wheelen/Hunger 198
 14.1d Financial Ratio — Leverage (Table 14.1)

Financial Ratio Analysis — Leverage

How
Formula Expressed Meaning

4. Leverage Ratios
Total debt
Debt to asset ratio ——————— Percentage Measures the extent to which borrowed
Total assets funds have been used to finance the
company’s assets.

Debt to equity ratio Total debt Percentage Measures the funds provided by creditors
—————————
Shareholders’ equity versus the funds provided by owners.

Long-term debt to Long-term debt Percentage Measures the long-term component of

—————————
capital structure Shareholders’ equity capital structure.

Times interest earned Profit before taxes + Interest charges Decimal Indicates the ability of the company to
————————————————
Interest charges meet its annual interest costs.
Coverage of fixed
charges Profit before taxes + Decimal A measure of the company’s ability to
Interest charges + Lease charges meet all of its fixed-charge obligations.
————————————————
Interest charges + Lease obligations
Current liabilities to
equity Current liabilities Percentage Measures the short-term financing
—————————
Shareholders’ equity portion versus that provided by owners.

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 14.1e Financial Ratio Analysis — Other (Table 14.1 )

Financial Ratio Analysis — Other

How
Formula Expressed Meaning

5. Other Ratios
Market price per share
—————————
Price/earning ratio Earnings per share Decimal Shows the current market’s evaluation
of a stock, based on its earnings;
shows how much the investor is willing
to pay for each dollar of earnings.

Dividend payout ratio Annual dividends per share Percentage Indicates the percentage of profit that
————————————
Annual earnings per share is paid out as dividends.

Dividend yield on Annual dividends per share Percentage Indicates the dividend rate of return to
———————————————
common stock Current market price per share common shareholders at the current
market price.

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 Poor’s and Robert Morris Associates for average industry data. Special thanks
to Dr. Moustafa H. Abdelsamad, Dean, Business School, Texas A&M University–Corpus Christi, Corpus Christi, Texas, for
his definitions of these ratios.

Prentice Hall, Chapter 14Chapter 14 200

2000Prentice Hall, Wheelen/Hunger