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