General rules for the presentation:
• All graphs should read from LEFT to RIGHT so that the earliest year is shown on the left and the most recent year is shown on the right; so if you are graphing data for 5 years (say 2015-2019), then start with 2015 (on the left) and 2019 should be the last year shown on the right side of the graph (horizontal axis).
• Be sure that all graphs and charts have titles and labels: for example, ABC Co., Total Asset Trend, 2010-2019.
• Use the “Notes” part of the Power Point slide to give explanatory information that you will explain to the class during your presentation.
• Be sure to include the name of the student who prepared and presented each slide in the “Notes” section. If one person prepared and another person presented, then give both names.
• Show ratios as percentages when appropriate and round to the nearest tenth of a percent. For example, show as 50.5% and not as 0.505.
Part 1: Balance Sheet, Growth of Assets, Capital Structure, Solvency & Liquidity
Objectives: explain the major accounts (assets, liabilities and equity) for your company; determine the extent of asset growth over the 5 years, the extent of its financial leverage and whether this has increased (more risk) or decrease (less risk), and significant changes in capital structure. Conclude whether liquidity has changed favorably or not or remained constant.
Assets-Composition and Growth over the most recent 5 years.
1. Present your company’s most recent year end actual balance sheet. If your presentation is in the classroom, then you can provide a copy for each student. If presenting online, pull up an online link to the financials (have it ready in advance). The purpose is so that the students get an idea of what your company’s balance sheet looks like, the types of accounts, etc.
a. Point out the most significant current and LT assets, the significant current and LT liabilities, and the significant equity accounts your company has. Does it have a Treasury Stock (contra equity) account?
b. Point out any unusual and significant balance sheet accounts that you company has. For example, General Motors has “finance receivables” which are loans to customers for vehicles.
2. Identify Significant Assets: Identify your company’s major assets (2-4+). Use a pie chart of all assets for the most recent year.
a. For a pie chart, the total circle should add to 100%. Combine assets that are not significant. For example, if Inventory, Goodwill & Intangibles, and net PPE are the 3 most significant accounts, then group all other current assets (exclude inventory) and group other LT assets (exclude GW & Intangibles and net PPE) so that you have 5 categories shown in the pie chart or chart: Inventory, other current assets, GW & Intangibles, net PPE, and other LT assets.
b. Identify/explain any unusual significant assets your company has.
c. Using the chart, identify the percentage of total assets that are current and the percentage that is long-term.
3. Total Assets:Is your company in growth mode or not? By referring to growth rates some specific amounts, explain how total assets have grown or declined over the 5-year period.Avoid referring to too many numbers. For example, don’t read amounts for each year.
Also explain whether one or more assets grew or declined most significantly over the 5 years, or if each of the assets grew at approximately the same rate. This determination must be made by comparing the balance sheets for each of the 5 years. No graph needed here.
a. Display a line graph of 5-year trend analysisof Total Assets (e.g. 2015-2019).
b. Also provide a graph that shows the amounts over the 5 years(show on same slide if possible) OR just use the trend analysis graph and provide some key amounts and data including the amount of total assets for the initial year shown, the current year amount, years and amounts for highest revenue and lowest revenue,etc.
c. Identify the compounded growth rate (use the Excel RATE function), average annual growth rate, and trend growth; see example below.
EXAMPLE for Total Asset:
1) Using the trend analysis, the total percentage growth was 33.3% (=200,000/150,000 = 133.3%) so total assets have grown about 33.3% since the 2015 base year.
2) From 2015 to 2019, total assets grew by a compounded annual rate of 7.7%.
3) Whereas the calculated average annual growth rate was 7.5%.
4. Total Liabilities, Total Equity& Overall Change in Capital Structure
Composition: Identify the major 2-4 types of Liabilities (ST & LT) and the major types of Equity
Graphs to show changes: Use graphs to show and explain the overall changes in the capital structure over the 5-year period. How has financing changed over the 5 years? Have liabilities and equity increased at about the same rate, or have liabilities grown more than equity or vice versa? In other words, how has capital structure changed over the 5 years, or has it remained stable and proportional?
• Display line graphs: one graph should show 2 lines using the dollar amounts for TL’s and TE over the 5 years. Use a similar graph for the trend percentages for TL’s and TE. This should be shown on the same slide if possible. The base year should always be shown as 100.0%.
• As done for total assets, give the rates (both the compounded growth rate using the Excel RATE function, average annual growth rate, and trend relative to the base year for both total liabilities and total equity over the 5 years. Explain which has grown or declined more and if more financial risk or not.
• Identify any significant change in Liabilities and Equity in total over the 5-year period. For example, if total liabilities grew significantly in one particular year, go to the financial statements for that year to determine which account(s) increased. For example, the company could have issued LT Debt that year. Or perhaps the companyrepurchased a significant number of shares and there was a large increase in the treasury stock account (if applicable) or a large decline in Retained Earnings in a specific year which caused total equity to decline that year as shown in your graph.
5. Capital Structure, Financial Leverageratios (this area relates to the section above)-use the graph of the ratios to illustrate the changes in the capital structure of your company over the last 5 years. The purpose is to exhibit if your firm’s financial leverage/risk has increased or not.
Graphs for1) Debt ratio (TL/TA),
and 2)Equity Multiplier (TA/TE) and Debt to Equityratios (2 lines)
NOTE: these graphs should look very similar in shape as they all illustrate the level of financial leverage using the “basic accounting equation” (A, L, and E).
For each graph, be sure to give the average of each ratio and the high and low amounts.
For Debt ratio graph and D/E & Equity Multiplier graph: give the average for each of the ratios over the 5 years, the highs and low; AND how the recent ratio compares to those points (average, high, low). Relate the ratios and their changes to the discussion about TL’s and TE above.
a. Debt ratio (%): graph the debt ratio (TL/TA) for the 5 years and show as a percentage to 1 decimal place (e.g. 45.6%).
Relate the changes in the debt ratio to conclusions made in the section above relative to changes in TL’s and TE over the 5 years.
b. Debt to Equity and Equity Multiplier ratio graph (2 lines):the 2 lines should mirror each other and be equidistant from each other since the D/E ratio + 1 = Equity Multiplier. For example, if the D/E =2.4 then the Equity Multiplier = 3.4
i. Debt to Equity (D/E ratio): use TL’s in the numerator and show as a number to 2-3 decimal places (e.g. 0.818 or 2.33)
ii. Equity Multiplier = TA/TE. If TL = 60% and TE = 40%, then EM = (60+40)/40 = 100/40= 2.50
If TL = 80% and TE = 20%, then EM = (80+20)/20 = 100/20 = 5.00
iii. Equity Multiplier: like the D/E ratio, show as a number to 2-3 decimal places. Since D/E + 1 = Equity Multiplier, the equity multiplier line should be higher than the D/E line and the lines should be equidistant over the 10 years.
iv. Relate the changes in this graph to the changes in TL’s and TE over the 5 years as you did for the debt ratio above. In other words, if TL’s increased at a faster rate than TE, then the EM should have increased.
Equity Multiplier & relation to ROA & ROE:
Later in the presentation, you should explain why the ROA and ROE differ over the 5 years.Be sure to relate the changes in the graph of the Equity Multiplier (TA/TE)to the ROA/ROE graph. You should refer to the slide with the Equity Multiplier graph or you can duplicate the graph.
ROA x Equity Multiplier = ROE, so use the EM ratio and its changes to explain the differences between the company’s ROA’s and ROE’s over the years (ROA and ROE section).
6. Equity- Composition and Change over the 5 years- Identify the firm’s primary components of equity and explain how they have changed over the 5 years.
• Using a chart or a schedule such as below, explain the major changes in your firm’s equity accounts over the past 5 years.
• For example, has the company issued a significant amount of stock or repurchased a significant amount over the past 5 years? Or if the company has been profitable but Retained Earnings has not grown significantly, confirm that the company has paid out a significant portion of its net income each year by reviewing the statements of stockholders’ equity and cash flow statements; explain what percentage of income in total has been paid out over the 5 years.
• Equity Chart or Schedule: Two side by side pie charts (one for 2015 and one for 2019) can be used if there is no Treasury Stock account. If a treasury stock account, then use a schedule such as the one below. Use the chart/schedule to explain the largest changes. See the explanation at the bottom of the schedule.
o In the example below, see explanation below the schedule to explain the 3 major changes.
7. Liquidity Evaluation using the Current ratio and Quick ratios – Short term liquidity measures to determine the firm’s ability to meet its current debts.
• Current ratio and Quick Ratio Graph (2 lines): Use a line graph to illustrate the changes in the current ratio and the quick ratio for your firm over the past 5 years.
• Compare the most recent current and quick ratios to your firm’s5-year averages (the average current ratio and the average quick ratio over the period shown).
Current ratio = Total current assets/Total current liabilities
Quick ratio = [Cash + ST investments (if any) + current receivables]/total current liabilities
• The quick ratio excludes Inventory and other current assets such as prepaid assets from the numerator so it is a stricter measure of liquidity, and its amount will always be less than the current ratio.
If there are no “non-quick” current assets (so no inventory or other current assets), then the current ratio would equal the quick ratio, but this is not typical.
Explain changes and their Implication on your firm’s liquidity:
• Has each ratio remained stable, improved or not? How do the most recent current and quick recent ratios compare to their 5-year averages? Has each ratio remained stable, significantly improved or declined, and if so, what are the reasons for significant changes? E.G. which CA or CL account increased/decreased in a particular year?
• Identify yourfirm’s primary current assets and quick assets for the most recent year end. For example, assume your firm’s largest CA’s was Cash (5% of total CA’s and Inventory (80% of total CA’s). Since inventory is not a quick asset, it explains why your firm’s current ratio is so much larger than its quick ratio.
• Identify your firm’s primary current liability accounts at its most recent year end (e.g. accounts payable, current portion of debt, etc.)?
• Have the current and quick ratios remained equidistant over the years? If not, which current asset(s) have contributed to the change? Typically, this is inventory if your firm owns inventory.
• If the current ratio changed significantly one year, was it due to a change in one or more assets or a change in a certain current liability. Note: a significant increase in receivables or inventory could signal a potential problem possibly indicating that its customers are slow in paying on the receivables or that inventory is not selling.
8. Balance Sheet Conclusion: discuss growth of assets over the 5 years, type of capital structure (the extent of financial leverage) and identify any significant changes in the balance sheet over the past 5 years. Be sure to explain whether asset growth over the past 5 years was primarily financed by liabilities or by equity or via a combination of the two. Briefly focus on key points you already covered.
Part 2: Income statement&Income Statement Profit ratios- the objectives of this section:
1) Identify how the company generates revenue which is crucial for generating net income.
2) Identify the company’s revenue growth over the past 5 years.
3) Evaluate if revenue and net income have increased over the past 5 years and whetherexpenses (especially CGS and operating expenses) have grown faster or slower than revenue.
4) Evaluate profitability over the 5-year period and whether it has improved or not using the various profit ratios (gross profit, operating income margin, net profit margin, ROA & ROE).
5) Identify if the company can cover its interest expense using the times interest earned ratio.
1. Present your company’s most recent year-end income statement. If your presentation is in the classroom, then you can provide a copy for each student. If presenting online, pull up an online link to the financials (have it ready in advance).
a. Point out how the company generates revenue and what kind(s) of revenue account(s) it has. If Sales Revenue, what does the company sell? If Service Revenue, what kind of service(s) does it provide? (You should have found this information in Note 1 of the financials.)
b. If it has more than one type of revenue, what are the proportions? For example, Sales revenue may have comprised 70% of total revenue whereas service revenue made up 30% of the total.
c. Identify/point out your firm’sprimary operating expenses. If the company has Sales revenue, CGS should be a primary expense. If Service revenue, what are its primary expenses? For example, Delta Airlines’ are fuel and salaries.
d. Point out how profitable the company was for its most recent year end by referring to ratios. Does it have a high or low profit margin? For the current year, what were the company’s gross profit ratio (if applicable), operating income margin, and net profit margin. Suggest showing these numbers on a slide.
For example: fye 12/31/19
Gross profit ratio: 40.5%
Operating income margin: 25.5%
Net profit margin: 10.0%
2. Revenue graphs for 5 years: Explain and show how total Revenue have grown or declined over the 5-year period.
a. Display a line graph of 5-year trend analysisof total revenue (e.g. 2015-2019). Explain whether Revenue has fluctuated over the 5 years, shown a steady increase, remained stable, etc.
Preferably, we want to see a steady increase that at least exceeded the inflation rate over the past 5 year (of 1-2%), but that may not be the case for your company.
If you company had more than one type of revenue, has one improved more than the other. For example, a tech company may have seen a growth in its service revenue but a drop in its sales revenue.
b. You should also provide agraph that shows the amounts over the 5 years (show on same slide if possible.) Point out some key amounts and data including the amount of total revenue for the initial year shown and the current year amount. Avoid reading out too many numbers and be sure to round properly. For example, $54,350 m can be stated at about $54.4 b.
c. Identify the compounded growth rate (use the Excel RATE function), average annual growth rate, and trend growth. See the example done for total assets on page 2 of this handout and use this same format/methodology for total revenue.
3. Net income(NI) graph for the last 5 years:
a. Point out any key amounts in the graph including the amount of total income for the initial year shown and the current year amount. Avoid reading out too many numbers and be sure to round properly: e.g. $54,565 m can be rounded to $54.6 billion.
b. Growth over the 5 years: Give the growth rates over the 5 years (see the Total Assets section for growth rates example). What was the general trend in net income over the 5 years: generally increasing, decreasing, variable, etc.?
Preferably, net income has increased, but his may not be the case for your company.
c. Identify reasons for significant changes in net income over the 5-year period. For example, there may be a large gain in a particular year that significantly boosted NI that year; or there may have been a large increase in tax expense one year that reduced NI. Briefly, identify and explain the item of income or expense that significantly affected income that year.
4. EPS basic graphfor the 5 years:
a. As for the income graph, identify a few key amounts.
i. Give the growth rates for EPS over the 5 years. Are the rates very close to the rates for Net income?
ii. If so, the company did not repurchase a significant amount of its common shares (treasury shares); be sure to verify this by reviewing the # shares over the 5 years by checking the EPS calculation (below the income statement) and/or by reviewing the Statement of SE for the 5 years.
iii. If the EPS growth rates are higher, verify that the firm has repurchased shares over the past 5 years.
5. Times interest earned ratio graph for the last 5 years:
a. Times interest earned = Operating income/interest expense… be sure to use a positive number for interest expense.
If you can’t locate interest expense on the income statement (may be buried in “net” interest expense), then use “net interest” or use interest paid which should be shown below the Cash Flow Statement. Be sure to tell us what you used for interest expense (interest expense, net interest expense, or interest paid). See me if you can’t find interest expense or if you are not sure which number to use.
b. A good times interest earned ratio is said to be at least 4. Ideally, you want operating income to cover interest expense with no problem.
If the ratio has declined (or increased) significantly, explain why. Is it due to the decline of operating income or due to an increase in interest expense which is likely the result of more borrowing (debt)? If an increase in interest expense was due to more borrowing/debt in a specific year, relate this to the balance sheet section.
6. Profit from the perspective of the Income Statement only: present separate graphs of the Gross Profit Margin % (if applicable) and the Net Profit Margin % for 5 years. These ratios relate only to the income statement.
a. Gross profit % ratio graph for 5 years applies to retailers selling inventory and manufacturers producing and selling inventory.
• Explain whether the GP% improved or not over the 5 years? What was the average GP% for the 5 years? What is the company’s most recent GP%, and how does it compare to its average over the 5 years?
• Compare your firm’s recent net profit margin to a competitor or to the industry. Be sure to cite how where you found your data; or you may use your competitor’s financial statements to calculate this yourself.
b. Net Profit Margin % graph (or Return on Sales) = Net income/Total Revenue.
Net profit margin reflects the portion of each dollar of revenue that is left in net income.
Preferably, both net profit margin % and total net income have increased.
• Net profit margin is a measure of how well the firm has controlled increases in its expenses. As revenue increases, we can expect expenses to also increase. However, if expenses increase at a greater rate than revenue, the net profit margin will decline.
• A decline in Net profit margin can be due to flat or lower revenue and higher expenses.
• If a firm’s revenue declined, but the firm managed to decrease its expenses at a higher rate, then its Net Profit Margin may have increased while its amount of net income declined (due to lower revenue). So just because a firm has a higher profit margin, does not mean that net income has improved. Its net income could have declined if revenue has declined.
• Give the average net profit margin over the 5 years. How does the company’s recent profit margin compare to its 5-year average and to highs and lows over the 5years?
• Identify and explain significant drops in the profit margin over the 5 years by explaining which expenses or loss increased most significantly in a specific year that caused the decline in profit margin. Relate this to coverage of the net income graph discussion.
• Suggest comparing your firm’s recent net profit margin to a competitor if you can identify a direct competitor.
7. Income Statement conclusion: review the keys points in this section such as revenue growth, income growth, changes in profit ratios, significant items of revenue or expense that affected income, etc. Focus on how the company’s revenue, income, and ratios have improved for the most recent year or not.
Part 3: Turnover/Efficiency Ratios – these ratios are important indicators of efficiency and liquidity. A slowdown in a turnover ratio can indicate a problem in a firm’s ability to generate revenue (asset turnover) and/or in liquidity (inventory and receivables turnover ratios).
• Turnover ratios relate an amount from the income statement to an amount on the balance sheet.
• For a firm that does not sell inventory, the inventory turnover ratio is not applicable. If so, state this in the presentation.
• For retailers that deal mostly in cash and credit card receivables, the amount of the receivable balance may be immaterial to the firm’s balance sheet and/or the turnover rate very fast with a high number of times and a low # days (say 3-5 days).
1. Asset turnover(=Total Revenue/Total Assets): the ability of a firm to generate revenue from its assets.
• For example, if asset turnover is 1.25, then the firm generated $1.25 for each $1.00 of assets. Preferably, total revenue grows at a greater rate than total assets with an asset turnover of 1.0 or more, but this may not be the case for your company.
• Your company may have a low asset turnover ratio (less than 1.0) if it has a significant amount of recorded intangible assets. Or it may have a high asset turnover (greater than 1.0). Because asset turnover depends on a company’s asset composition, it may be difficult to compare this ratio between competitors.
• The asset turnover affects a firm’s ROA: Profit margin X Asset turnover = ROA.
So be sure to refer to your firm’s asset turnover ratio when evaluating its ROA; a high turnover can boost ROA whereas a low turnover can reduce a firm’s ROA.
a. Graph the Asset Turnover ratio for 5 years. What is the average and range of its asset turnover for your company over the 5 years? Has the ratio improved or declined over the years? How does the firm’s most recent asset t/o compare to prior years (the average, high, and low points)? Use the Revenue and Assets graph (explained below) to explain major changes in the asset turnover.
b. Graph of Total Revenue and Total Assets for 5 years(2 lines- one for total revenue and one for total assets): use this graph to explain why asset turnover (previous graph) has increased or decreased in a particular year.
For example, total assets may have increased (or decreased) significantly in one year causing a large drop (or increase) in the asset turnover ratio that year such that the drop (or increase) in the ratio was due to the increase (or decrease) in total assets rather than a drop in total revenue.