Lecture 3: Financial Analysis
& Value Creation
Dr. Chen Liu, Ph.D.
Director of MBA Programs
Associate Professor of Finance
1
Five Areas of financial performance
Cash Mgmt:
Current Ratio
Quick Ratio
Inventory, A/R, A/P, Cash Cycle
Cash flows
Use of Debt:
Debt/Asset; Debt/Equity
Equity Multiple
Interest Coverage
Efficiency:
Asset turnover
WC turnover
Fixed asset turnover
Profitability
Gross Margin,
Operating Margin,
Net Profit Margin
ROA & ROE
P/E
Price/ Sales
Market/Book
DONE!
2
Short-Term Liquidity
Long-Term Leverage
Asset Turnover
Profitability
Market Ratio
Five Areas of financial performance
Cash Mgmt:
Current Ratio
Quick Ratio
Inventory, A/R, A/P, Cash Cycle
Cash flows
Use of Debt:
Debt/Asset; Debt/Equity
Equity Multiple
Interest Coverage
Efficiency:
Asset turnover
WC turnover
Fixed asset turnover
Profitability
Gross Margin,
Operating Margin,
Net Profit Margin
ROA & ROE
P/E
Price/ Sales
Market/Book
3
Short-Term Liquidity
Long-Term Leverage
Asset Turnover
Profitability
Market Ratio
Financial Leverage & Use of Debt
What is leverage?
What is Financial leverage?
Use of debt to achieve higher earnings!!!
| NIKE Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables | $4,463 |
| Inventories | $6,854 |
| Prepaid expenses and other current assets | $1,498 |
| Total Current Assets | $26,291 |
| Gross Property, Plant & Equipment | $13,174 |
| Accumulated Depreciation | -$5,157 |
| Net Property, Plant & Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Accounts Payable | $2,836 |
| Taxes Payable | $306 |
| Accrued Expenses | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabiliteis | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities and Shareholders' Equity | $37,740 |
DONE!
Long-term Intangible assets.
IP, Patent, trademark
Long-term Fixed Assets
DONE!
| NIKE Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables | $4,463 |
| Inventories | $6,854 |
| Prepaid expenses and other current assets | $1,498 |
| Total Current Assets | $26,291 |
| Net Property, Plant & Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Accounts Payable | $2,836 |
| Taxes Payable | $306 |
| Accrued Expenses | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabilities | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities & Shareholders' Equity | $37,740 |
66% is other people’s money.
Total Asset = $37,740
= Total Equity +Total Liabilities
Total Liabilities
[VALUE]
([PERCENTAGE])
Total Equity
[VALUE] ([PERCENTAGE])
Total Liabilities Total Equity2497312767
| NIKE Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables | $4,463 |
| Inventories | $6,854 |
| Prepaid expenses and other current assets | $1,498 |
| Total Current Assets | $26,291 |
| Net Property, Plant & Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Accounts Payable | $2,836 |
| Taxes Payable | $306 |
| Accrued Expenses | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabilities | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities & Shareholders' Equity | $37,740 |
(also called: equity multiplier)
Financial Leverage Ratios
66% is other people’s money.
34% is borrowing with interest payment.
Total Liabilities
[VALUE] ([PERCENTAGE])
Total Equity
[VALUE] ([PERCENTAGE])
Total Liabilities Total Equity2497312767
Interest Coverage Ratio
Measures firm’s ability to generate enough income to cover interest expenses.
| Revenue (or Sales) | 10 mil |
| – Cost of Goods Sold (COGS) | 2 mil |
| = Gross Profit | 8 mil |
| – Operating Expense | 4 mil |
| = EBIT (operating income) | 4 mil |
| – Interest Expense | 1 mil |
| = Taxable Income | 3 mil |
| – Taxes (30%) | 0.9 mil |
| = Net Income | 2.1 mil |
8
| Revenue | 10 mil | 10 mil |
| – Cost of Goods Sold (COGS) | 2 mil | 2 mil |
| = Gross Profit | 8 mil | 8 mil |
| – Operating Expense | 4 mil | 4 mil |
| = EBIT (operating income) | 4 mil | 4 mil |
| – Interest Expense | 1 mil | 0 mil |
| = Taxable Income | 3 mil | 4 mil |
| – Taxes (30%) | 0.9 mil | 1.2 mil |
| = Net Income | 2.1 mil | 2.8 mil |
A
B
Total asset = 20 mil
Equity = 10 mil
Debt =10 mil, r =10%
Total asset = 20 mil
Equity = 20 mil
Debt =0 mil
Do you want to invest in A or B?
50% equity
50% debt
100% equity
9
1010
| Revenue | 10 mil | 10 mil |
| – Cost of Goods Sold (COGS) | 2 mil | 2 mil |
| = Gross Profit | 8 mil | 8 mil |
| – Operating Expense | 4 mil | 4 mil |
| = EBIT (operating income) | 4 mil | 4 mil |
| – Interest Expense | 1 mil | 0 mil |
| = Taxable Income | 3 mil | 4 mil |
| – Taxes (30%) | 0.9 mil | 1.2 mil |
| = Net Income | 2.1 mil | 2.8 mil |
A
B
Total asset = 20 mil
Equity = 10 mil
Debt =10 mil, r =10%
Total asset = 20 mil
Equity = 20 mil
Debt =0 mil
Do you want to invest in A or B?
50% equity
50% debt
100% equity
10
1010
| Revenue | 10 mil | 10 mil |
| – Cost of Goods Sold (COGS) | 2 mil | 2 mil |
| = Gross Profit | 8 mil | 8 mil |
| – Operating Expense | 4 mil | 4 mil |
| = EBIT (operating income) | 4 mil | 4 mil |
| – Interest Expense | 1 mil | 0 mil |
| = Taxable Income | 3 mil | 4 mil |
| – Taxes (30%) | 0.9 mil | 1.2 mil |
| = Net Income | 2.1 mil | 2.8 mil |
A
B
Total asset = 20 mil
Equity = 10 mil
Debt =10 mil, r =10%
Total asset = 20 mil
Equity = 20 mil
Debt =0 mil
50% equity
50% debt
100% equity
0.30 mil
Scale-Up
Pay Interest
Financial Distress
11
1010
| Revenue | 10 mil | 10 mil |
| – Cost of Goods Sold (COGS) | 2 mil | 2 mil |
| = Gross Profit | 8 mil | 8 mil |
| – Operating Expense | 4 mil | 4 mil |
| = EBIT (operating income) | 4 mil | 4 mil |
| – Interest Expense | 1 mil | 0 mil |
| = Taxable Income | 3 mil | 4 mil |
| – Taxes (30%) | 0.9 mil | 1.2 mil |
| = Net Income | 2.1 mil | 2.8 mil |
A
B
Total asset = 20 mil
Equity = 10 mil
Debt =10 mil, r =10%
Total asset = 20 mil
Equity = 20 mil
Debt =0 mil
50% equity
50% debt
100% equity
0.30 mil
Scale-Up
Pay Interest
Financial Distress
Anything missing?
Assume: Pay debt principal = 2 mil
12
1010
Revenue = 10 million
COGS = 2 mil
Operating Expense = 4 mil
Interest Expense = 1 mil
Tax = 0.9 mil
= Net Income = 2.1 mil
+ 2.1 mil
Pay debt principal = 2 mil
Pay dividend = 1 mil
– 3 mil in total
Year-start:
Cash holding = 5 mil
Year-end:
Cash holding =
5 +2.1 – 3= 4.1 mil
Total Assets
Current Assets
Cash (& equivalent, ST)
Account Receivable
Inventory
Long-term Assets
Total Liabilities
Current Liabilities
Long-term Liabilities
Shareholders’ Equity
13
Cash flow statement
Balance Sheet
Income statement
CF in Investing
(Sale / Purchase asset)
CF in Operating
(Revenue, Cost, Profit)
CF in Financing
(Equity & Debt)
Five Areas of financial performance
Cash Mgmt:
Current Ratio
Quick Ratio
Inventory, A/R, A/P, Cash Cycle
Cash flows
Use of Debt:
Debt/Asset; Debt/Equity
Equity Multiple
Interest Coverage
Efficiency:
Asset turnover
WC turnover
Fixed asset turnover
Profitability
Gross Margin,
Operating Margin,
Net Profit Margin
ROA & ROE
P/E
Price/ Sales
Market/Book
14
Short-Term Liquidity
Long-Term Leverage
Asset Turnover
Profitability
Market Ratio
| Nike Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables | $4,463 |
| Inventories | $6,854 |
| Prepaid expenses and other current assets | $1,498 |
| Total Current Assets | $26,291 |
| Gross Property, Plant & Equipment | $13,174 |
| Accumulated Depreciation | -$5,157 |
| Net Property, Plant & Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Accounts Payable | $2,836 |
| Taxes Payable | $306 |
| Accrued Expenses | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabilities | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities and Shareholders' Equity | $37,740 |
| Nike Income Statement (mil USD) | 2021 |
| Total Revenue | $44,538 |
| Cost of Goods Sold | -$24,576 |
| Gross Profit | $19,962 |
| Operating Expenses | -$13,025 |
| Operating Income (EBIT) | $6,937 |
| Net Interest Income/Expense | -$262 |
| Pretax Income | $6,661 |
| Provision for Income Tax | -$934 |
| Net Income | $5,727 |
| Nike Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables | $4,463 |
| Inventories | $6,854 |
| Prepaid expenses and other current assets | $1,498 |
| Total Current Assets | $26,291 |
| Gross Property, Plant & Equipment | $13,174 |
| Accumulated Depreciation | -$5,157 |
| Net Property, Plant & Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Accounts Payable | $2,836 |
| Taxes Payable | $306 |
| Accrued Expenses | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabilities | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities and Shareholders' Equity | $37,740 |
| Nike Income Statement (mil USD) | 2021 |
| Total Revenue | $44,538 |
| Cost of Goods Sold | -$24,576 |
| Gross Profit | $19,962 |
| Operating Expenses | -$13,025 |
| Operating Income (EBIT) | $6,937 |
| Net Interest Income/Expense | -$262 |
| Pretax Income | $6,661 |
| Provision for Income Tax | -$934 |
| Net Income | $5,727 |
Working Capital (NWC) = CA-CL = 16,617
| Nike Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables | $4,463 |
| Inventories | $6,854 |
| Prepaid expenses and other current assets | $1,498 |
| Total Current Assets | $26,291 |
| Gross Property, Plant & Equipment | $13,174 |
| Accumulated Depreciation | -$5,157 |
| Net Property, Plant & Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Accounts Payable | $2,836 |
| Taxes Payable | $306 |
| Accrued Expenses | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabilities | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities and Shareholders' Equity | $37,740 |
| Nike Income Statement (mil USD) | 2021 |
| Total Revenue | $44,538 |
| Cost of Goods Sold | -$24,576 |
| Gross Profit | $19,962 |
| Operating Expenses | -$13,025 |
| Operating Income (EBIT) | $6,937 |
| Net Interest Income/Expense | -$262 |
| Pretax Income | $6,661 |
| Provision for Income Tax | -$934 |
| Net Income | $5,727 |
Working Capital (NWC) = CA-CL = 16,617
| Total Asset Turnover | 1.18 | 0.98 | 1.13 |
| WC Turnover | 2.68 | 4.26 | 3.01 |
| Fixed Asset Turnover | 5.56 | 4.51 | 5.05 |
Revenue
Cost
(Costs of Good Sold)
(Operating Expense)
(Interest Expense)
(Taxes, etc.)
= Net Income
Total Assets
Current Assets
Cash & Cash equivalent
Short-term Investment
Account Receivable
Inventory
Long-term Assets
Total Liabilities
Current Liabilities
Long-term Liabilities
Shareholders’ Equity
20
Cash flow statement
Balance Sheet
Income statement
CF in Investing
(Sale / Purchase asset)
CF in Operating
(Revenue, Cost, Profit)
CF in Financing
(Equity & Debt)
Five Areas of financial performance
Cash Mgmt:
Current Ratio
Quick Ratio
Inventory, A/R, A/P, Cash Cycle
Cash flows
Use of Debt:
Debt/Asset; Debt/Equity
Equity Multiple
Interest Coverage
Efficiency:
Asset turnover
WC turnover
Fixed asset turnover
Profitability
Gross Margin,
Operating Margin,
Net Profit Margin
ROA & ROE
P/E
Price/ Sales
Market/Book
21
Short-Term Liquidity
Long-Term Leverage
Asset Turnover
Profitability
Market Ratio
| Income Statement ($mil) | 2018 | 2019 | 2020 | 2021 |
| Total Revenue | $36,397 | $39,117 | $37,403 | $44,538 |
| Cost of Goods Sold | -$20,441 | -$21,643 | -$21,162 | -$24,576 |
| Gross Profit | $15,956 | $17,474 | $16,241 | $19,962 |
| Operating Expenses | -$11,511 | -$12,702 | -$13,126 | -$13,025 |
| Operating Income (EBIT) | $4,445 | $4,772 | $3,115 | $6,937 |
| Net Interest Income | -$120 | -$49 | -$89 | -$262 |
| Pretax Income | $4,325 | $4,801 | $2,887 | $6,661 |
| Income Tax | -$2,392 | -$772 | -$348 | -$934 |
| Net Income | $1,933 | $4,029 | $2,539 | $5,727 |
| NIKE | 2018 | 2019 | 2020 | 2021 |
| Gross Margin | 43.84% | 44.67% | 43.42% | 44.82% |
COGS is around 55% of revenue
If you buy a pair of shoes for $100 USD, $55 goes to the supplier in Vietnam.
| 2018 | 2019 | 2020 | 2021 | |
| NIKE | ||||
| Gross Margin | 43.84% | 44.67% | 43.42% | 44.82% |
| Adidas | ||||
| Gross Margin | 51.85% | 52.00% | 49.66% | 50.70% |
| UAA | ||||
| Gross Margin | 45.07% | 46.90% | 48.27% | 50.35% |
COGS is ~ 55% of revenue
COGS is ~ 50% of revenue
COGS is ~ 50% of revenue
| Income Statement ($mil) | 2018 | 2019 | 2020 | 2021 |
| Total Revenue | $36,397 | $39,117 | $37,403 | $44,538 |
| Cost of Goods Sold | -$20,441 | -$21,643 | -$21,162 | -$24,576 |
| Gross Profit | $15,956 | $17,474 | $16,241 | $19,962 |
| Operating Expenses | -$11,511 | -$12,702 | -$13,126 | -$13,025 |
| Operating Income (EBIT) | $4,445 | $4,772 | $3,115 | $6,937 |
| Net Interest Income | -$120 | -$49 | -$89 | -$262 |
| Pretax Income | $4,325 | $4,801 | $2,887 | $6,661 |
| Income Tax | -$2,392 | -$772 | -$348 | -$934 |
| Net Income | $1,933 | $4,029 | $2,539 | $5,727 |
| NIKE | 2018 | 2019 | 2020 | 2021 |
| Gross Margin | 43.84% | 44.67% | 43.42% | 44.82% |
| NIKE | 2018 | 2019 | 2020 | 2021 |
| Op. Margin | 12.21% | 12.20% | 8.33% | 15.58% |
COGS is around 55% of revenue
| 2018 | 2019 | 2020 | 2021 | |
| NIKE | ||||
| Gross Margin | 43.84% | 44.67% | 43.42% | 44.82% |
| Op. Margin | 12.21% | 12.20% | 8.33% | 15.58% |
| Adidas | ||||
| Gross Margin | 51.85% | 52.00% | 49.66% | 50.70% |
| Op. Margin | 10.94% | 11.31% | 4.34% | 9.37% |
| UAA | ||||
| Gross Margin | 45.07% | 46.90% | 48.27% | 50.35% |
| Op. Margin | 3.05% | 4.50% | -0.26% | 9.27% |
COGS is ~ 55% of revenue
COGS is ~ 50% of revenue
COGS is ~ 50% of revenue
Operating Exp. ~ 30% of revenue
(difference between gross & op margin)
Operating Exp. ~ 40% of revenue
Operating Exp. ~ 40% of revenue
| Income Statement ($mil) | 2018 | 2019 | 2020 | 2021 |
| Total Revenue | $36,397 | $39,117 | $37,403 | $44,538 |
| Cost of Goods Sold | -$20,441 | -$21,643 | -$21,162 | -$24,576 |
| Gross Profit | $15,956 | $17,474 | $16,241 | $19,962 |
| Operating Expenses | -$11,511 | -$12,702 | -$13,126 | -$13,025 |
| Operating Income (EBIT) | $4,445 | $4,772 | $3,115 | $6,937 |
| Net Interest Income | -$120 | -$49 | -$89 | -$262 |
| Pretax Income | $4,325 | $4,801 | $2,887 | $6,661 |
| Income Tax | -$2,392 | -$772 | -$348 | -$934 |
| Net Income | $1,933 | $4,029 | $2,539 | $5,727 |
| NIKE | 2018 | 2019 | 2020 | 2021 |
| Gross Margin | 43.84% | 44.67% | 43.42% | 44.82% |
| NIKE | 2018 | 2019 | 2020 | 2021 |
| Op. Margin | 12.21% | 12.20% | 8.33% | 15.58% |
| NIKE | 2018 | 2019 | 2020 | 2021 |
| Net Margin | 5.31% | 10.30% | 6.79% | 12.86% |
Reflect pricing strategy & ability to control costs!
Important for operating managers!!!
COGS is around 55% of revenue
| 2018 | 2019 | 2020 | 2021 | |
| NIKE | ||||
| Gross Margin | 43.84% | 44.67% | 43.42% | 44.82% |
| Op. Margin | 12.21% | 12.20% | 8.33% | 15.58% |
| Net Margin | 5.31% | 10.30% | 6.79% | 12.86% |
| Adidas | ||||
| Gross Margin | 51.85% | 52.00% | 49.66% | 50.70% |
| Op. Margin | 10.94% | 11.31% | 4.34% | 9.37% |
| Net Margin | 7.77% | 8.36% | 2.18% | 9.97% |
| UAA | ||||
| Gross Margin | 45.07% | 46.90% | 48.27% | 50.35% |
| Op. Margin | 3.05% | 4.50% | -0.26% | 9.27% |
| Net Margin | -0.89% | 1.75% | -12.27% | 6.34% |
Nike Net Margin
20182019202020215.3100000000000001E-20.102999999999999996.7900000000000002E-20.12859999999999999Adidas Net Margin
20182019202020217.7700000000000005E-28.3599999999999994E-22.18E-29.9699999999999997E-2UAA Net Margin
2018201920202021-8.8999999999999999E-31.7500000000000002E-2-0.12276.3399999999999998E-2
| Nike Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables, Current | $4,463 |
| Inventories | $6,854 |
| Prepayments and Deposits, Current | $1,498 |
| Total Current Assets | $26,291 |
| Gross Property, Plant and Equipment | $13,174 |
| Accumulated Depreciation | -$5,157 |
| Net Property, Plant and Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Trade/Accounts Payable, Current | $2,836 |
| Taxes Payable, Current | $306 |
| Accrued Expenses, Current | $3,156 |
| Short-Term Debt | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt | $12,344 |
| Other Long-term Liabiliteis | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities & Shareholders' Equity | $37,740 |
| Nike Income Statement (mil USD) | 2021 |
| Total Revenue | $44,538 |
| Cost of Goods Sold | -$24,576 |
| Gross Profit | $19,962 |
| Operating Expenses | -$13,025 |
| Operating Income (EBIT) | $6,937 |
| Net Interest Income/Expense | -$262 |
| Pretax Income | $6,661 |
| Provision for Income Tax | -$934 |
| Net Income | $5,727 |
| Nike Balance Sheet (millions USD) | 2021 |
| Cash and Cash Equivalents | $9,889 |
| Short Term Investments | $3,587 |
| Account Receivables, Current | $4,463 |
| Inventories | $6,854 |
| Prepayments and Deposits, Current | $1,498 |
| Total Current Assets | $26,291 |
| Gross Property, Plant and Equipment | $13,174 |
| Accumulated Depreciation | -$5,157 |
| Net Property, Plant and Equipment | $8,017 |
| Net Intangible Assets | $511 |
| Other Assets, Non-Current | $2,921 |
| Total Assets | $37,740 |
| Trade/Accounts Payable, Current | $2,836 |
| Taxes Payable, Current | $306 |
| Accrued Expenses, Current | $3,156 |
| Short-Term Debt & Capital Lease, Current | $469 |
| Other Current Labilities | $2,907 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabiliteis | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities and Shareholders' Equity | $37,740 |
| Nike Income Statement (mil USD) | 2021 |
| Total Revenue | $44,538 |
| Cost of Goods Sold | -$24,576 |
| Gross Profit | $19,962 |
| Operating Expenses | -$13,025 |
| Operating Income (EBIT) | $6,937 |
| Net Interest Income/Expense | -$262 |
| Pretax Income | $6,661 |
| Provision for Income Tax | -$934 |
| Net Income | $5,727 |
ROE measures the annual return shareholders earn: for every dollar of equity that shareholders invest in a business, what is their annual flow of income?
ROA measures how much profit a company generates for every dollar of assets? i.e. How effectively a company’s assets are generating profits
| Nike Balance Sheet (millions USD) | 2021 |
| Total Assets | $37,740 |
| Total Current Liabilities | $9,674 |
| Long-Term Debt & Capital Lease | $12,344 |
| Other Long-term Liabilities | $2,955 |
| Total Liabilities | $24,973 |
| Total Equity | $12,767 |
| Total Liabilities &Shareholders' Equity | $37,740 |
| Nike Income Statement (mil USD) | 2021 |
| Total Revenue | $44,538 |
| Cost of Goods Sold | -$24,576 |
| Gross Profit | $19,962 |
| Operating Expenses | -$13,025 |
| Operating Income (EBIT) | $6,937 |
| Net Interest Income/Expense | -$262 |
| Pretax Income | $6,661 |
| Provision for Income Tax | -$934 |
| Net Income | $5,727 |
?
DuPont
Analysis
| Company | ROE | Net Margin | Asset Turnover | Financial Leverage |
| Microsoft | 42.88% | 34.37% | 0.58 | 2.15 |
| Amazon.com | 8.78% | 2.25% | 1.24 | 3.15 |
| Apple | 175.46% | 25.31% | 1.12 | 6.19 |
| Meta (Facebook) | 22.40% | 24.41% | 0.68 | 1.35 |
| UBER | -87.66% | -30.45% | 0.85 | 3.39 |
| Airbnb | 32.61% | 20.29% | 0.54 | 2.98 |
| Walmart | 11.61% | 1.49% | 2.44 | 3.19 |
| NIKE | 37.32% | 11.47% | 1.25 | 2.60 |
| Lululemon | 41.05% | 15.66% | 1.51 | 1.74 |
| Pfizer | 35.37% | 29.81% | 0.53 | 2.24 |
| Moderna | 83.69% | 56.90% | 0.88 | 1.67 |
| Tesla | 33.43% | 14.94% | 1.13 | 1.98 |
| General Motors | 14.45% | 5.86% | 0.59 | 4.18 |
Data: most recent 12 months Morningstar
Five Areas of financial performance
Cash Mgmt:
Current Ratio
Quick Ratio
Inventory, A/R, A/P, Cash Cycle
Cash flows
Use of Debt:
Debt/Asset; Debt/Equity
Equity Multiple
Interest Coverage
Efficiency:
Asset turnover
WC turnover
Fixed asset turnover
Profitability
Gross Margin,
Operating Margin,
Net Profit Margin
ROA & ROE
P/E
Price/ Sales
34
Short-Term Liquidity
Long-Term Leverage
Asset Turnover
Profitability
Market Ratio
1. Voting rights
2. Dividend
3. Capital Gains
Stocks: Ownership
Usually not paying dividends
-> need cash for growth
Pay dividends
Dividend is paying cash directly to shareholders on a per share basis
From Earnings to Dividends
| Cash Flow Statement (mil USD) | 2019 | 2020 | 2021 |
| Cash Dividends Paid | -$1,332 | -$1,452 | -$1,638 |
| Income Statement (mil USD) | 2019 | 2020 | 2021 |
| Total Revenue | $39,117 | $37,403 | $44,538 |
| Cost of Goods Sold | -$21,643 | -$21,162 | -$24,576 |
| Operating Expenses | -$12,702 | -$13,126 | -$13,025 |
| Operating Income (EBIT) | $4,772 | $3,115 | $6,937 |
| Net Interest Income | -$49 | -$89 | -$262 |
| Pretax Income | $4,801 | $2,887 | $6,661 |
| Income Tax | -$772 | -$348 | -$934 |
| Net Income | $4,029 | $2,539 | $5,727 |
| Basic WASO (Weighted Average Shares Outstanding) | 1,579.7 | 1,591.6 | 1,573 |
| 2019 | 2020 | 2021 | |
| Earnings Per Share (EPS)= Net Income /WASO | $2.55 | $1.60 | $3.64 |
| Dividend Per Share (DPS)= Cash Dividends / WASO | $0.84 | $0.91 | $1.04 |
| Dividend Payout Ratio = DPS / EPS | 33% | 57% | 29% |
| Retention Ratio = 1 – payout ratio | 67% | 43% | 71% |
Earnings & Dividends
See Liu_NKE_Ratio (Moodle) for detailed calculation.
| Cash Flow Statement (mil USD) | 2019 | 2020 | 2021 |
| Cash Dividends Paid | -$1,332 | -$1,452 | -$1,638 |
| Income Statement (mil USD) | 2019 | 2020 | 2021 |
| Total Revenue | $39,117 | $37,403 | $44,538 |
| Cost of Goods Sold | -$21,643 | -$21,162 | -$24,576 |
| Operating Expenses | -$12,702 | -$13,126 | -$13,025 |
| Operating Income (EBIT) | $4,772 | $3,115 | $6,937 |
| Net Interest Income | -$49 | -$89 | -$262 |
| Pretax Income | $4,801 | $2,887 | $6,661 |
| Income Tax | -$772 | -$348 | -$934 |
| Net Income | $4,029 | $2,539 | $5,727 |
| Basic WASO (Weighted Average Shares Outstanding) | 1,579.7 | 1,591.6 | 1,573 |
| 2019 | 2020 | 2021 | |
| Earnings Per Share (EPS)= Net Income /WASO | $2.55 | $1.60 | $3.64 |
| Dividend Per Share (DPS)= Cash Dividends / WASO | $0.84 | $0.91 | $1.04 |
| Dividend Payout Ratio = DPS / EPS | 33% | 57% | 29% |
| Retention Ratio = 1 – payout ratio | 67% | 43% | 71% |
Earnings & Dividends
See Liu_NKE_Ratio (Moodle) for detailed calculation.
Five Areas of financial performance
Cash Mgmt:
Current Ratio
Quick Ratio
Inventory, A/R, A/P, Cash Cycle
Cash flows
Use of Debt:
Debt/Asset; Debt/Equity
Equity Multiple
Interest Coverage
Efficiency:
Asset turnover
WC turnover
Fixed asset turnover
Profitability
Gross Margin,
Operating Margin,
Net Profit Margin
ROA & ROE
P/E
Price/ Sales
39
Short-Term Liquidity
Long-Term Leverage
Asset Turnover
Profitability
Market Ratio
P/E Ratio
Company A
Company B
Shares
20 million
50 million
Net Income
10 million
25 million
EPS
20/10 = $2.00
50/25 = $2.00
Stock Price
$50
$20
P/E ratio
$50 / $2 = 25
$20 / $2 = 10
Revenue
Cost
(Costs of Good Sold)
(Operating Expense)
(Interest Expense)
(Taxes, etc.)
= Net Income
Market price of a stock
| industry | P/E | industry | P/E | ||
| Rubber& Tires | 7.09 | Semiconductor | 29.66 | ||
| Bank (Money Center) | 9.52 | Restaurant/Dining | 32.06 | ||
| Auto & Truck | 10.30 | Green & Renewable Energy | 34.62 | ||
| Steel | 12.80 | Healthcare Info. Technology | 48.34 | ||
| Apparel | 13.80 | Electronics (General) | 58.25 | ||
| Retail (Grocery & Food) | 16.75 | Information Services | 60.50 | ||
| Real Estate (General) | 17.53 | Healthcare Products | 62.96 | ||
| Drugs (Pharmaceutical) | 17.77 | Environmental & Waste Services | 76.99 | ||
| Education | 18.21 | Electronics (Consumer & Office) | 78.61 | ||
| Retail (General) | 18.55 | Software (System & Application) | 103.74 | ||
| Power | 19.07 | Software (Entertainment) | 105.43 | ||
| Farming/Agriculture | 22.12 | Hospitals/Healthcare Facilities | 105.59 | ||
| Transportation | 23.85 | Drugs (Biotechnology) | 113.80 | ||
| Software (Internet) | 28.70 | Telecom. Services | 145.85 | ||
| Engineering/Construction | 29.06 | Retail (Online) | 205.21 |
Jan 2023 US Data:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm
Aswath Damodaran
Professor of Finance, New York U
| Company | P/E | ROE | Net Margin | Asset Turnover | Financial Leverage |
| Microsoft | 25.38 | 42.88% | 34.37% | 0.58 | 2.15 |
| Amazon.com | 86.41 | 8.78% | 2.25% | 1.24 | 3.15 |
| Apple | 21.85 | 175.46% | 25.31% | 1.12 | 6.19 |
| Meta (Facebook) | 12.68 | 22.40% | 24.41% | 0.68 | 1.35 |
| UBER | NA | -87.66% | -30.45% | 0.85 | 3.39 |
| Airbnb | 39.19 | 32.61% | 20.29% | 0.54 | 2.98 |
| Walmart | 44.96 | 11.61% | 1.49% | 2.44 | 3.19 |
| NIKE | 36.14 | 37.32% | 11.47% | 1.25 | 2.60 |
| Lululemon | 34.32 | 41.05% | 15.66% | 1.51 | 1.74 |
| Pfizer | 9.09 | 35.37% | 29.81% | 0.53 | 2.24 |
| Moderna | 6.73 | 83.69% | 56.90% | 0.88 | 1.67 |
| Tesla | 38.11 | 33.43% | 14.94% | 1.13 | 1.98 |
| GM | 6.43 | 14.45% | 5.86% | 0.59 | 4.18 |
DuPont last 12 months;
PE & PEG Current, prepared Feb 2023
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/home.htm
Aswath Damodaran
Professor of Finance, New York U
http://www.econ.yale.edu/~shiller/
Robert Shiller, Nobel Laureate (2013)
Professor of Economics, Yale U
P/E for S&P 500 Index: 1980-2023
Rule of thumb:
PE >16 expensive stock
PE <12 cheap stock
Nov 21:
38.58
Apr 23:
28.91
CAPE Price E10 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A high PE reflects investors’ views of the growth potential.
But can also indicate stock overvaluation
Solution : compare PE vs. sustainable growth rate (or expected growth rate)
Price-Earning (P/E) Ratio
PEG >1 overvalued
PEG < 1 undervalued
PEG =1 correctly valued
If a company has ROE = 20%, Retention Ratio= 80%
Sustainable Growth Rate = 20% * 80%=16%
If P/E =25
Four scenarios…
High PE, High SGR
PE = 50
SGR = 30%
High PE, Low SGR
PE = 30
SGR = 5%
Low PE, Low SGR
PE = 10
SGR = 5%
Low PE, High SGR
PE = 10
SGR = 20%
$10
$20
Buy
Looking for an under-valued company?
If you were looking for the “perfect” undervalued asset, it would be one:
With a low PE ratio (it is cheap)
With high expected growth in earnings (high growth potential)
With low risk (low business & operation risk)
And high ROE
It is cheap with no good reason for being cheap!
In real world, this may be too good to be true!
3,386.15
Feb 18, 2020
2,237.40,
Mar. 23,2020
34%
Standard & Poor (S&P) 500: US Market
| Company | P/E | PEG | ROE | Net Margin | Asset Turnover | Financial Leverage |
| Microsoft | 25.38 | 2.11 | 42.88% | 34.37% | 0.58 | 2.15 |
| Amazon.com | 86.41 | 5.04 | 8.78% | 2.25% | 1.24 | 3.15 |
| Apple | 21.85 | 2.53 | 175.46% | 25.31% | 1.12 | 6.19 |
| Meta (Facebook) | 12.68 | 2.87 | 22.40% | 24.41% | 0.68 | 1.35 |
| UBER | NA | NA | -87.66% | -30.45% | 0.85 | 3.39 |
| Airbnb | 39.19 | NA | 32.61% | 20.29% | 0.54 | 2.98 |
| Walmart | 44.96 | 3.76 | 11.61% | 1.49% | 2.44 | 3.19 |
| NIKE | 36.14 | 4.03 | 37.32% | 11.47% | 1.25 | 2.60 |
| Lululemon | 34.32 | 1.34 | 41.05% | 15.66% | 1.51 | 1.74 |
| Pfizer | 9.09 | 1.64 | 35.37% | 29.81% | 0.53 | 2.24 |
| Moderna | 6.73 | NA | 83.69% | 56.90% | 0.88 | 1.67 |
| Tesla | 38.11 | 1.08 | 33.43% | 14.94% | 1.13 | 1.98 |
| GM | 6.43 | 0.95 | 14.45% | 5.86% | 0.59 | 4.18 |
DuPont last 12 months;
PE & PEG Current, prepared Feb 2023
| Company | P/E | PEG | ROE | Net Margin | Asset Turnover | Financial Leverage |
| Microsoft | 25.38 | 2.11 | 42.88% | 34.37% | 0.58 | 2.15 |
| Amazon.com | 86.41 | 5.04 | 8.78% | 2.25% | 1.24 | 3.15 |
| Apple | 21.85 | 2.53 | 175.46% | 25.31% | 1.12 | 6.19 |
| Meta (Facebook) | 12.68 | 2.87 | 22.40% | 24.41% | 0.68 | 1.35 |
| UBER | NA | NA | -87.66% | -30.45% | 0.85 | 3.39 |
| Airbnb | 39.19 | NA | 32.61% | 20.29% | 0.54 | 2.98 |
| Walmart | 44.96 | 3.76 | 11.61% | 1.49% | 2.44 | 3.19 |
| NIKE | 36.14 | 4.03 | 37.32% | 11.47% | 1.25 | 2.60 |
| Lululemon | 34.32 | 1.34 | 41.05% | 15.66% | 1.51 | 1.74 |
| Pfizer | 9.09 | 1.64 | 35.37% | 29.81% | 0.53 | 2.24 |
| Moderna | 6.73 | NA | 83.69% | 56.90% | 0.88 | 1.67 |
| Tesla | 38.11 | 1.08 | 33.43% | 14.94% | 1.13 | 1.98 |
| GM | 6.43 | 0.95 | 14.45% | 5.86% | 0.59 | 4.18 |
DuPont TTM; PE & PEG Current
When earnings is negative,
You cannot calculate a P/E, then what do we do?
| Price/Sales |
| P/E |
| Company | A | B |
| Revenue | 10 mil | 30 mil |
| COGS | 6 mil | 18 mil |
| Operating Expense | 5 mil | 14 mil |
| Other exp. | 1 mil | 2 mil |
| Net Income | -2 mil | – 4 mil |
We cannot compare negative PE
| EPS | $ -2.00 | $ -4.00 |
Use Price/Sales for negative profit companies
Mostly for IPOs
| Sales/share | $10.00 | $30.00 |
| Stock Price | $40 | $100 |
Both companies have 1 million shares
Snap IPO
March, 2017
Price-to-Sales Ratio at IPO
Price-to-Sales Ratio after IPO
stock plunged Friday after the social-networking firm posted and guidance that fell shy of estimates on Thursday.
The parent of Snapchat said its advertising revenue was hurt more than expected by ‘s change in the rules surrounding advertising on mobile apps.
Snap stock was down 25% in Friday trading.
(FB) was down 6% on the news, while (TWTR) was off 5%, (PINS) had fallen 4.4%, and (GOOGL) had slipped 3.4%. Snap is the first of the companies to report September quarter results.
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