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? The size of the divided is decided by the board of directors。 current ratio = D Legal Services ? High percentage of cash ? Almost zero inventory ? High asset turnover ? High profitability ? Long collection period ? Cash = 31% ? Inventory = 1% ? Assets turns = ? Gross margin = 57%。 ROE = 29% ? Collection period = 52 days E Prepackaged Software ? High percentage of cash ? High accounts receivable ? Low inventory ? High gross margin ? Low fixed assets ? Significant intangible assets (patents) ? Cash = 22% ? Accounts receivable = 32% ? Inventory = 5% ? Gross margin = 59% ? Fixed assets = 19% ? Other noncurrent assets = % F 30 Gillette Exercise Exercise: Please calculate Gillette Company’s key financial ratios based on its 1996 annual report ?Profitability ?Turnover ?Leverage ?Liquidity and coverage The objective of this exercise is to test your ability to calculate key financial ratios. Note: For this exercise, do not include mergerrelated costs in the calculations. 31 Gillette Exercise Profitability Ratios * This is not a profitability ratio, but it does impact ROS **Excluding mergerrelated costs. Nonoperating charges should not be included in the operating profit margin. Ratios Gillette Ratio Calculations Gross profit margin (or gross margin) Sales cost of goods sold Sales Operating profit margin (or operating margin) Earnings before interest and taxes** Sales Return on sales (ROS) Profit after tax** Sales Effective tax rate* Taxes Profit before tax 6, 9, = = 62% 2, 9, = = % 1, 9, = = % 1, = = % () () (, ) () Page Number in 1996 Annual Report 1, + 9, = + 9, = 32 Gillette Exercise Turnover Ratios Note: Average=(Year Beginning+Year End)/2 * Sales is often a good proxy ** Cost of goods sold is often a good proxy Ratios Gillette Ratio Calculations Receivables turnover Credit sales in period* Accounts receivable average balance 9, (2, + 2,)/2 = = (, ) or 365 = 94 days Inventory turnover Cost of goods sold in period Average inventory in period 3, (1, + 1,)/2 = (, ) or 365 = 130 days = Payables turnover Purchases on account** Accounts payable average balance 3, ( + )/2 = (, ) or 365 = 52 days = 365 Asset turnover Sales in period Average assets 9, (10, + 8,)/2 = (, ) or = 365 days = Page Number in 1996 Annual Report 33 Gillette Exercise Leverage Ratios * All three ratios here are called “l(fā)everage” ratios by different people, so be sure to understand which ratio is being used when someone is talking about leverage. **The inclusion of deferred ine taxes in longterm debt is debatable. Ratios* Gillette Ratio Calculations DuPont leverage ratio Assets Equity Debt to equity ratio Longterm debt** Equity Debt to total capital or debt to total assets ratio 10, 4, = = () + 1, + 4, = = () 5, 10, = = () Page Number in 1996 Annual Report 1, 4, = Total liabilities Debt + equity Total liabilities Assets = 34 Gillette Exercise Liquidity and Coverage Ratios Ratios Gillette Ratio Calculations Current ratio Current assets Current liabilities Quick ratio (acid test) Cash + marketable securities + receivables Current liabilities Interest coverage ratio Earnings before interest and taxes* Interest expense Fixed charge coverage Earnings before interest and taxes* All essential payments (including lease payments) Liquidity: Coverage: 4, 2, = = () + + 2, 2, = = () 2, = = () 2, ( ) + = = (, ) Page Number in 1996 Annual Report *” Other charges ” under nonoperating charges have been included here because they appear to be recurring and thus will impact the pany’s ability to make its interest payments. 35 Agenda ?Using ratios ?Types of key ratios –profitability –turnover –leverage –liquidity –coverage ?Return on Equity ?Ratio exercises ?Forecasting exercise ?Abbreviations ?Key takeaways 36 Forecasting Exercise Data * Financial statements have been constructed for this exercise based in part on The Gillette Company’s 1996 Annual Report. Since the data have been changed significantly, you should not use them to analyze Gillette’s financial performance. For this exercise, assume that historical data is a good indicator of 1997 financials. ** Net working capital in year 1994 is $854 million *** Cumulative CAPEX at the end of 1994 is $3,139 million The New England Razor Company Statement of Operations ($ 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) $734 1997 Assumptions Using abbreviated financial statements for The New England Razor Company in 1995 and 1996, forecast the statements for 1997.* 37 Forecasting Exercise Answer The New England Razor Company Statement of Operations ($ 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) EB