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Management and investors often are more interested in the return camed on the funds invested than in the level of profits as a percentage of sales. Companies operating in business requiring very little investment in assets often have low profit margins but earn very attractive return on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that eam miserably low returns on invested funds, despite seemingly attractive profit margins Therefore, it is useful to examine the retum eamed on the funds provided by the shareholders and by the investors in the company's interest-bearing debt. To increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return 6 This document is stored for use only by Monary in F. Corporate Finance by WILLIAM COFFING Glycon College introm 2000 Dec 2000 For the Amusing a Company's future Financial Health 1-12 The use of EBIAT as the measure of return also allows the analyst to compare the return on invested capital (calculated before the deduction of interest expense) with the company's estimated cost of capital to determine the long-term adequacy of the company's profitability. EBLAT is calculated by multiplying EBIT (earnings before interest and taxes) times (1-the average tax rate) EBIT (1-tax rate) Owners equity plus interest bearing debt 3. SciTronics had a total of 5 of capital at year end 2008 and eamed, before interest but after taxes (EBIAT), S_ in 2005. Its return on capital was in 2008, which represented an increase/decrease from the camed in 2005 From the viewpoint of the shareholders, an equally important figure is the company's retum on equity. Return on equity is calculated by dividing profit after tax by the owners equity. Profit after takes Owners equity Return on equity Return on equity indicates how profitably the company is utilizing shareholders funda 4. SciTronics had __ of owners' equity and earned $__after taxes in 2008. Its return on equity was _, which represented an improvement deterioration from the camed in 2005 Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio. Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratios may indicate uncollectible accounts receivable or obsolete inventory or equipment Total asset turnover measures the company's effectiveness in utilizing its totales and is calculated by dividing total assets into sales Net sales Total assets 1. Total asset turnover for SciTronics in 2005 can be calculated by dividing $_ intos The tumover improved/deteriorated from times in 2005 to times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait, on average, between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days Management and investors often are more interested in the returneamed on the funds invested than in the level of profits as a percentage of sales. Companies operating in businesses requiring very little investment in assets often have low profit margins but cam very attractive return on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that eam miserably low returns on invested funds, despite seemingly attractive profit margins Therefore, it is useful to examine the retum eamed on the funds provided by the shareholders and by the investors in the company's interest-bearing debt To Increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return. This document is thorized to use only by Wamuna Turne- Corporate Finance WILLIAM COFFING Gold Beacon Culegerinc tronn Dec2000 For the exclusive use of M. Turay, 2020. Amusing Company's future Financial Health The use of EBIAT as the measure of return also allows the analyst to compare the return on invested capital calculated before the deduction of interest expense) with the company's estimated cost of capital to determine the long-term adequacy of the company's profitability EBIAT is calculated by multiplying EBIT (earnings before interest and taxes) times (1 - the average tax rate) EBIT (1-tax rate) Owners equity plus interest bearing debt 3. SciTronics had a total of 5 of capital at year-end 200 and eamed, before interest but after taxes (EBIAT). S in 2005. Ils retum on capital was_% in 2008, which represented an increase decrease from the eamed in 2005. From the viewpoint of the shareholders, an equally important figure is the company's return on equity. Return on equity is calculated by dividing profit after tax by the owners' equity. Profit after taxes Owners equity Return on equity Return on equity indicates how profitably the company is utilizing shareholders' funds. 4. SetTronics had __ of owners' equity and cared_after taxes in 2005. Its return on equity was 5, which represented an improvement deterioration from the camed in 2005 Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio. Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratios may indicate uncollectible accounts receivable or obsolete inventory or equipment Total asset turnover measures the company's effectiveness in utilizing its total assets and is calculated by dividing total assets into sales Net sales Total assets 1. Total asset turnover for SciTronics in 2005 can be calculated by dividing S_ into The turnover improvedeteriorated from times in 2005 to times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset Categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait, on average, between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days Financial Ratios and Financial Analysis The three primary sources of financial data for a business are its income statement, the balance sheet, and statement of cash flows. The income statement summarizes revenues and expenses over a period of time. The balance sheet shows what a company owns (its assets), what it owes (its liabilities), and what has been invested by the owners (owners' equity) at a specific point in time. The statement of cash flow categorizes all cash transactions during a specific period in terms of cash flows generated or used for operating activities, investing activities, and financing activities. The focus of this section is on performance measures based on the income statements and balance sheets of SciTronics-a medical device company. The measures can be grouped by type: (1) profitability measures, (2) activity (asset management) measures, and (3) leverage and liquidity measures. Please refer to the financial statements of SciTronics as shown in Exhibits 1 and 2. As you work through the questions in this section, please also consider three broad questions: 1. What is your assessment of the performance of SciTronics during the 2005-2008 period? 2. Has its financial strength and its access to external sources of finance improved or weakened? 3. What are the 2-3 most important questions you would ask management as the result of your analysis? Sales Growth Sales growth is an important driver of the need to invest in various types of assets and of the company's value. Sales growth also provides some indication of the effectiveness of a firm's strategy and product development activities, and of customer acceptance of a firm's products and services. Use the following questions to guide your analysis. 1. During the four-year period ended December 31, 2008, SciTronics' sales grew at a compound rate. There were no acquisition or divestitures. Profitability Ratio: How Profitable Is the Company? Profitability is a necessity over the long-run. It strongly influences (1) the company's access to debt; (2) the valuation of the company's common stock; (3) the willingness of management to issue stock; and (4) the capacity to self-finance. One measure of a company's profitability is its return on sales, measured by dividing net income by net sales. 1. SciTronics' profit as a percentage of sales in 2008 was 2. This represented an increase/decrease from _% in 2005 Management and investors often are more interested in the return earned on the funds invested than in the level of profits as a percentage of sales. Companies operating in businesses requiring very little investment in assets often have low profit margins but earn very attractive returns on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that earn miserably low returns on invested funds, despite seemingly attractive profit margins. Therefore, it is useful to examine the return earned on the funds provided by the shareholders and by the "investors" in the company's interest-bearing debt. To increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return. Management and investors often are more interested in the return camed on the funds invested than in the level of profits as a percentage of sales. Companies operating in business requiring very little investment in assets often have low profit margins but earn very attractive return on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that eam miserably low returns on invested funds, despite seemingly attractive profit margins Therefore, it is useful to examine the retum eamed on the funds provided by the shareholders and by the investors in the company's interest-bearing debt. To increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return 6 This document is stored for use only by Monary in F. Corporate Finance by WILLIAM COFFING Glycon College introm 2000 Dec 2000 For the Amusing a Company's future Financial Health 1-12 The use of EBIAT as the measure of return also allows the analyst to compare the return on invested capital (calculated before the deduction of interest expense) with the company's estimated cost of capital to determine the long-term adequacy of the company's profitability. EBLAT is calculated by multiplying EBIT (earnings before interest and taxes) times (1-the average tax rate) EBIT (1-tax rate) Owners equity plus interest bearing debt 3. SciTronics had a total of 5 of capital at year end 2008 and eamed, before interest but after taxes (EBIAT), S_ in 2005. Its return on capital was in 2008, which represented an increase/decrease from the camed in 2005 From the viewpoint of the shareholders, an equally important figure is the company's retum on equity. Return on equity is calculated by dividing profit after tax by the owners equity. Profit after takes Owners equity Return on equity Return on equity indicates how profitably the company is utilizing shareholders funda 4. SciTronics had __ of owners' equity and earned $__after taxes in 2008. Its return on equity was _, which represented an improvement deterioration from the camed in 2005 Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio. Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratios may indicate uncollectible accounts receivable or obsolete inventory or equipment Total asset turnover measures the company's effectiveness in utilizing its totales and is calculated by dividing total assets into sales Net sales Total assets 1. Total asset turnover for SciTronics in 2005 can be calculated by dividing $_ intos The tumover improved/deteriorated from times in 2005 to times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait, on average, between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days Management and investors often are more interested in the returneamed on the funds invested than in the level of profits as a percentage of sales. Companies operating in businesses requiring very little investment in assets often have low profit margins but cam very attractive return on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that eam miserably low returns on invested funds, despite seemingly attractive profit margins Therefore, it is useful to examine the retum eamed on the funds provided by the shareholders and by the investors in the company's interest-bearing debt To Increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return. This document is thorized to use only by Wamuna Turne- Corporate Finance WILLIAM COFFING Gold Beacon Culegerinc tronn Dec2000 For the exclusive use of M. Turay, 2020. Amusing Company's future Financial Health The use of EBIAT as the measure of return also allows the analyst to compare the return on invested capital calculated before the deduction of interest expense) with the company's estimated cost of capital to determine the long-term adequacy of the company's profitability EBIAT is calculated by multiplying EBIT (earnings before interest and taxes) times (1 - the average tax rate) EBIT (1-tax rate) Owners equity plus interest bearing debt 3. SciTronics had a total of 5 of capital at year-end 200 and eamed, before interest but after taxes (EBIAT). S in 2005. Ils retum on capital was_% in 2008, which represented an increase decrease from the eamed in 2005. From the viewpoint of the shareholders, an equally important figure is the company's return on equity. Return on equity is calculated by dividing profit after tax by the owners' equity. Profit after taxes Owners equity Return on equity Return on equity indicates how profitably the company is utilizing shareholders' funds. 4. SetTronics had __ of owners' equity and cared_after taxes in 2005. Its return on equity was 5, which represented an improvement deterioration from the camed in 2005 Activity Ratios: How Well Does the Company Employs Its Assets? The second basic type of financial ratio is the activity ratio. Activity ratios indicate how well a company employs its assets. Ineffective utilization of assets results in the need for more finance, unnecessary interest costs, and a correspondingly lower return on capital employed. Furthermore, low activity ratios or deterioration in activity ratios may indicate uncollectible accounts receivable or obsolete inventory or equipment Total asset turnover measures the company's effectiveness in utilizing its total assets and is calculated by dividing total assets into sales Net sales Total assets 1. Total asset turnover for SciTronics in 2005 can be calculated by dividing S_ into The turnover improvedeteriorated from times in 2005 to times in 2008 It is useful to examine the turnover ratios for each type of asset, since the use of total assets may hide important problems in one of the specific asset Categories. One important category is accounts receivables. The average collection period measures the number of days the company must wait, on average, between the time of a sale and when it is paid. The average collection period is calculated in two steps. First, divide annual credit sales by 365 days to determine the average sales per day Net credit sales 365 days Financial Ratios and Financial Analysis The three primary sources of financial data for a business are its income statement, the balance sheet, and statement of cash flows. The income statement summarizes revenues and expenses over a period of time. The balance sheet shows what a company owns (its assets), what it owes (its liabilities), and what has been invested by the owners (owners' equity) at a specific point in time. The statement of cash flow categorizes all cash transactions during a specific period in terms of cash flows generated or used for operating activities, investing activities, and financing activities. The focus of this section is on performance measures based on the income statements and balance sheets of SciTronics-a medical device company. The measures can be grouped by type: (1) profitability measures, (2) activity (asset management) measures, and (3) leverage and liquidity measures. Please refer to the financial statements of SciTronics as shown in Exhibits 1 and 2. As you work through the questions in this section, please also consider three broad questions: 1. What is your assessment of the performance of SciTronics during the 2005-2008 period? 2. Has its financial strength and its access to external sources of finance improved or weakened? 3. What are the 2-3 most important questions you would ask management as the result of your analysis? Sales Growth Sales growth is an important driver of the need to invest in various types of assets and of the company's value. Sales growth also provides some indication of the effectiveness of a firm's strategy and product development activities, and of customer acceptance of a firm's products and services. Use the following questions to guide your analysis. 1. During the four-year period ended December 31, 2008, SciTronics' sales grew at a compound rate. There were no acquisition or divestitures. Profitability Ratio: How Profitable Is the Company? Profitability is a necessity over the long-run. It strongly influences (1) the company's access to debt; (2) the valuation of the company's common stock; (3) the willingness of management to issue stock; and (4) the capacity to self-finance. One measure of a company's profitability is its return on sales, measured by dividing net income by net sales. 1. SciTronics' profit as a percentage of sales in 2008 was 2. This represented an increase/decrease from _% in 2005 Management and investors often are more interested in the return earned on the funds invested than in the level of profits as a percentage of sales. Companies operating in businesses requiring very little investment in assets often have low profit margins but earn very attractive returns on invested funds. Conversely, there are numerous examples of companies in very capital-intensive businesses that earn miserably low returns on invested funds, despite seemingly attractive profit margins. Therefore, it is useful to examine the return earned on the funds provided by the shareholders and by the "investors" in the company's interest-bearing debt. To increase the comparability across companies, it is useful to use EBIAT (earnings before interest but after taxes) as the measure of return