Essentials of Investment Chapter 11

E11.3. Reformulation and Analysis of Financial Statements a. Reformulated balance sheet 2009 Operating cash Accounts receivable Inventory PPE Operating assets Operating liabilities: Accounts payable Accrued expenses Net operating assets Net financial obligations: Short-term investments Long-term debt Common shareholders’ equity $1,200 390 $ 60 940 910 2,840 4,750 1,040 450 2008 50 790 840 2,710 4,390

1,590 3,160

1,490 2,900

$( 550) 1,840 1,290 $1,870

( 500) 1,970

1,470 1,430

Reformulated equity statement (to identify comprehensive income): Balance, end of 2008 Net transactions with shareholders: Share issues Share repurchases Common dividend Comprehensive income: Net income Unrealized gain on debt investments Balance, end of 2009 $1,430 $ 822 (720) (180) $ 468 50

(

78)

518 $1,870

Reformulated statement of comprehensive income Revenue Operating expenses, including taxes Operating income after tax Net financing expense: Interest expense $ Interest income Net interest Tax at 35% Net interest after tax Unrealized gain on debt investments Comprehensive income $3,726 3,204 522

98 15 83 29 54 50

4 $ 518

After calculating the net financial expense, the bottom-up method is used to get operating income after tax. b. Free cash flow = OI – ΔNOA = 522 – (3,160 – 2,900) = 262 c. Ratio analysis Profit Margin (PM) = 522/3,726 = 14.01% Asset turnover (ATO) = 3,726/2,900 = 1.285 RNOA = 522/2,900 = 18% d. Individual asset turnovers Operating cash turnover = 3,726/5 = 74.52 Accounts receivable turnover = 3,726/790 = 4.72 Inventory turnover = 3,726/840 = 4.44 PPE turnover = 3,726/2,710 = 1.37 Accounts payable turnover = 3,726/1,040 = 3.58 Accrued expenses turnover = 3,726/450 = 8.28 1/individual turnover aggregate to 1/ATO: 1/ATO = 1/1.285 = 0.778 = 0.013 + 0.212 + 0.225 + 0.730 – 0.279 – 0.121 (allow for rounding error)

e. ROCE = 518/1,430 = 36.22% Financial leverage (FLEV) = 1,470/1,430 = 1.028 Net borrowing cost (NBC) = 4/1,470 = 0.272%