【正文】 reciation Increase in working capital Taxes paid Capital expenditure*** = Cash flow 1995 $8,834 (6,769) 2,065 (266) 1,799 667 $1,132 $2,291 269 (1,610) $950 $1,799 266 (96) (667) (593) $709 1996 $9,698 (7,356) 2,342 (293) 2,049 (760) $1,289 $2,725 309 (1,965) $1,069 $2,049 293 (119) (760) (729) $734 1997 Assumptions Using abbreviated financial statements for The New England Razor Company in 1995 and 1996, forecast the statements for 1997.* 37 Ratio Analysis BOS Forecasting Exercise Answer The New England Razor Company Statement of Operations ($ Millions) Revenues COGS = Gross profit SGA = EBIT Taxes = Net ine Working Capital Balance Sheet (year end) ($ Millions) Accounts receivable + Inventory Accounts payable = Net working capital Cash Flow Statement ($ millions) EBIT + Depreciation Increase in working capital Taxes paid Capital expenditure = Cash flow 1995 $8,834 (6,769) 2,065 (266) 1,799 (667) $1,132 $2,291 269 (1,610) $950 $1,799 266 (96) (667) (593) $709 1996 $9,698 (7,356) 2,342 (293) 2,049 (760) $1,289 $2,725 309 (1,965) $1,069 $2,049 293 (119) (760) (729) $734 1997 Assumptions $10,668 (8,129) 2,539 (320) 2,219 (823) $1,396 $2,891 333 (2,057) $1,167 $2,219 358 (98) (823) (763) $893 10% annual growth % of sales % of sales % effective tax rate % of sales % of COGS % of COGS % of sales in 1998 $11,735 1998 % of cumulative CAPEX 38 Ratio Analysis BOS Forecasting Exercise Assumptions () Assumptions should be made based on the pany’s historical financial data, as well as your judgment regarding future trends. Line Item Assumptions (Rationale) Alternative method of making assumption ?Revenue growth ?Historical growth rate of 10% (Historical rate judged to be a good predictor of future rate) ?Industry forecasted growth rate ?COGS ?Average ratio of COGS/Sales in 1995 and 1996 (COGS is directly related to sales) ?Estimate fixed and variable portions of COGS and then apply ratio of variable cost to sales to the sale forecast ?Potential improvement of cost structure could also be considered ?Depreciation ?Average ratio of depreciation to cumulative CAPEX (Depreciation is based on cumulative CAPEX) ?Estimate the average life of the PPE assets and calculate depreciation based on the asset lives ?Taxes ?Historical effective tax rate of % is used 39 Ratio Analysis BOS Forecasting Exercise Assumptions () ?Accounts receivable ?Average ratio of A/R to sales (A/R is directly related to sales) ?Estimate number of days of sales ?Inventory ?Average ratio of inventory to COGS (Inventory is more related to COGS than to sales) ?Estimate number of days of inventory ?Accounts payable ?Average ratio of A/P to COGS (A/P is the money payable to suppliers, therefore it is more related to COGS than to sales) ?Estimate number of days of COGS ?Capital expenditure ?Average ratio of CAPEX to next year’s sales (In a growing business, the pany should keep capital spending in line with its sales projection) ?Assume PPE has constant relation with sales growth, and then plug CAPEX Line Item Assumptions (Rationale) Alternative method of making assumption 40 Ratio Analysis BOS Forecasting Exercise Detailed Answer * (Year beginning + Year end)/2 The New England Razor Company Statement of Operations Revenue 1997: Revenue 1996 x = 9,698 x = 10,668 Revenue 1998: Revenue 1997 x = 10,668 x = 11,735 (Revenue 1998 is needed to calculate CAPEX later) COGS 1997: Revenue 1997 x = 10,668 x = 8,129 Gross profit: 10,668 8,129 = 2,539 SGA: 10,668 x = 320 EBIT: Gross profit SGA = 2,539 320 = 2,219 Taxes: EBIT x effective tax rate = 2,219 x % = 823 Net Ine: EBIT taxes = 2,219 823 = 1,396 1994 1995 1996 1997 Cumulative CAPEX (year end) $3,139 $3,732 $4,461 $5,224 Average cumulative CAPEX* $3,436 $4,097 $4,843 Depreciation as % of average cum. CAPEX % % % Depreciation: Average cumulative CAPEX in 1997 x % = 4,843 x = 358 Account receivable: Sales x % = 10,668 x = 2,891 Inventory: COGS x % = 8,129 x = 333 Account payable: COGS x % = 8,129 x = 2,057 Net working capital: A/R + inventory A/P = 2,891 + 333 2,057 = 1,167 Working Capital Balance Sheet Cash Flow Statement EBIT: 2,219 Depreciation: 358 Increase in working capital: (NWC) 1997 (NWC) 1996 = 1,167 1,069 = 98 Taxes paid: 823 Capital expenditure: Sales in 1998 x % = 11,735 x = 763 Cash flow: EBIT + depreciation increase in working capital taxes paid CAPEX = 893 41 Ratio Analysis BOS Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 42 Ratio Analysis BOS Abbreviations A/P = Accounts payable A/R = Accounts receivable CAPEX = Capital expenditures COGS = Cost of goods sold EBIT = Earnings before interest and taxes NWC = Net working capital PAT = Profit after tax PBT = Profit before tax PPE = Property, plant, and equipment ROA = Return on assets ROE = Return on equity ROS = Return on sales SGA = Selling, general, and administrative WC = Working capital 43 Ratio Analysis BOS Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 44 Ratio Analysis BOS Key Takeaways ?Ratios hel