internal assessment finance/accounting three decision areas; investment decision- what assets to buy...

INTERNAL ASSESSMENTFINANCE/ACCOUNTING

THREE DECISION AREAS;

•INVESTMENT DECISION- WHAT ASSETS TO BUY

•FINANCING DECISION- WHAT IS THE BEST CAPITAL STRUCTURE

•OPERATING DECISION- HOW TO OPERATE THE ASSETS OF THE FIRM IN THE MOST

EFFICIENT MANNER

RATIO ANALYSIS

• PROVIDE A PICTURE AT A POINT IN TIME• MEASURES STRENGTH AND WEAKNESS• CAN PROVIDE A COMPARISON WITH

INDUSTRY NORMS• PROVIDES A COMPARISON WITH

INDUSTRY LEADERS• NEEDS TO BE LOOKED AT OVER TIME

TYPES OF FINANCIAL RATIOS

• LIQUIDITY-MEASURES ABILITY TO PAY SHORT TERM DEBT

• LEVERAGE - THE EXTENT OF DEBT IN THE CAPITAL STRUCTURE

• ACTIVITY- HOW EFFECTIVELY A FIRM USES ITS ASSETS

• PROFITABILITY- HOW MUCH VALUE DOES THE FIRM CREATE

• GROWTH-MEASURES THE FIRM’S ABILITY TO MAINTAIN ITS ECONOMIC POSITION

LIQUIDITY RATIOS

• LIQUIDITY RATIOS

CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES

1984 = 1.90

1989 = 1.99

1998 = 1.39

NESTLE, 1998 = 1.18

CAMPBELL’S, 1998 = .52

LEVERAGE RATIOS

DEBT TO ASSETS- TOTAL DEBTS/ TOTAL ASSETS(%)

1984 = 13.62 1989 = 13.99 1998 = 70.4.03

NESTLE, 1998 = 59.2

CAMPBELL’S, 1998 = 85.5

DEBT TO EQUITY- TOTAL DEBT/ EQUITY

1984 = .18 1989 = .23 1998 = 2.26

NESTLE, 1998 = 2.45

CAMPBELL’S, 1998 = .85

ACTIVITY RATIOS

TOTAL ASSET TURNOVER- SALES/TOTAL ASSETS

1984 = 1.80 1989 = 1.35 1998 = 1.30

NESTLE, 1998 = 1.27

CAMPBELL’S, 1998 = 1.19

PROFITABILITY RATIOS

NET PROFIT MARGIN- NET INCOME/ SALES

1984 = 5.74% 1989 = 7.07% 1998 = 7.66%

NESTLE, 1998 = 5.98%

CAMPBELL’S, 1998 = 9.86%

RETURN ON EQUITY 1984 = 16.44% 1989 = 16.12% 1998 = 32.7%

NESTLE, 1998 = 18.6%

CAMPBELL’S, 1998 = 75.5%

GROWTH RATIOS

EPS= NET INCOME/ NO. SHARES OUTSTANDING

HERSHEY NESTLE CAMPBELL’S

1998 2.38 3.48 3.83

5 YR. AVE. 1.69 3.14 2.80

RETURN ON EQUITY

EFFECTIVENESS X EFFICIENCY X LEVERAGE = RETURN ON EQUITY

(SALES/ TOTAL ASSETS) X (NET INCOME/ SALES) X (TOTAL ASSETS/ EQUITY) = ROE

HERSHEY, 1998 (000)

(4435/3404) X (340/4435) X (3404/1042) = 32.7%

PHARMACEUTICALS

Novartis .196 .167

Schering Plough .439 .213

Warner-Lambert .347 .105

American Home .257 .134

Merck .41 .20

Pfizer .38 .196

Watson .16 .278

COMPANY 1998 1996/1995