Corporate Stockholders' Report

Stockholders' Report

• Corporations use standardized reports of financial activities for various purposes.
• Reports are prepared periodically for regulators, creditors (lenders), and owners.

Letter to Stockholders

• The primary communication from management.
• It describes events with the greatest impact on the firm during the year.
• Discusses management philosophy, corporate governance, strategies, actions, and future plans.

Key Financial Statements

• Four key financial statements are required by the SEC for shareholder reporting:
  • Income statement
  • Balance sheet
  • Statement of stockholders’ equity
  • Statement of cash flows

Income Statement

• Provides a financial summary of a firm's operating results over a specific period.
• Many firms operate on a 12-month financial cycle (fiscal year) ending outside December 31.
• Monthly income statements are for management use.
• Quarterly statements are available stockholders of publicly-owned corporations.
• Includes revenues and expenses.
• Revenues represent funds earned in exchange for business efforts.
• Expenses represent costs incurred while earning revenues.

Balance Sheet

• Presents a summary of a firm's financial position at a specific time.
• Balances a firm's assets against its financing, which includes debt and equity.
• Assets are economic resources acquired for business transactions.
• Liabilities are debt burdens.
• Owner's equity equals invested funds.

Statement of Retained Earnings

• An abbreviated form of the statement of stockholders' equity.
• It reconciles a year's net income with cash dividends paid.
• It shows the change in retained earnings from the beginning to the end of the year.

Statement of Cash Flows

• Summarizes cash flows over a period.
• Provides insight into a firm's operating, investment, and financing cash flows.
• Reconciles these flows with changes in cash and marketable securities during the period.

Using Financial Ratios

• Information in financial statements is significant to internal and external users who need relative measures.
• Financial statement analysis relies on ratios or relative values.
• Ratio analysis involves calculating and interpreting financial ratios to analyze and monitor firm performance.
• The basic inputs are the firm’s income statement and balance sheet.

Types of Ratio Comparisons

• Includes the interpretation of the ratio value.
• Comparison is needed to determine if a ratio is too high, too low, good, or bad.
• Cross-sectional and time-series ratio comparisons can be made.
• Cross-sectional analysis compares financial ratios of different firms at the same time.
• Benchmarking involves comparisons to key competitors or industry averages.
• Time-series analysis evaluates performance over time.
• Trends can be seen using multiyear comparisons, where any significant year-to-year change may indicate a problem.
• Combined analysis joins cross-sectional with time-series analyses to assess ratio trends relative to the industry.
• Five general categories of financial ratios: liquidity, activity, debt, profitability, and market ratios.
  • Liquidity, activity, and debt ratios primarily measure risk.
  • Profitability ratios measure return.
  • Market ratios capture both risk and return.

Liquidity Ratios

• Liquidity gauges a firm's ability to meet short-term obligations when due.
• Liquidity regards a firm's overall financial stability and bill-paying ease.
• Enough liquidity for day-to-day operations is important.
• Liquid assets do not earn high returns, so shareholders do not want overinvestment in liquidity.

Current Ratio

Current Ratio = Current Assets / Current Liabilities

• Current assets are $31,280.
• Current liabilities are $13,332.
• The current ratio is 2.3.
• The industry average is 2.0.
• Managers know that liquidating Bayside’s current assets at book value yields $2.30 cash per $1 of current liabilities.
• Bayside’s current ratio is slightly above the average for hospitals.

Days Cash on Hand

Days Cash on Hand = (Cash + Short-term Investments) / ((Expenses - Depreciation - Provision for Uncollectibles) / 365)

• Equals 22.5 days for the hospital Bayside.
• The industry average = 30.6 days.
• Two liquidity measures (current ratio and days cash on hand) give conflicting results for Bayside.

Asset Management Ratios

• The purpose is to measures how well a business manages its assets

Fixed Asset Turnover Ratio

Fixed Asset Turnover = Total Revenues / Net Fixed Assets

• Bayside's ratio of 0.98 means that each dollar of fixed assets generated 98 cents in revenue.
• The industry average of 2.2 indicates that Bayside does not use its fixed assets productively.

Total Asset Turnover Ratio

Total Asset Turnover = Total Revenues / Total Assets

• Each dollar of total assets generated 78 cents in revenue.
• Bayside’s total asset turnover ratio, at 0.78, is below the 0.97 industry average.
• Bayside utilizes its current assets better than its fixed assets compared to the industry.

Days in Patient Accounts Receivable

• Measures effectiveness in managing receivables (also called days in receivables, average collection period or days’ sales outstanding).

Days in Patient Accounts Receivable = Net Patient Accounts Receivable / (Net Patient Service Revenue / 365)

• Bayside is at 73.4 days.
• The industry average is 64.0 days.
• Bayside is not collecting receivables as well as the average hospital, where many hospitals are doing worse at 78.7, the lower quartile.

Debt Ratios

• Amount of other people's money used to generate profits.
• More debt means greater risk of not meeting contractual payments.
• More debt relative to total assets means greater financial leverage.
• Two types of ratios
• Capitalization ratios, using balance sheet data to assess borrowed funds used to finance assets
• Coverage ratios, using income statement data to assess how well reported profits cover fixed financial charges

Debt Ratio

Debt Ratio = Total Debt / Total assets

• Bayside’s debt ratio is 29.0%.
• Each dollar of assets was financed with 29 cents of debt and 71 cents of equity.
• Bayside uses significantly less debt than the average hospital.

Debt-to-equity Ratio

Debt-to-Equity Ratio = Total Liabilities / Common Stock Equity

• Bayside is at 40.9%.
• Industry average is 73.3%.
• Bayside's creditors have contributed 40.9 cents for each dollar of equity capital.
• The industry average is 73.3 cents per dollar.
• Lenders prefer this ratio over the debt ratio as it indicates capital provided by creditors per dollar of equity capital, where a higher ratio suggests a riskier creditors' position.

Coverage Ratios

• Assess a company's ability to cover its debt obligations.

Times Interest Earned (TIE) Ratio

• Sometimes called the interest coverage ratio, measures a firm’s ability to make contractual interest payments.
• A higher value indicates a greater ability to fulfill obligations:

Times Interest Earned (TIE) Ratio = EBIT / Interest Expense

• Bayside’s interest is covered 6.6 times, which is higher than the industry's average of 4.0.
• The hospital is covering its interest by relatively high margin of safety.

Cash Flow Coverage Ratio

• Cash flow coverage ratio (fixed-payment coverage ratio) measures a firms ability to meet fixed payment obligations, such as loan interest and principal, lease payments and preferred stock dividends.
• With a higher value being better.

Cash Flow Coverage Ratio = (EBIT + Lease Payments + Depreciation Expense) / (Interest Expense + Lease Payments + Debt Principal / (1 - T))

• Bayside's CFC ratio (3.2) exceeds the industry standard of 2.3.
• Bayside can cover its total fixed payments with cash flow better than average, reassuring creditors and management and indicating untapped debt capacity.

Profitability ratios

• Measures the company earnings

Total Margin

• Also known as total profit margin or profit margin

Total Margin = Net Income / Total Revenues

• Bayside demonstrates 7.3 percent which means the hospital makes 7.3 cents on every dollar of total revenues.
• The total margin measures the organization's ability to keep expenses low.
• Bayside’s total margin is above the industry average of 5.0 percent, showing good controlling of expenses..

Operating Profit Margin

• This value indicates operating income divided by operating revenues.
• Operating revenues are equal to net patient service revenue plus premium revenue.
• This is good to measure core business because it removes the influence of non-operating revenues and costs, which are unrelated to core operations.

Operating Margin = (Operating Revenues – Operating Expenses) / Operating Revenues

• Bayside’s operating revenue for 2006: $108,600,000 + $5,232,000 = $113,832,000
• As of 2006, the operating margin is : ($113,832-$108,904) / $113,832 = $4,928 / $113,832 = 0.043 = 4.3%
• Note that removing non-operating revenue from the calculation lowers the profit margin.

Return on Assets (ROA)

• The return on total assets (ROA) otherwise called return on investment measures the overall effectiveness of the management team in generating profits with the firm's assets.

Return on Assets = Net Income / Total Assets

• Bayside’s is well above the 4.8 percent average for hospitals at 5.7 percent.
• The dollar amount being 5.7 cent in profit.

Return on Equity (ROE)

• Measures the return earned on the common stockholder’s investment in the firm.

Return on Equity = Net Income / Total Equity

• Bayside’s is at 8.0 percent.
• Industry average is 8.4 percent.

Market Ratios

• It helps in the decision making process to understand the companies risk and return to assess if its a good investment

Average Age in Plant

• Gives an estimated age of a business's fixed assets

Average Age of Plant = Accumulated Depreciation / Depreciation Expense

• For Bayside the average age of plant equals 6.1 Years.
• The industry average is 9.1 years.

Price/Earning Ratio

• It show how much an investor is willing to pay per dollar of reported profits.
• A lower result means that the investor is paying less than the market average

Price/Earning Ratio = Price per Share / Earnings per Share

• Is P/E ratios are higher for firms with high growth prospects, also lower if risker firms
• As of this text General’s P/E ratio is slightly below average for other investor-owned home health care, which may suggest poorer growth prospects and that its a more riskier business to invest in.