Universal Office Furnishings has a statement of cash flows.
There are three parts to the statement.
The statement highlighted the line.
Cash flow is the amount of cash generated by the company and available for investment and financing activities.
Universal's cash flow from operating activities was $198.6 million, down slightly from the year before.
It was enough to cover the company's investing activities and financing activities.
The line near the bottom of the statement shows the increase in Universal's cash position.
The firm's cash position fell by more than $35 million in the previous year.
A high cash flow means the company has enough money to service debt, finance growth, and pay dividends.
Over time, investors like to see the firm's cash position increase because of the positive impact that it has on the company's ability to meet operating needs in a prompt and timely fashion.
The information content of the company's financial statements can be expanded by using such ratios.
tives used a number of accounting tricks to deceive the public in the United States and around the world.
Daniel Poston, CFO of Fifth Third Bank of Cincinnati, was reprimanded by the SEC for improper use of off-balance-sheet derivative transactions to accounting for commercial real.
Fifth Third was forced to pay a $6.5 nary loss rather than amortizing it over time to million fine to settle the case, and Poston agreed never to manipulate future earnings growth.
One of the steps to February 2012 is to separate internal products such as Kettle Chips and Pop Secret Popcorn, and external audits of a company by not permitting an Diamond Foods, fired its CEO and CFO after discover auditor to provide both internal and external audits.
Will this regulation be able to account for correctly?
The I InveStIng measure relates an item on the balance sheet to another or, as is more often, to an income statement.
We can look at what the financial state ment accounts tell us about the firm's ability to make money, rather than the absolute size of the accounts.
Financial ratios are used by investors to evaluate the financial results of the company and compare them to historical or industry standards.
The ratios from one year to the next are compared by investors.
When using industry standards, investors look at the ratios of other companies in the same line of business.
The reason we use ratios is to develop information about the past that can be used to plan for the future.
It's only from an understanding of a company's past performance that you can forecast its future.
If sales have been growing rapidly over the past few years, you need to carefully assess the reasons for the growth, rather than assuming that the trends will continue into the future.
Financial statement analysis and financial ratios can provide such insights.
There are five groups of financial ratios: (1) liquidity, (2) activity, (3) leverage,(4) profitability, and(5) common-stock, or market, measures.
We will identify and briefly discuss some of the more widely used ratios in each of the categories using the 2016 figures from the Universal financial statements.
Whether a company has adequate cash and other liquid assets on hand to service its debt and operating needs in a prompt and timely fashion is a major con cern.
The current ratio, quick ratio, and working capital ratio are three ratios that investors use to assess a firm's liquidity position.
One of the best measures of a company's financial health is the current ratio, which shows a company's ability to meet its short-term liabilities with its short-term assets.
According to this figure, Universal had enough short-term resources to service every dollar of debt.
The company is carrying an adequate level of liquid assets to satisfy the period's obligations, and that's a fairly good number.
The firm's inventory balance is often the least liquid on the balance sheet.
It can be difficult to sell its inventory and convert it into cash.
Many investors like to subtract inventory from the current assets total in order to assess whether a firm has enough liquid assets to meet obliga tions.
The quick ratio is similar to the current ratio but excludes inventory in the numerator.
Universal appears to have enough liquid assets.
Net working capital is an absolute measure and shows the dollar amount of equity in the working capital position of the firm.
Current assets and current liabilities are different.
Universal had a net working capital position for the year.
A net working capital figure greater than $125,000,000 is substantial for a firm of this size.
Our contention is that the firm's liquidity position is good if it is not made up of slow- moving obsolete inventories and past due accounts receivable.
The answer depends on many factors.
When a company's business is volatile, investors would like to see higher values for these ratios for firms in turbulent industries.
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Apple's balance sheet showed that the company had more than $33 billion in cash and marketable securities and another $160 billion in cash invested in long-term securities.
The low rate of return on those cash balances made investors want Apple to distribute some of its cash through dividends.
In general, investors want firms to have enough liquid assets to cover their short-term obligations, but they don't want firms to hold too much liquid assets because it will hurt the rate of return that the company earns on its overall asset portfolio.
The analysis begins with measuring general liquidity.
We need to assess the composition and underlying liquidity of key current assets and evaluate how effectively the company is managing these resources.
The company's use of its assets is measured by I InveStIng In Common StoCkS.
Accounts receivable, inventory, and total assets are three of the most widely used activity ratios.
There may be instances when activity ratios can be too high, as was the case with liquidity ratios, though other things being equal, high or increasing ratio values indicate that a firm is managing its assets efficiently.
A glance at most financial statements will show that the asset side of the balance sheet is dominated by a few accounts.
Accounts receivable, inventory, and net property, plant, and equipment accounted for 80% of total assets in 2016 at Universal Office Furnishings.
Universal has a significant accounts receivable balance, and most firms want to keep a close eye on it.
receivables are credit that a firm grants to its clients.
Firms want to collect from their customers as quickly as possible, and the sooner their customers pay their bills, the lower the accounts receivable balance.
If a firm gives its customers a long time to pay their bills, the receivables balance will be relatively high, but giving customers more time to pay might generate more sales.
There is a balance between taking advantage of the time value of money and using more generous credit terms to attract customers.
A firm that has a high receivables turnover is able to generate sales.
Universal's receivables were turned about 8.5 times a year.
A strong credit and collec tion policy is suggested by that excellent turnover rate.
If Universal's rapid collection policy did not discourage customers from buying Universal products, investors would be happy with this performance.
Each dollar invested in receivables was supporting $8.53 in sales.
Inventory is an important corporate resource that requires a lot of management attention.
Firms prefer to sell their products quickly than hold them in stock.
Some items, such as consumer electronics, lose value over time.
It is not possible for a firm to make a profit on an item that it has produced.
Firms have great incentives to increase inventory turnover.
Universal's 2016 turnover of almost 19 times a year means that the firm is holding inventory for less than a month.
A high turnover ratio indicates that the firm is doing a good job with its inventory.
If the inventory bal ance is lower, the inventory turnover ratio will be higher.
Firms could improve their turnover ratio by holding less inventory.
Firms have to manage a tradeoff here.
Firms may not be able to fill customers' orders on time if they are too aggressive in trimming their inventory levels.
If there are no problems associated with inventory levels that are too lean, investors like to see rapid inventory turnover.
Universal will have a lower inventory turnover figure in 2016 because cost of goods sold is less than sales.
For analytical purposes, you would still use the measure in the same way regardless of whether you use sales or cost of goods sold.
Universal is generating more than $2 in revenues from every dollar invested in assets.
This is important because it has a direct bearing on corporate profitability.
The principle at work here is that $100 from a $1,000 investment is more desirable than $100 from a $2,000 investment.
A high total asset turnover figure indicates that corporate resources are being well managed and that the firm is able to realize a high level of sales from its asset investments.
They show the amount of debt being used to support the company.
Potential investors are concerned about the amount of debt within the financial structure and the firm's ability to service it.
The leverage ratios are widely used.
The amount of debt that a company uses is measured by the debt-equity ratio and equity multiplier.
The company's ability to service its debt is assessed by the third, times interest earned.
This ratio is helpful in assessing a stock's risk exposure because highly leveraged firms are more likely to default on their loans.
Most of the company's capital comes from its owners, as shown by the 2016 debt-equity ratio for Universal.
There was only 60 cents of long-term debt in the capital structure for every dollar of equity.
The firm has a more reason able debt load if the debt-equity ratio is low, as that indicates lower risk exposure.
Below is the formula for the equity mul tiplier.
It may seem odd to say that the equity multiplier measures a firm's use of debt because debt does not appear in Equation 7.8, but keep in mind that total assets is the sum of liabilities and equity.
For a firm with no debt, assets will equal stockholders' equity, and the equity multiplier will be 1.0.
The firm's total assets will be higher if it holds equity fixed and if it uses more debt.
There is $3.20 of assets for every $1 of equity for Universal.
Universal has debt of all types, not just long-term debt, for each $1 of equity because assets is the sum of debt and equity.
The ability of the firm to cover its fixed interest payments is measured.
The ability of the company to meet its interest payments in a timely fashion is an important consideration in evaluating risk exposure.
The firm has $17.55 of EBIT available to cover every dollar of interest expense, according to Universal's times interest earned ratio.
That is a very high coverage ratio.
A strong ratio is eight to nine times earnings.
When interest earned is less than two or three times earnings, there's usually little concern.
The times interest earned ratio has an alternative earnings figure in it.
They argue that depreciation and amortization should be added back to earnings to give a more realistic figure.
The problem is that the figures put performance in a better light.
As a result, the ratio of times interest earned tends to increase.
In the case of Universal, adding depreciation and amortization results in a coverage ratio of $312.3/$13.4, which is better than the conventional way of calculating it.
The returns of a company to its sales, assets, or equity are related to the various profitability measures.
Profitability measures include net profit margin, return on assets and return on equity.
Other things being equal, higher or increasing measures of profitability are what you'd like to see if the company is more profitable.
The bottom line is operations.
The net profit margin is a percentage of sales.
Universal had a net profit margin of 7.2%.
The company earned a profit for every dollar of revenue it generated.
It is above average for firms in the business equipment industry.
The most important measure of return is the effectiveness of generating profits from assets that are available.
The annual profit earned by the firm is a percentage of the equity that stockholders have invested in the firm.
It's about 47 cents for every dollar of equity for Universal.
That is an outstanding measure of performance and suggests that the company is doing its best to maximize shareholder value.
It's a good idea to look out for a falling ROE.
The measures of corpo rate profitability are called ROA and ROE.
To get the most from these two measures, we have to break them down into their component parts.
The firm's net profit margin and total asset turnover are two key compo nents of ROA.
We can use the net profit margin and total asset turnover figures that we computed earlier, rather than using Equation 7.11 to find ROA.
We can find Universal's 2016 ROA using this expanded format.
We end up with the same figure as the one found in Equation 7.11.
It shows you what's driving company profits.
If the company's profit margin improves or its total asset turnover goes down, you want to know if the company's Return on Assets is moving up or down.
The company is doing a good job of managing its assets and profits.
Return on equity can also be broken into its component parts.
ROE is just an exten sion of ROA.
The assessment of profit ability is brought into the financing decisions of the company.
The expanded ROE measure shows the extent to which financial leverage can increase return to stockholders.
The use of debt in the capital structure means that the ROE will always be greater than the ROA.
The question is how much more.
The abbreviated ver sion of ROE in Equation 7.12 can be used instead.
First, recall that Universal's equity multiplier was 3.2.
Here we can see that the use of debt has increased returns to stockholders.
We can expand Equation 7.14 by breaking it into component parts.
The expanded version of ROE allows investors to assess the company's profitability in terms of three key components: net profit margin, total asset turnover, and financial leverage.
It is possible to determine if the firm is moving up simply because it is employing more debt, or if it is managing its assets and operations in a positive way.
To stockholders, ROE is a measure of performance.
A high ROE means that the firm is currently very profitable, and if some of those profits are reinvested in the business, the firm may grow rapidly.
Common-stock ratios include earnings per share, price-to-earnings ratio, dividends per share, and book value per share.
We looked at the measures of earnings per share and dividend yield earlier in the text.