How Financial Assets Can Be Evaluated

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  • Topic: Generally Accepted Accounting Principles, Balance sheet, Financial ratios
  • Pages : 11 (3346 words )
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  • Published : January 28, 2013
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Evaluating Financial Performance
Finance

Financial Performance
• One of the most fundamental facts about
businesses is that the operating performance of the firm shapes its financial structure. • It is also true that the financial situation of the firm can also determine its operating performance. • The financial statements are therefore important diagnostic tools for the informed manager. – To keep the discussion grounded, we will use the 1997-98 financial statement for the Timberland Company as illustrations.

The Timberland Company, Balance Sheets ($ millions) 12/31/1997 Assets Cash and marketable securities 98.8 Accounts receivable 75.8 Inventories 142.6 Prepaid expenses and other current assets 24.9 Total current assets 342.1 Property, plant, and equipment 116.5 Less accumulated depreciation and amortization (63.6) Net property, plant, and equipment 52.9 Intangible assets 20.9 Other assets 4.2 Total assets $420.1 Liabilities and Shareholders' Equity Accounts Payable Wages payable Income taxes payable Other accrued expenses Total current liabilities Long-term debt Deferred income taxes Total liabilities Common stock Additional paid-in capital Retained earnings Less treasury stock Total shareholders' equity Total liabilities and shareholders' equity

12/31/1998 151.9 79.0 131.2 25.4 387.5 131.2 (74.3) 56.9 19.2 5.8 $469.4

Change 53.1 3.2 (11.4) 0.5 14.7 (10.7) 4.0 (1.7) 1.6

20.4 28.2 17.7 32.8 99.1 100.0 6.0 205.1 0.1 68.6 146.3 (0.1) 214.9 $420.1

25.9 22.1 18.2 29.5 95.7 100.0 7.5 203.2 0.1 74.7 207.7 (16.3) 266.2 469.4

5.5 (6.1) 0.5 (3.3) -1.5

51.3

The Timberland Company, Income Statements ($ millions) 12/31/1997 12/31/1998 Net sales Cost of sales Gross profit Selling expenses General and administrative expenses Depreciation and amortization Amortization of goodwill Total operating expenses Operating income Interest expense Other expense (income) Total nonoperating expenses Income before income taxes Provision for income taxes Net income 796.5 464.2 332.3 174.7 51.7 20.3 1.7 248.4 83.9 14.8 1.4 16.2 67.7 20.3 $47.4 862.2 501.1 361.1 195.7 50.9 18.2 1.7 266.5 94.6 9.5 (1.9) 7.6 87.0 27.8 $59.2

The Timberland Company, Statement of Cash Flow, 1998 ($ millions) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Loss on disposal of property, plant, and equipment Changes in current assets and liabilities Increase in accounts receivable Decrease in inventories Decrease in prepaid expenses Increase in accounts payable Increase in accrued expenses Increase in accrued income taxes Net cash provided by operating activities Cash Flows from Investing Activities Proceeds from sale of property, plant, and equipment Additions to property, plant, and equipment Other Net cash provided by investing activities Cash Flows from Financing Activities Common stock repurchases Issuance of common stock, including tax benefit Net cash provided by financing activities Effect of exchange rate changes on cash Net increase in cash Cash at beginning of year Cash at end of year

59.2

18.2 1.3 -2.8 11.6 1.1 5.1 -10 0.5 84.2

0.1 -20.7 -1.2 -21.8

-16.2 6.1 -10.1 0.9 53.2 98.8 $152.0

Return On Equity
• The most popular measure of financial
performance (for many audiences) is ROE. • ROE measures accounting earnings for a period per dollar of shareholders’ equity invested. Net Income ROE  Shareholders' Equity

• For Timberland 1998 ROE was:
$59.2 ROE   22.2% $266.2

Dissecting ROE
• ROE is so popular because it is, in a sense, a
summary of the information on the income statement and both sides of the balance sheet. It provides an “accounting” measure of the “returns” to shareholders’ investment. • The three determinants of ROE: – Profit Margin = Net Income/Sales – Asset Turnover = Sales/Assets – Financial Leverage = Assets/Shareholders’ equity

• ROE comes from the joint inputs of these...
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