Winning Business : How to Use Financial Analysis and Benchmarks to Outscore Your Competition

Winning Business......Page 1
Imprint......Page 2
Title page......Page 3
Copyright......Page 4
Contents......Page 5
Acknowledgments......Page 12
Introduction......Page 13
Considerations......Page 15
Argo, Inc. Financial Statements......Page 17
Financial Statement Analysis Methods......Page 19
1 Using Vertical Analysis to Analyze Financial Statements......Page 20
2 Using Horizontal Analysis to Analyze Financial Statements......Page 21
3 Exploring Variance Analysis......Page 22
4 Studying Ratio Analysis......Page 23
Income Analysis......Page 24
5 Determining Gross Profit......Page 25
6 Examining the Gross Profit Ratio......Page 27
7 Calculating Income from Operations......Page 29
8 Examining the Operations Income Ratio......Page 31
9 Measuring Pretax Profit......Page 33
10 Evaluating the Pretax Profit Ratio......Page 35
11 Calculating Net Income......Page 37
12 Comparing Net Income to Sales......Page 39
13 Finding the Percentage of Net Sales and Net Income that are Domestic......Page 41
14 Finding the Percentage of Sales and Net Income that are Foreign......Page 42
15 Determining the Cost of Capital......Page 43
16 Measuring Economic Value Added (EVA)......Page 44
17 Comparing Economic Value Added (EVA) to Net Income......Page 45
18 Examining the Size of Residual Income......Page 46
19 Comparing Residual Income to Net Income......Page 48
20 Determining the Return on Equity (ROE)......Page 49
21 Finding the Return on Assets (ROA)......Page 51
22 Determining the Return on Invested Capital (ROIC)......Page 53
23 Comparing Cash Provided by Operations to Net Income......Page 55
24 Comparing Short-Lived Income to Net Income......Page 56
25 Determining the Significance of Short-Lived Sales to Net Sales......Page 57
26 Operations to Total Cash Flow......Page 58
27 Comparsing Cash Flow from Investing Activities to Total Cash Flow......Page 60
28 Comparing Cash Flow from Financing Activities to Total Cash Flow......Page 61
Investment Analysis......Page 62
29 Determining Revenues Earned Per Share of Stock......Page 63
30 Finding the Amount of Earnings Per Share of Common Stock......Page 64
31 Examining Dividends Per Common Share......Page 65
32 Calculating the Growth Rate of Revenues......Page 67
33 Calculating the Growth Rate of Earnings......Page 69
34 Finding the Common Stock Dividend Growth Rate......Page 71
35 Determining the Price-to-Earnings (P/E) Ratio......Page 72
36 Measuring the Price-to-Earnings-to-Growth- Rate Ratio (PEG)......Page 73
37 Examining the Earnings Yield......Page 74
38 Determining the Market Price Return Ratio......Page 75
39 Stock Dividend Return Ratio......Page 76
40 Determining the Size of the Common Stock Dividend Payout......Page 77
41 Determining the Size of the Dividend Payout in Relation to Operations Cash Flow......Page 78
42 Determining the Preferred Dividend Return Ratio......Page 80
43 Determining the Size of the Preferred Dividend Payout......Page 81
44 Determining the Size of the Preferred Dividend Payout in Relation to Operations Cash Flow......Page 82
45 Determining the Size of the Total Return on Common Stock......Page 83
46 Computing the Cash Flow Per Share of Outstanding Common Stock......Page 84
47 Computing the Operating Cash Flow Per Share of Outstanding Common Stock......Page 86
48 Determining the Volatility, or Beta, of a Stock......Page 88
Product and Factory Costs......Page 89
49 Calculating the Total Amount of Direct Costs Per Production Unit......Page 90
50 Determining the Total Labor Cost Per Production Unit......Page 91
51 Calculating the Total Cost Per Production Unit......Page 92
52 Examining Variable Costs......Page 93
53 Comparing Variable Costs with Total Costs......Page 95
54 Examining Variable Costs Per Production Unit......Page 97
55 Examining Fixed Costs......Page 99
56 Comparing Fixed Costs to Total Costs......Page 101
57 Finding the Fixed Cost Per Unit......Page 103
58 Finding the Contribution Margin......Page 105
59 Determining the Break-Even Point in Sales Volume......Page 107
60 Determining the Break-Even Point in Sales Dollars......Page 109
61 Finding the Sales Volume Necessary to Generate a Desired Operating Income......Page 111
62 Finding the Sales Dollars Necessary to Generate a Desired Operating Income......Page 113
63 Finding the Break-Even Plant Capacity......Page 115
Expense Analysis......Page 117
64 Comparing the Cost of Goods Sold to Sales and Net Income......Page 118
65 Calculating the Amount of Sales and Cost of Goods Sold Per Employee......Page 120
66 Determining Sales, Net Income, and the Cost of Goods Sold Per Direct Labor Employee......Page 121
67 Comparing the Cost of Direct Labor and Direct Labor Hours Worked to Sales, Net Income, and the Cost of Goods Sold......Page 122
68 Comparing Direct Labor Costs, Direct Labor Employees, and Direct Labor Hours Worked to the Cost of All Labor......Page 124
69 Finding the Labor Cost and Hours Worked Per Direct Employee......Page 126
70 Determining the Percentage of All Employees Who Are Direct Laborers......Page 128
71 Determining the Direct Labor Costs Per Production Unit and Other Direct Labor Efficiency Ratios......Page 130
72 Comparing the Direct Overhead Cost to Sales, Net Income, and the Cost of Goods Sold......Page 131
73 Comparing Raw Materials Costs to Sales, Net Income, and the Cost of Goods Sold......Page 132
74 Comparing Other Direct Costs to Sales, Gross Profit, Net Income, and the Cost of Goods Sold......Page 133
75 Comparing R&D Costs to Sales and Net Income......Page 134
76 Comparing Selling, General, and Administrative Costs (SG&A) to Sales and Net Income......Page 136
77 Comparing Individual Overhead Expenses to Total Overhead Expenses and Sales......Page 137
78 Finding Plant Equipment Costs Per Hour......Page 139
79 Comparing the Cost of Fixed Asset Maintenance to Sales......Page 140
80 Comparing the Cost of Fixed Asset Maintenance to the Value of Fixed Assets......Page 141
81 Relating Insurance Costs to Sales Revenue......Page 142
82 Relating Insurance Expenses to the Value of Fixed Assets......Page 143
83 Examining Book Depreciation......Page 144
84 Examining Tax Return Depreciation......Page 145
85 Relating Book Depreciation Expenses to Sales Revenue......Page 146
86 Comparing Book Depreciation Expenses to the Value of Fixed Assets......Page 147
Assets......Page 148
87 Determining the Size of Fixed Assets......Page 149
88 Examining the Relationship Between Fixed Assets and Sales......Page 150
89 Examining the Relationship Between Fixed Assets and Net Income......Page 151
90 Examining the Relationship Between Fixed Assets and Operations Cash Flow......Page 153
91 Comparing Fixed Assets to Total Assets......Page 154
92 Assessing the Fixed-Asset- to-Equity Ratio......Page 155
93 Determining the Relationship Between Fixed Assets and Long-Term Debt......Page 156
94 Comparing Fixed Assets to Short-Term Debt......Page 157
95 Examining Fixed Asset Turnover......Page 158
96 Assessing the Age of Fixed Assets......Page 159
97 Determining the Turnover Rate of Total Assets......Page 160
98 Finding the Total Asset Coverage Ratio......Page 161
99 Comparing Intangible Assets to Sales Revenue......Page 162
100 Comparing Intangible Assets to Net Income......Page 163
101 Comparing Intangible Assets to Total Assets......Page 165
102 Comparing Intangible Assets to Owner’s Equity......Page 167
103 Comparing Changes in Intangible Assets to Changes in Net Income......Page 168
104 Comparing Individual Intangible Assets to Sales......Page 169
105 Comparing Individual Intangible Assets to Net Income......Page 170
106 Comparing Individual Intangible Assets to Total Assets......Page 171
107 Measuring the Rate of Fixed Asset Reinvestment......Page 172
108 Determining the Productivity of Fixed Assets......Page 173
109 Comparing Fixed Asset Replacement Cost and Book Value......Page 174
110 Comparing High-Risk Assets to Sales Revenue......Page 175
111 Relating High-Risk Assets to Total Assets......Page 176
Debt......Page 177
112 Comparing Debt to Sales......Page 178
113 Examining the Debt-to-Operating Income Ratio......Page 179
114 Examining the Debt-to-Asset Ratio......Page 180
115 Examining the Debt-to-Equity Ratio......Page 181
116 Comparing Debt to the Market Value of Assets......Page 182
117 Determining Debt Turnover......Page 183
118 Comparing Debt and Total Invested Capital......Page 184
119 Relating Short-Term Debt to Long-Term Debt......Page 185
120 Determining the Cost of Debt Capital......Page 186
Equity......Page 187
121 Comparing Equity to Sales Revenue......Page 188
122 Comparing Equity to Total Assets......Page 189
123 Comparing Equity to Total Debt......Page 190
124 Determining the Turnover of Equity......Page 191
125 Examining the Turnover of Invested Capital......Page 192
126 Comparing Net Income to Invested Capital......Page 193
127 Comparing Stock to Invested Capital......Page 194
128 Comparing Retained Earnings to Invested Capital......Page 195
Liquidity......Page 196
129 Finding the Current Ratio......Page 197
130 Using the Acid Test......Page 198
131 Determining the Cash Flow Ratio......Page 199
132 Calculating Cash Turnover......Page 200
133 Finding How Many Days of Cash Expenses are Available......Page 201
134 Examining How Many Days of Sales in Cash are Available......Page 202
135 Using Altman’s Z-score to Determine the Probability of Bankruptcy......Page 203
136 Comparing Sales to Current Assets......Page 205
137 Comparing Liquid Assets to Current Liabilities......Page 206
138 Relating Liquid Assets to Cash Expenses......Page 207
139 Relating Current Debt to Sales......Page 208
140 Comparing Current Debt to Total Debt......Page 209
141 Examining Working Capital......Page 210
142 Finding the Turnover of Working Capital......Page 211
143 Comparing Working Capital to Sales......Page 212
144 Comparing Working Capital to Net Income......Page 213
145 Relating Working Capital to Current Debt......Page 214
146 Relating Working Capital to Long-Term Debt......Page 215
147 Relating Working Capital to Total Debt......Page 216
148 Comparing Working Capital to Current Assets......Page 217
149 Comparing Working Capital to Specific Current Assets Such as Cash and Inventory......Page 218
150 Comparing Working Capital to Total Assets......Page 219
151 Relating Liquid Assets to Total Current Assets......Page 221
152 Relating Marketable Securities to Total Current Assets......Page 222
153 Comparing Accounts Receivable to Total Current Assets......Page 223
154 Comparing Inventory to Total Current Assets......Page 224
155 Comparing Other Specific Current Asset Accounts to Total Current Assets......Page 225
156 Comparing Specific Expenses Such Interest and Taxes to Total Current Assets......Page 226
Solvency......Page 227
157 Determining How Times Interest Expense is Earned......Page 228
158 Comparing Operations Cash Flow Plus Interest to Interest......Page 229
159 Finding How Many Times Debt Expenses are Covered......Page 230
160 Comparing Operations Cash Flow Plus Debt Expenses to Debt Expenses......Page 231
161 Finding How Many Times the Long-Term Debt is Covered......Page 232
162 Comparing Operations Cash Flow to Long-Term Debt......Page 233
163 Finding How Many Fixed Costs are Covered......Page 234
164 Comparing Operations Cash Flow Plus Fixed Costs to Fixed Costs......Page 235
165 Expenses are Covered......Page 237
166 Comparing Operations Cash Flow Plus Operating Expenses to Operating Expenses......Page 238
167 Determining How Many Days of Operating Expense Payables are Outstanding......Page 239
168 Finding How Many Times Asset Additions are Covered......Page 240
169 Comparing Operations Cash Flow to Changes in Assets......Page 241
170 Comparing Retained Earnings to Total Assets......Page 242
Leverage......Page 243
171 Comparing Debt to the Market Value of Equity......Page 244
172 Comparing Current Debt to the Market Value of Equity......Page 245
173 Comparing Long-Term Debt to the Market Value of Equity......Page 246
174 Determining the Funded-Capital- to-Fixed-Asset Ratio......Page 247
175 Examining Financial Leverage......Page 248
176 Examining Operating Leverage......Page 250
177 Examining Total Leverage......Page 252
Accounts Receivable......Page 254
178 Comparing Accounts Receivable to Sales......Page 255
179 Determining the Turnover of Accounts Receivable......Page 256
180 Determining How Many Days of Credit Sales are in Accounts Receivable......Page 257
181Examining the Ages of Accounts Receivable (Aging Schedule)......Page 258
182 Determining What Percentage of Current-Period Sales Will Be Collected in the Current Period......Page 259
183 Determining What Percentage of Current-Period Sales Will Not Be Collected in the Curren......Page 260
184 Examining Bad Debt and Accounts Receivable......Page 261
185 Relating Bad Debts to Sales......Page 262
186 Determining if Credit Discounts Should be Accepted and Offered......Page 263
187 Examining Accounts Receivable Factoring......Page 265
Accounts Payable......Page 266
188 Comparing Accounts Payable to Sales......Page 267
189 Finding the Turnover of Accounts Payable......Page 268
190 Calculating the Number of Days of Purchases in Accounts Payable......Page 269
191 Comparing Accounts Payable to Purchases......Page 270
192 Finding How Many Days of Purchases Have Been Paid......Page 271
193 Comparing Accounts Payable Cash Disbursements to Accounts Payable......Page 272
194 Comparing Individual Accounts Payable Disbursements to Total Cash Disbursements......Page 273
Inventory......Page 274
195 Relating Inventory and Sales Levels......Page 275
196 Determining the Turnover of the Entire Inventory......Page 276
197 Determining How Many Days of Inventory Are On Hand......Page 277
198 Calculating the Turnover of Finished Product Inventory......Page 278
199 Finding How Many Days of Finished Product Inventory Are Available......Page 279
200 Determining the Turnover of Work in Process Inventory......Page 280
201 Calculating How Many Days of Work in Process Are Available......Page 281
202 Determining the Turnover of Raw Materials Inventory......Page 282
203 Examining How Many Days of Raw Materials Inventory Are Available......Page 283
204 Determining the Inventory Ordering Cost......Page 284
205 Measuring the Inventory Carrying Cost......Page 286
206 Determining the Optimum Inventory Order Quantity......Page 287
207 Determining the Total Cost of Inventory Per Item......Page 289
208 Determining the Timing of Inventory Reorders......Page 291
209 Estimating the Size of Inventory Safety Stock......Page 292
210 Examining Just-in-Time (JIT) Systems......Page 294
Product and Service Demand Types......Page 295
211 Examining Elastic Demand for Goods or Services......Page 296
212 Examining Inelastic Demand for Goods and Services......Page 297
213 Understanding Unitary Elasticity for Goods or Services......Page 298
214 Examining Cross-Elasticity for Goods or Services......Page 299
215 Examining Price Elasticity of Supply......Page 300
Capital Investment......Page 301
216 Determining the Payback Period......Page 302
217 Determining the Payback Reciprocal......Page 303
218 Finding the Discounted Payback Period......Page 304
219 Finding the Accounting Rate of Return......Page 306
220 Determining the Net Present Value (NPV)......Page 307
221 Finding the Risk-Adjusted Discount Rate......Page 309
222 Ascertaining the Benefit Cost Ratio......Page 311
223 Finding the Internal Rate of Return (IRR)......Page 312
224 Finding the Modified Internal Rate of Return (MIRR)......Page 314
225 Determining the Certainty Equivalent......Page 315
226 Determining the Future Value of $1......Page 317
227 Finding the Future Value of an Annuity of $1......Page 318
228 Calculating the Future Value of an Annuity Due of $1......Page 319
229 Finding the Present Value of $1......Page 320
230 Determining the Present Value of an Annuity of $1......Page 321
231 Calculating the Present Value of an Annuity Due of $1......Page 322
232 Examining Perpetuities......Page 323
Investment/Loan Interest Rate Information......Page 324
233 Examining Simple Interest......Page 325
234 Exploring Compounded Interest......Page 326
235 Examining the Current Yield on Bonds......Page 327
236 Examining the Yield to Maturity on Bonds......Page 328
237 Examining the Effective Annual Yield on T-bills......Page 329
238 Exploring the Rule of 72......Page 330
239 Exploring Interest Rates and Their Significance: Federal Funds Rate......Page 331
240 Exploring Interest Rates and Their Significance: Discount Rate......Page 332
241 Exploring Interest Rates and Their Significance: Treasury Bills/Notes/Bonds......Page 333
External Indicators......Page 334
242 Examining the Index of Leading Economic Indicators......Page 335
243 Examining the Index of Coincident  Economic Indicators......Page 336
244 Examining the Index of Lagging Economic Indicators......Page 337
245 Assessing the Gross Domestic Product (GDP)......Page 338
246 Examining the Gross National Product (GNP)......Page 339
247 Examining the Producer Price Index (PPI)......Page 340
248 Assessing the Consumer Price Index (CPI)......Page 341
249 Examining the Dow Jones Industrial Average (DJIA)......Page 342
250 Exploring the Russel 2000 Average......Page 343
251 Exploring the Wilshire 5000 Average......Page 344
Company Valuation......Page 345
252 Determining the Book Value of a Company......Page 346
253 Finding the Liquidation Value of a Company......Page 347
254 Ascertaining the Market Value of a Company......Page 349
255 Assessing the Price-to-Earnings Value of a Company......Page 350
256 Valuing a Company on Discounted Future Cash Flow......Page 351
257 Determining the Value of a Company with No-Earnings-Per-Share Dilution......Page 352
Appendix A......Page 353
Appendix C......Page 355
References and Suggested Reading......Page 356
Index......Page 357
About the Author......Page 362