Management: Financial Ratios and Balance Sheet Balance Essay

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Lesson 4: Standard Ratio Analysis (SRA & Comp)
Purpose: To show students how financial ratios are comparisons of various financial data that can lead an analyst to a decision about the financial condition of a company.
Application: The www.businessallstars.com/calculator site has analytical tools for examining a company’s relative performance against itself, other companies or over time. Use the “SRA” and “COMP” tools to generate critical comparisons that senior management may use to tell if a company is operating at peak performance. These are all classic measures that most companies have used for years.

Note: In using the internet model do not enter commas when inputting numbers. In addition, you can move from one yellow input cell to the next by tabbing after entering each number.

Name and Date:
Enter the name and symbol for the company in the first line followed by the Date of the Financial information (Last Year End). The company selected was 3M Corporation (MMM) with its most recent complete year being Dec. 31.2012.

Source Inputs:
Most of the financial data that is entered in this worksheet comes from finance.yahoo.com in one way or another. The Income Statement, Balance Sheet, and Statement of Cash Flow are easily identified as links at the bottom of the left column of the main page. The number of shares outstanding comes by looking at the 10-K that is filed with the Securities and Exchange Commission. Click on the link that reads “SEC Filings” and proceed to find the 10-K report. The Market Capitalization is found by multiplying the number of shares outstanding at year end times the price of the common stock that is consistent for year end. This can be found by going clicking on “Historic Prices” and selecting the date needed.

Description of Account
Amount
Source
Net Sales (Rev)
Cost of Goods Sold (COGS)
E.B.I.T. [EBIT]
Income Tax Expense (Tax)
Net Income (NI)
$29,904
15,685
6,522
1,840
4,444
Income Statement
Income Statement
Income Statement
Income Statement
Income Statement
Net Accounts Receivable (A/R)
Inventory (Inv)
Current Assets (CA)
Total Assets (TA)
Accounts Payable (A/P)
Current Liabilities (CL)
Long-Term Debt (LTD)
Common Equity (CE)
4,061
3,837
13,630
33,876
2,834
16,301
4,916
17,575
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Balance Sheet
Market Capitalization (Mkt)
63,788
Year End Price of stock times Number of Shares
Number of Shares Outstanding (Shrs)
687
10-K Report with SEC
Dividends Paid (Div)
1,635
Statement of Cash Flow

Asset Management Ratios:
The following ratios relate to working capital management and resource utilization.

Name
Formula
Calculation
Days in Inventory
Inv / (COGS / 365)
3,837 / (15,685 / 365) = 89.29 days
Days in Receivables
A/R / (Rev / 365)
4,061 / (29,904 / 365) = 49.57 days
Days in Payables
A/P / (COGS / 365)
2,834 / (15,685 / 365) = 65.95 days
Cash Conversion Cycle
Inv days + A/R days – A/P days
89.29 + 49.57 – 65.95 = 72.91 days
Total Asset Turnover
Rev / TA
29,904 / 33,876 = 0.88 times
Current Ratio
CA / CL
13,630 / 6,200 = 2.20 times
Quick Ratio
(CA – Inv) / CL
(13,630 – 3,837) / 6,200 = 1.58 times

In the case of 3M an item will sit in inventory for 89.29 days before it is sold and then it will take 49.57 days before the customer pays for the item. This means that from purchase order to collection of the revenue this is close to 140 days or over three months. This is offset by 65.95 days or the time from purchase or to payment of vendor. The net of 72.91 days is the company’s financial exposure for their credit policies and the number of days that need external financing.

The Current Ratio and the Quick Ratio both show that the company has more than enough short-term assets that will be converted into cash within the next year to cover those current liabilities that will be coming due. This is
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