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32 Dividends =-IS!C31
33 Inc (dec) in long-term liabs =BS!C28-BS!B28
34 Inc (dec) common stock =BS!C32-BS!B32
35 Other inc (dec) ret™d earnings =C68
36 Inc (dec) in other equity acct =BS!C34-BS!B34
37 Cash from financing =SUM(C27:C36)
38
39 Change in cash and equiv =C19+C25+c37
40 Cash and equivalents =SUM(BS!C5:C7) =B40+C39
41
42 Cash and equiv in B/S =SUM(BS!C5:C7)
43 Parity check =C40-C42
44




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The CF Sheet 205




A B C
45 Proj
46 RECONCILIATION =B4 =C4
47
48 Net PPE
49 Beginning amount =BS!B13
50 Capex =-C21
51 Depreciation =C9
52 Expected ending amount =C49+C50-C51
53 B/S amount =BS!C13
54 Other (inc) dec Net PPE =C52-C53
55
56 Intangibles
57 Beginning amount =BS!B14
58 Amortization =C10
59 Expected ending amount =C57-C58
60 B/S amount =BS!C14
61 Other (inc) dec Intangibles =C59-C60
62
63 Retained earnings
64 Beginning amount =BS!B33
65 Net to retained earnings =IS!C32
66 Expected ending amount =C64+C65
67 B/S amount =BS!C33
68 Other inc (dec) ret™d earnings =C67-C66
69
70
CF




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Chapter 11
206




And this is what the final set of numbers should look like:

A B C D E F G
1 First Corporation
2
3 Proj Proj Proj
4 CASH FLOW 2000 2001 2002 2003 2004 2005
5
6 Net income 73.0 87.0 102.8 118.0 129.5
7
8 Add back:
9 Depreciation 75.0 80.0 85.0 91.8 102.5
10 Amortization of intangibles 4.0 4.0 4.0 4.0 4.0
11 Operating cash flow 152.0 171.0 191.8 213.8 236.0
12
13 (Inc) in Acct receivable (15.0) (15.0) (0.4) (9.0) (9.9)
14 (inc) in Inventory (15.0) (15.0) (12.4) (10.8) (17.3)
15 (inc) in Other current assets 0.0 (2.0) 1.0 (1.1) (1.2)
16 Inc in Accts payables 10.0 10.0 11.2 9.1 10.0
17 Inc in Other current liabs 10.0 0.0 2.0 2.2 2.4
18 (Inc) in Operating working capital (10.0) (22.0) 1.3 (9.6) (16.0)
19 Cash from operations 142.0 149.0 193.2 204.2 220.0
20
21 Capex (155.0) (130.0) (165.0) (217.8) (266.2)
22 Other (inc) dec net PPE 0.0 0.0 0.0 0.0 0.0
23 Other (inc) dec in Intangibles 0.0 0.0 0.0 0.0 0.0
24 Other (inc) dec in Long-term assets (24.0) (34.0) (4.0) (15.4) (16.9)
25 Cash from investments (179.0) (164.0) (169.0) (233.2) (283.1)
26
27 Inc (dec) in Short-term notes 2.0 2.0 0.0 0.0 0.0
28 Inc (dec) in Necessary to finance 0.0 0.0 0.0 0.0 19.4
29 Inc (dec) in Debt 1 25.0 (75.0) 0.0 0.0 0.0
30 Inc (dec) in Debt 2 0.0 25.0 0.0 0.0 0.0
31 Inc (dec) in Debt 3 0.0 0.0 0.0 0.0 0.0
32 Dividends (12.0) (11.0) (10.3) (11.8) (13.0)
33 Inc (dec) in Other long-term liabs (2.0) (1.0) 7.0 4.4 4.8
34 Inc (dec) in Common stock 40.0 80.0 70.0 0.0 0.0
35 Other inc (dec) in Ret™d earnings 0.0 0.0 0.0 0.0 0.0
36 Inc (dec) in Other equity account 1.0 1.0 0.1 0.1 0.1
37 Cash from financing 54.0 21.0 66.9 (7.3) 11.4
38
39 Change in cash and equiv 17.0 6.0 91.0 (36.3) (51.7)
40 Cash and equivalents 90.0 107.0 113.0 204.0 167.7 116.1
41
42 B/S cash and equiv 90.0 107.0 113.0 204.0 167.7 116.1
43 Parity check 0.0 0.0 0.0 0.0 0.0 0.0
44




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The CF Sheet 207




A B C D E F G
45 Proj Proj Proj
46 RECONCILIATON 2000 2001 2002 2003 2004 2005
47
48 Net PPE
49 Beginning amount 870.0 950.0 1,000.0 1,080.0 1,206.0
50 Capex 155.0 130.0 165.0 217.8 266.2
51 Depreciation 75.0 80.0 85.0 91.8 102.5
52 Expected ending amount 950.0 1,000.0 1,080.0 1,206.0 1,369.7
53 B/S amount 950.0 1,000.0 1,080.0 1,206.0 1,369.7
54 Other (inc) dec Net PPE 0.0 0.0 0.0 0.0 0.0
55
56 Intangibles
57 Beginning amount 58.0 54.0 50.0 46.0 42.0
58 Amortization 4.0 4.0 4.0 4.0 4.0
59 Expected ending amount 54.0 50.0 46.0 42.0 38.0
60 B/S amount 54.0 50.0 46.0 42.0 38.0
61 Other (inc) dec Intangibles 0.0 0.0 0.0 0.0 0.0
62
63 Retained earnings
64 Beginning amount 200.0 261.0 337.0 429.6 535.7
65 Net to retained earnings 61.0 76.0 92.6 106.2 116.6
66 Expected ending amount 261.0 337.0 429.6 535.7 652.3
67 B/S amount 261.0 337.0 429.6 535.7 652.3
68 Other inc (dec) Retained earnings 0.0 0.0 0.0 0.0 0.0
69
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TLFeBOOK
CHAPTER 12


Ratios: Key Performance
Indicators




At this stage, we have a model with a complete set of the three
financial statements. In this chapter, we will go through the types
of ratios for showing how well a company is performing and
a type of presentation called ˜˜common-size™™ that will show the
income statement and balance sheet as”in effect”nothing but
ratios.


COMPARING NUMBERS AGAINST
ONE ANOTHER
Once we have a complete model for a company, we can now use
the numbers being produced to gain an understanding of the
company. We can look at the historical numbers to have an
insight into how well the company has been performing. From
these, we can make forecast assumptions based on the historical
trends and what we know of developments in the company™s
industry and see how well we think the company will perform
based on these assumptions.
Numbers are most useful when we can compare them
against other numbers to show ratios. For example, let™s say
there are two companies, each with a net income of $10 million.
With just this information, the two may seem to be equals.
But as the table shows, when we compare this against other
209



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Chapter 12
210




numbers”in this case each company™s revenues”we see a
different picture:
Company A Company B

Net income $10 million $10 million
Revenues $100 million $200 million
Net margin 10% 5%


Now the fact emerges that the second company is only half
as profitable on a net margin basis as the first.
By the same token, we can have two companies, one
with profits twice as high as the other. Twice as profitable? Not
necessarily:
Company C Company D

Net income $10 million $20 million
Revenues $100 million $200 million
Net margin 10% 10%


With one company™s revenues twice as high as the other, the
two have the same net margin profitability, even though they are
of different sizes. This illustrates another valuable aspect of
ratios: They allow us to compare risk and return relationships
among firms of different sizes, though with the caveat that firms
with greatly differing sizes operate in different economic envi-
ronments, and that such comparisons should be made with this
in mind.
(In common-size statements, which we will cover a little
later in this chapter, we can also look at the performance of
one company across time, even if that company has gone
through considerable growth.)
Different industries also have different ratio benchmarks,
so it is important to limit ratio analysis to companies within
an industry, but not across industries. And as you work with
ratios, you should also keep in mind that companies often
have some ˜˜window dressing™™ to make ratios look better. As a
simple example, many department stores choose a fiscal year-end
of January or February, when their inventory is at the lowest
point after the end-of-the-year holiday sales. Companies can




TLFeBOOK
Ratios: Key Performance Indicators 211




pay off their short-term working capital loans just before
their reporting date, so that their debt ratios may be more favor-
able. They then draw down on their credit lines again after the
reporting date passes.


NEGATIVE NUMBERS
From a modeling viewpoint, negative numbers present some
problems. Here is a return on equity (net income/equity)
calculation:
Company E Company F

Net income $10 million ($10 million)
Equity $100 million ($100 million)
Return on equity 10% 10%


It seems that both companies earn the same return on their

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