MYSTERY COMPANY INCOME STATEMENT

Consolidated Statement of Income - USD ($) shares in 12 Months Ended

Millions, $ in Millions 2014 2015
REVENUES-Gross Profits
Revenue (Sales) 27,441 25,413
Cost of revenue (COGS) 16,986 15,624
Gross profit 10,456 9,789
OPERATING Results
Sales, General and administrative 2,488 2,434
Total operating expenses 2,488 2,434
Operating income (Also called EBIT) 7,968 7,355
Net Profits
Interest Expense 570 638
Other income (expense) (25) (161)
Income before taxes 7,372 6,556
Provision for income taxes 2,614 2,026
Net income 4,758 4,529
EPS (Basic) 4.86 4.82
Number of Shares Outstanding (Basic) 980 939

EBITDA 9,587 8,750

Current Market Price of Mystery Company Stock 95 118
Use this for your Market Ratios

Part 3 - Common-Size Income Statement Analysis

First, compute a Common Size Income Statement in the template provided above. Then review both the Income State
Common Size Income Statement and list your observations below. What have your learned about this company by rev
Statements?

Points of Interest:
The Common-Size Income Statement computes the Gross, Operating and Net Margins
The company has managed to control costs and improve profitability, even as revenues have declined. However, rising
ME STATEMENT Common Size Income Statement
12 Months Ended
2014 2015 2016
2016 2017 2018

24,622 22,820 21,025 100.0% 100.0% 100.0%

14,417 12,200 10,239 61.9% 61.5% 58.6%
10,205 10,621 10,786 38.1% 38.5% 41.4%

2,384 2,231 2,200 9.1% 9.6% 9.7%

2,384 2,231 2,200 9.1% 9.6% 9.7%
7,820 8,390 8,586 29.0% 28.9% 31.8%

885 921 981 2.1% 2.5% 3.6%

(69) 1,105 212 -0.1% -0.6% -0.3%
6,866 8,574 7,816 26.9% 25.8% 27.9%
2,180 3,381 1,892 9.5% 8.0% 8.9%
4,686 5,192 5,924 17.3% 17.8% 19.0%
5.49 6.43 7.61
854 807 778

9,267 10,858 10,279

122 172 175

ve. Then review both the Income Statement and the

our learned about this company by reviewing its Income

venues have declined. However, rising interest expenses and unpredictable tax provisions are areas of concern. To maintain long-term pr
Income Statement ABOUT THE INCOME STA

2017 2018
The Income Statement sumarizes a company's revenues and expenses,
Based on the equation: Revenues - Expenses = Net Income
100.0% 100.0%
53.5% 48.7% The Income Statement is also known as a Profit and Loss Statement
46.5% 51.3%
Most income statements cover a 1-year period, however, SEC requires c
9.8% 10.5%
9.8% 10.5% All Income Statements have 3 parts: (they may be named differently, bu
36.8% 40.8% First Part = Gross Profits, also called Statement of Earnin
The first part always subtracts the COG
4.0% 4.7% Second Part = Operating Results, also called Statement
4.8% 1.0% or EBIT (Earnings before interest and ta
37.6% 37.2% The second part always subtracts the o
14.8% 9.0% Third Part = Net Profits, also called Statement of Income
22.8% 28.2% The third part always subtracts out inte

* Some companies list the EBITDA, EPS, and the Number

below their Income Statement.

The Common-Size Income Statement expresses the Income Statement

(Divide everything by Total Sales)

Earnings Available to Shareholders (The text does not mention this, but
the preferred stock dividends must be subtracted from the Net I
Earnings Available to Shareholders = Net Income less Preferred St
If the company does not have preferred stock: Earnings Available

To maintain long-term profitability, the company will need to stabilize or grow its revenue while keeping costs under control.
BOUT THE INCOME STATEMENT

mpany's revenues and expenses,

xpenses = Net Income

as a Profit and Loss Statement

ar period, however, SEC requires companies to report quarterly too.

(they may be named differently, but will always give the same information)
fits, also called Statement of Earnings
first part always subtracts the COGS from the total revenue
ting Results, also called Statement of Operations,
BIT (Earnings before interest and taxes.)
second part always subtracts the operating expenses from the gross profit
ts, also called Statement of Income
hird part always subtracts out interest and taxes

t the EBITDA, EPS, and the Number of Shares Outstanding

w their Income Statement.

expresses the Income Statement as a percentage of Total Revenue (Sales).

Total Sales)

he text does not mention this, but when a company issues preferred stock,
must be subtracted from the Net Income before Profit margins are calculated)
ders = Net Income less Preferred Stock Dividends
preferred stock: Earnings Available to Shareholders = Net Income

ng costs under control.

 MYSTERY COMPANY BALANCE SHEET
Consolidated Balance Sheet - USD ($) $ in Millions 2014 2015 2016
Current assets
Cash and cash equivalents 2,078 7,686 1,223
Receivables 1,214 1,299 1,474
Inventories 110 100 59
Prepaid expenses 783 559 565
Other current assets 1,527
Total current assets 4,186 9,643 4,849
Non-current assets
Property, plant and equipment 39,126 37,692 34,443
Accumulated Depreciation (14,569) (14,575) (13,186)
Net property, plant and equipment 24,558 23,118 21,258
Equity and other investments 1,004 793 726
Goodwill 2,735 2,516 2,336
Other long-term assets 1,799 1,869 1,855
Total non-current assets (Long-term) 30,096 28,296 26,175
TOTAL ASSETS 34,281 37,939 31,024
Current liabilities
Short-term debt 77
Accounts payable 860 875 756
Taxes payable 497 464 534
Accrued liabilities 1,391 1,612 1,407
Other current liabilities 695
Total current liabilities 2,748 2,950 3,468
Non-current liabilities
Long-term debt 14,990 24,122 25,878
Deferred taxes liabilities 1,624 1,704 1,817
Deferred revenues
Other long-term liabilities 2,066 2,074 2,064
Total non-current liabilities (Long-term) 18,680 27,900 29,760
Total Liabilities 21,428 30,851 33,228
Stockholders' equity
Common stock 17 17 17
Additional paid-in capital 6,239 6,533 6,758
Retained earnings 43,294 44,594 46,223
Treasury stock (35,177) (41,177) (52,109)
Accumulated other comprehensive income (1,520) (2,880) (3,093)
Total stockholders' equity 12,853 7,088 (2,204)
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY 34,281 37,939 31,024
 Part 3 - Common-Size Balance Sheet Analysis
Follow the same instructions as for the Income Statement.

List your observations from the Balance Sheet Analysis here:

Cash as a percentage of total assets dropped from 6% in 2014 to 2.6% in 2018, indicating reduced liquidity.
Receivables grew from 3.5% to 7.4%, suggesting slower customer payments.
Property, plant, and equipment consistently made up 65-72% of total assets, indicating a capital-heavy business.
Long-term debt rose sharply, from 44% to 94.5%, showing higher reliance on debt.
Stockholders equity turned negative by 2017, driven by high treasury stock purchases and growing liabilities.
Despite higher debt, retained earnings grew steadily, showing ongoing profitability.
This points to expansion but with rising debt risks and reduced liquidity.
EET Common-Size Balance Sheet
2017 2018 2014 2015 2016 2017

2,464 866 6.06% 20.26% 3.94% 7.29%

1,976 2,442 3.54% 3.42% 4.75% 5.85%
59 51 0.32% 0.26% 0.19% 0.17%
828 695 2.28% 1.47% 1.82% 2.45%
0.00% 0.00% 4.92% 0.00%
5,327 4,053 12.21% 25.42% 15.63% 15.76%

36,626 37,194 114.13% 99.35% 111.02% 108.35%

(14,178) (14,351) -42.50% -38.42% -42.50% -41.94%
22,448 22,843 71.64% 60.93% 68.52% 66.41%
1,086 1,203 2.93% 2.09% 2.34% 3.21%
2,380 2,332 7.98% 6.63% 7.53% 7.04%
2,563 2,381 5.25% 4.93% 5.98% 7.58%
28,476 28,758 87.79% 74.58% 84.37% 84.24%
33,804 32,881 100.00% 100.00% 100.00% 100.00%

0.00% 0.00% 0.25% 0.00%

925 1,208 2.51% 2.31% 2.44% 2.74%
541 482 1.45% 1.22% 1.72% 1.60%
1,425 1,284 4.06% 4.25% 4.54% 4.22%
0.00% 0.00% 2.24% 0.00%
2,891 2,974 8.02% 7.78% 11.18% 8.55%

29,536 31,075 43.73% 63.58% 83.41% 87.37%

1,119 1,216 4.74% 4.49% 5.86% 3.31%
628 0.00% 0.00% 0.00% 0.00%
3,525 3,178 6.03% 5.47% 6.65% 10.43%
34,181 36,096 54.49% 73.54% 95.93% 101.12%
37,072 39,070 62.51% 81.32% 107.10% 109.67%

17 17 0.05% 0.04% 0.05% 0.05%

7,072 7,376 18.20% 17.22% 21.78% 20.92%
48,326 50,487 126.29% 117.54% 148.99% 142.96%
(56,504) (61,529) -102.61% -108.53% -167.96% -167.15%
(2,178) (2,610) -4.43% -7.59% -9.97% -6.44%
(3,268) (6,258) 37.49% 18.68% -7.10% -9.67%
33,804 32,881 100.00% 100.00% 100.00% 100.00%
ating reduced liquidity.

ng a capital-heavy business.

s and growing liabilities.

heet ABOUT THE BALA

2018 The balance sheet reports a firm's total assets, and how these assets are financed,
Remember the Accounting Equation: Assets = Liabilities + Sharehol
2.63%
7.43% That mix of debt and equity used to finance a firm's assets is called the firm's CAPIT
0.16% A standard balance sheet has three parts: assets, liabilities, and equity. The assets
2.11% The balance sheet is the only financial statement which applies to a single point in
0.00%
12.33% There is a very important distinction between Short-Term and Long-Term
Short-term assets and liabilities refer to a firm's operations
113.12% Short-term assets and liabilities are expected to be converted to cas
-43.65% Short-term assets should more than offset short-term liabilities, whi
69.47%
3.66% Long-term assets and liabilities last longer than a year and are consid
7.09% Stockholder's equity is assumed to have an infinite life - very long-te
7.24% A firm's short and long-term assets combined should more than offs
87.46% which represents the solvency of a firm
100.00%

0.00% Healthy firm's are normally both solvent and possess adequate liquid
3.67% to have low liquidity. It is also possible for a firm with a very healthy
1.47% long-term debt.
3.90%
0.00% Long-term assets represent the value of a firm's property, equipmen
9.04% What the firm owns, used for the production of goods
Short-term assets are a firm's cash, short-term investments, receiva
94.51% A firm's revenue from operations, used to facilitate da
3.70%
1.91%
9.67%
109.78%
118.82% The Common-Size Balance Sheet expresses the Balance Sheet as a percentage of
Specifically, the asset part of the Balance Sheet is expressed in terms of Total As
0.05% of Total Liabilities and Shareholder's Equity. But, since Total Assets = Total Liab
22.43% percentage of Total Assets.
153.54%
-187.13%
-7.94%
-19.03%
100.00%
 ABOUT THE BALANCE SHEET

s, and how these assets are financed, through a mix of debt and equity.
ation: Assets = Liabilities + Shareholder's Equity

firm's assets is called the firm's CAPITAL STRUCTURE - You will see this term later!
sets, liabilities, and equity. The assets and liabilities are divided into short-term and long-term.
ent which applies to a single point in time.

Short-Term and Long-Term

s refer to a firm's operations
s are expected to be converted to cash or paid off within 1 year
than offset short-term liabilities, which represents a firm's liquidity

last longer than a year and are considered fixed

d to have an infinite life - very long-term
sets combined should more than offset a firm's long-term liabilities,
s the solvency of a firm

h solvent and possess adequate liquidity. However, it is very possible for a healthy company
possible for a firm with a very healthy liquidity to go bankrupt because it could not cover its

e value of a firm's property, equipment and other capital assets and investments, minus depreciation.
wns, used for the production of goods or services
ash, short-term investments, receivables, and inventories.
from operations, used to facilitate day-to-day operational expenses and short-term investments.

he Balance Sheet as a percentage of Total Assets (Divide everything by Total Assets)

heet is expressed in terms of Total Assets and the Liabilities and Equity portion is expressed in terms
. But, since Total Assets = Total Liabilities and Shareholder's Equity, it's easier to just say it a
Assignment 1 - Ratio Analysis
Part 1 - Ratio Calculations - 20 pts Calculate Ratios Here
Ratio Formulas (To save you a little bit of time)
Ratios
Numerators / Denominators
Profitability Ratios
Gross Profit Margin Gross Profits / Sales

Operating Profit Margin Operating Profits / Sales

Net Profit Margin Net Income / Sales

Earnings per Share (EPS) Net Income / #shares outstanding

Return on Assets (ROA) Net Income / Total Assets

Return on Equity (ROE) Net Income / Common Stockholders Equ

Liquidity Ratios
Current Ratio Current Assets / Current Liabilities

Quick Ratio Current Assets-Inventory / Current Liabilities

Debt Ratios
Debt to Total Assets Total Liabilities / Total Assets

Equity Multiplier (FLM) Total Assets / Common Stockholders Equ

Times Interest Earned EBIT / Interest Expense

Activity Ratios
Average Collection Period Accounts Receivable / (Sales / 365)

Accounts Payable Turnover COGS / Accounts Payable

Days AP 365 / AP Turnover

Inventory Turnover Sales / Inventory

Days Inventory 365 / Inventory Turnover

Total Asset Turnover Sales / Total Assets

Market Ratios
Price/Earnings (P/E) Market Price per Share / Earnings per share

Market/Book (M/B) Market Price per Share / Book Value per share

Modified DuPont Analysis

Net Margin From above
Total Asset Turnover From above
ROA Net Profit Margin * Total Asset Turnover
Equity Multiplier (FLM) From above
ROE ROA * FLM
Part 2 - Common-Size Statements Go to "Income Statement" tab and "Balance Sheet" tab to complete these.
12 Points
 Ratios for Mystery Company Competitors
2014 2015 2016 2017 2018 Averages Part 3 - Ratio Analysis - 48 Points
Profitability Ratios
THE GROSS PROFIT MARGIN INCRE
38.10% 38.52% 41.45% 46.54% 51.30% 42.39% MARGIN ALSO IMPROVED OVER T
29.04% 28.94% 31.76% 36.77% 40.84% 23.62% THAT THE COMPANY WAS NOT ON
PROFITS PER SHARE TO ITS HOLDE
17.34% 17.82% 19.03% 22.75% 28.18% 23.32% NEGATIVE FROM 2016 DUE TO NE
4.86 4.82 5.49 6.43 7.61 3.68

13.88% 11.94% 15.10% 15.36% 18.02% 20.92%

37.02% 63.90% -212.61% -158.87% -94.66% 10.36%

Liquidity Ratios
THE COMPANY'S CURRENT RATIO
1.52 3.27 1.40 1.84 1.36 1.26 SHOULD COVER ITS SHORT-TERM
1.48 3.23 1.38 1.82 1.35 1.25 LIABILITIES WITHOUT SELLING INV

Debt Ratios
THE COMPANY'S DEBT PUSHED IT
62.51% 81.32% 107.10% 109.67% 118.82% 182.92% GENERATE ENOUGH CASH FLOW T
2.67 5.35 -14.08 -10.34 -5.25 1.57

13.98 11.53 8.84 9.11 8.75 9.90

Activity Ratios
THE COMPANY HAS BEEN MANAG
16.15 18.66 21.85 31.61 42.39 25.60 SOME OPERATIONAL INEFFICIENC
19.75 17.86 19.07 13.19 8.48 23.66

18.48 20.44 19.14 27.67 43.06 21.77

249.46 254.13 417.32 386.78 412.25 416.25

1.46 1.44 0.87 0.94 0.89 0.88

0.80 0.67 0.79 0.68 0.64 0.93

Market Ratios
THE MARKET RATIOES SHOW THA
19.57 24.47 22.23 26.73 22.98 15.69 NEGATIVE QQUITY AND RELIED HE
7.24 15.63 -47.27 -42.47 -21.76 -0.41

Modified DuPont Analysis

THE COMPANY'S PROFITABILITY H
17.34% 17.8% 19.0% 22.8% 28.2% 23.3% REDUCING DEBT AND DEALING W
0.80 0.67 0.79 0.68 0.64 0.93

13.88% 11.9% 15.1% 15.4% 18.0% 23.3%

2.67 5.35 -14.08 -10.34 -5.25 1.57

37.02% 63.90% -212.61% -158.87% -94.66% 10.36%

e Sheet" tab to complete these.
Part 4 - Sum it All Up - 20 Points
THE COMPANY IS DEFNITELY
LEVELS GOT SO HIGH THAT
TO COLLECT PAYMENTS FRO
BE ON PAYING DOWN THAT
RELYING LESS ON DEBT WIL

Bonus - 5 Points
In the last two years, the
shareholdes have to give
Analysis - 48 Points Complete your ratio analysis here.
bility Ratios
OSS PROFIT MARGIN INCREASED STEADILY EACH YEAR, WHICH MEANS THAT THE COMPANY MIGHT BE MORE EFFICIENT IN CONTROLLING
N ALSO IMPROVED OVER TIME, REFLECTING BETTER MANAGEMENT OF OPERATING EXPENSES OR INCREASING OPERATIONAL EFFICIENCY.
HE COMPANY WAS NOT ONLY MANAGING COSTS WELL BUT ALSO BENEFITING FROM FINANCIAL CONDITIONS. EPS SHOWED A STRONG U
S PER SHARE TO ITS HOLDERS. THE COMPANY'S ROA GREW FROM 2015 TO 2018, SUGGESTING IMPROVING EFFICIENCY IN ASSET UTILIZAT
VE FROM 2016 DUE TO NEGATIVE EQUITY. MEANING THE COMPANY STRUGGLED TO GENERATE PROFIT FROM SHAREHOLDERS.

y Ratios
MPANY'S CURRENT RATIO WAS HEALTHY THROUGHOUT THE PERIOD, PEAKING IN 2015 BUT IT ELCAINED IN 2018, SHOWING A DECREASE
D COVER ITS SHORT-TERM OBLIGATIONS. THE QUICK RATIO WAS HIGHEST AT 2015 AND DECLINED IN 2018, SUGGESTING THAT THE COMA
IES WITHOUT SELLING INVENTORY.

atios
MPANY'S DEBT PUSHED IT INTO A HIGH RISK CATEGORY. THE RISING LEVERAGE AND DECLINING EQUITY SUGGEST THAT THE COMPANY'S
ATE ENOUGH CASH FLOW TO MANAGE ITS INCRESING DEBT BURDEN.

Ratios
MPANY HAS BEEN MANAGING ITS INVENTORY WELL, WITH FAST TURNOVER AND LOW DAYS INVENTORY, BUT THE GROWING TIME TO CO
OPERATIONAL INEFFICIENCIES. IF THESE TRENDS CONTINUE, THE COULD CREATE CASH FLOW PROBLEMS, ESPECIALLY SINCE THE COMPAN

Ratios
ARKET RATIOES SHOW THAT THE COMPANY HAD STRONG INVESTOR CONFIDENCE IN THE EARLY YEARS, BUT ITS FINANCIAL HEALTH START
VE QQUITY AND RELIED HEAVILY ON DEBT, INVESTORS DIDN’T LOSE CONFIDENCE.

d DuPont Analysis
MPANY'S PROFITABILITY HAS BEEN GETTING BETTER, BUT ITS HEAVY USE OF DEBT AND NEGATIVE EQUITY IS WHY ITS ROE HAS BEEN SO P
NG DEBT AND DEALING WITH THE NEGATIVE EQUITY TO GET BACK ON TRACCK AND DELIVER POSITIVE RETURNS TO SHAREHOLDERS.
 Sum it All Up - 20 Points Put the summary of your analysis here.
OMPANY IS DEFNITELY PROFITABLE, WITH SOLID MARGINS AND IMPROVING OPERATIONS, BUT THE ISSUE IS THE
S GOT SO HIGH THAT THE COMPANY'S EQUITY TURNED NEGATIVE, WHICH IS A MAJOR RED FLAG. EVEN THOUGH
LLECT PAYMENTS FROM CUSTOMERS AND ARE DELAYING PAYMENTS TO SUPPLIERS, WHICH COULD LEAD TO CA
PAYING DOWN THAT DEBT AND FIXING THE NEGATIVE EQUITY TO AVOID ANY FINANCIAL TROUBLE DOWN THE
NG LESS ON DEBT WILL BE KEY TO MAKING SURE THE COMPANY STAYS HEALTHY LONG TERM.

5 Points Answer the Bonus Question here.

e last two years, the ROE for this company is negative. Is this good or bad, explain? Does the nega
holdes have to give money to the company?
 HT BE MORE EFFICIENT IN CONTROLLING PRODUCTION COSTS RELATIVE TO THE SALES. OPERATING PROFIT
INCREASING OPERATIONAL EFFICIENCY. NET PROFIT MARGIN INCREASED SIGNIFICANTLY, INDICATING
CONDITIONS. EPS SHOWED A STRONG UPWARD TREND, MEANING THE COMPANY WAS DELIVERING MORE
MPROVING EFFICIENCY IN ASSET UTILIZATION. ROE WAS STRONG IN 2014 AND 2015 BUT TURNED SHARPLY
PROFIT FROM SHAREHOLDERS.

CAINED IN 2018, SHOWING A DECREASE IN LIQUIDITY BUT IT WAS STILL ABOVE 1, MEANING THE COMPANY
D IN 2018, SUGGESTING THAT THE COMANY BECAME LESS LIQUID OVER TIME, WITH LESS ABILITY TO COVER

EQUITY SUGGEST THAT THE COMPANY'S FINANCIAL STABILITY COULD BE JEOPARDIZED IF IT DOES NOT

ENTORY, BUT THE GROWING TIME TO COLLECT PAYMENTS AND THE DROP IN ASSET TURNOVER POINT TO
BLEMS, ESPECIALLY SINCE THE COMPANY IS ALSO TAKING LONGER TO PAY ITS SUPLIERS

EARS, BUT ITS FINANCIAL HEALTH STARTED TO DECLINE AFTER 2015. EVEN THOUGH THE COMPANY HAD

E EQUITY IS WHY ITS ROE HAS BEEN SO POOR RECENTLY. TO FIX THIS, THE COMPANY NEEDS TO FOCUS ON
ITIVE RETURNS TO SHAREHOLDERS.
 ERATIONS, BUT THE ISSUE IS THE HUGE RELIANCE ON DEBT. STARTING IN 2016, DEBT
MAJOR RED FLAG. EVEN THOUGH THEY'RE MAKING MONEY, THEY'RE TAKING LONGER
LIERS, WHICH COULD LEAD TO CASH FLOW PROBLEMS. THE BIGGEST FOCUS SHOULD
FINANCIAL TROUBLE DOWN THE LINE. TIGHTENING UP CASH FLOW MANAGEMENT AND
HY LONG TERM.

bad, explain? Does the negative Shareholder's Equity mean that

Grading Rubric Points Score

Part 1: Ratios 20 0
Part 2: Common Size Statements 12 0
Part 3: Analysis

Profitbility 8 0
Liquidity 8 0
Leverage 8 0
Activity 8 0
Market 8 0
DuPont Analysis 8 0
Part 4: Summary 20 0
Total 100 0
Bonus 5 0
Total Grade 105 0