Ratio: Balance Sheet and Financial Results

UVA-C-2332 Rev. Oct. 17, 2012 RATIOS TELL A STORY2011 pecuniary results and conditions vary among companies for a bout of reasons. One reason for the mutation can be traced to the characteristics of the industries in which companies operate. For example, or so industries require large investments in property, plant, and equipment (PP&E), plot of ground others require very little. In some industries, the competitive productpricing structure permits companies to earn significant profits per gross revenue dollar, while in other industries the product-pricing structure imposes a much overthrow profit margin.In most low-margin industries, however, companies often experience a relatively richly rate of product finishedput. A second reason for some of the variation in fiscal results and conditions among companies is the result of worry philosophy and policy. Some companies lop their manufacturing capacity to match more closely their immediate gross revenue prospects, while others carry excess capacity to be prepargond for future gross revenue growth. Also, some companies finance their assets with borrowed funds, while others avoid that leverage and choose kinda to finance their assets with owners equity.And some corporate focussing teams choose to not stomach dividends to their owners, preferring to reinvest those funds in the company. Of course, another reason for some of the variation in reported financial results among companies is the differing competencies of management. Given the same industry characteristics and the same management policies, different companies may report different financial results simply because their managements cause differently. And last, one other reason is that some industries are more unprotected to macroeconomic conditions than others.This can be true when macroeconomic conditions (e. g. , foreign transposition rates, interest rates, and taxes) are weak and deteriorating as well as when they are strong and improving. O r this can also be true when such conditions are stable versus volatile. Those differences in industry characteristics, in company policies, in management performance, and in responsiveness to the macroeconomic environment are reflected in the financial statements published by publicly held companies. Furthermore, they can be highlighted through the use of financial proportionalitys. point 1 presents balance sheets, in percentage form, and This exercise was prepared by Professor Mark E. Haskins, Darden Graduate School of credit line Administration, and has benefited from collaborations with various colleagues over the social classs on earlier versions. It was written as a basis for discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright ? 2012 by the University of Virginia Darden School Foundation, Charlottesville, VA. all rights reserved.To order copies, send an e-mail to emailprotected com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. ? -2- UVA-C-2332 selected financial ratios computed from fiscal year 2011 balance sheets and income statements for 13 companies from the following industries ? ? ? ? ? ? ? ? ? ? ? ? ? irline railroad pharmaceuticals mercantile banking photographic equipment, printing, and gross revenue discount general-merchandise retail electric utility fast-food eating place chain wholesale food distribution supermarket (grocery) chain Internet retail advertising agency services computer software development hold the balance sheet profiles and the financial ratios listed for each of the 13 companies as presented in Exhibit 1. 1 Your assignment is to use your intuition, common sense, and basic collar of the unique attributes of each industry listed above to match each chromatography column in the exhibit with one of the industries.Be prepared to give the reasons for your pairings, citing the data that expects to be consistent with the characteristics of the industry you selected. Ours is not a perfect world, however, and for our class discussion, it lead be helpful if you will also identify those pieces of data that seem to contradict the pairings you have made. Please note that using the data functional here, you will find it difficult to identify those companies whose financial results differ because of management policy and competence.Please note in Exhibit 1 OCI = Other spaciotemporal Income, CFFO = Cash Flow From Operations, ST = Short Term, and LT = Long Term. 1 -3The ratios in Exhibit 1 are based on the following formulas 1. ROS (return on sales) = moolah income clear sales Net sales comely add together assets Net income Average total assets ROS ? Asset disorder Average total assets Average total owners equity Net income Average total owners equity ROA ? Financial leverage Total current assets Total current liabilities Cost of goods exchange Average ending inventory Average accounts receivable Net sales/365 days UVA-C-2332 . Asset turnover = 3. ROA (return on assets) or = = 4. Financial leverage = 5. ROE (return on equity) or = = 6. Current ratio = 7. Inventory turnover = 8. Receivables collection = 9. Revenue growth = This years net salesLast years net sales Last years net sales Net salesCost of goods interchange Net sales Cash dividends Net income Research and development outlay Net sales 10. Gross margin = 11. Dividend payout 12. R&D ratio = = -4Exhibit 1 RATIOS TE ELL A STORY Y2011 Selected Financ Data for 13 C S cial Companies (b balance sheet amou are percentage of total assets) unts UVA-C-2332 V