ABOUT THIS CONTENTThis note provides some broad guidelines to help you with quantitative analysis of cases. The first part of the note lists some general points and the second provides a list of some of the commonly used computations in such analyses.
Source: Gautam Ahuja, professor of Strategy
This note provides some broad guidelines to help you with quantitative analysis of cases. Please note that it is not possible to provide a formula or guideline to be followed for analyzing all cases. The guidelines provided below are therefore, illustrative. In the first part of the note I list some general points and in the second I provide a list of some of the commonly used computations in such analyses.
Some General Caveats & Notes
Please note that not all cases will be numerically oriented, nor will we use all these computations in this class. However, this note is also intended as a reference that you can keep for later use, hence more is provided than may be immediately relevant or applicable.
- Focus on the assignment questions given to you for the case. These, especially the first question, should provide an idea of what numbers are likely to be more important.
- Identify the central issue or issues that the case seeks to address. The positioning of the case in the module, as well as my brief overview (introductory lecture) should be helpful in this.
- Study each exhibit closely. They often contain the most critical information. Focus on such critical variables as sales, ROE, market share, industry size and growth rate, size and growth rate of market segments, gross and net margins, inventory turnover, and average collection and payable periods.
- Identify and explain trends in the above variables. Compare these variables and ratios for the firm across years, and across firms within the industry.
- Verify any important facts stated in the case. This exercise will enable you to identify any assumptions being made by the decision makers or case writers
- Identify and where possible, numerically evaluate the different alternatives available to the decision maker.
- If balance sheet data are given try and make a cash flow or funds flow statement (Statement of Sources and Uses of Funds). Often the cash flow of the business will indicate the severity of the problems that the business faces.
Commonly Used Ratios and Computation
Du Pont Formula:
This allows us to break down the ROE into 3 components:
- The Net Income/Sales ratio, which measures the profitability of sales, without any reference to the utilization of assets involved in generating the sales.
- The Sales/Assets ratio, which measures the efficiency of asset utilization in generating sales without any reference to the profitability of those sales.
- The Assets/Equity ratio, which can be used as a measure of the leverage of the business. To see that, rewrite Assets as (Total Debt + Shareholders Equity). Then Assets/Equity can be rewritten as 1 + Debt/Equity). Hence, return could be increasing through the use of more ‘risky’ strategies (i.e. the use of higher debt).
ROE=(Net Income/Sales) x (Sales/Assets) x (Assets/Equity)
ROE=(Net Income/Sales) x (Sales/Assets) x (1 + Debt/Equity)
The table below lists some of the more commonly used ratios.
|Net Margin||Profit After Taxes / Sales||Net profit margin on sales|
|Gross Margin||(Sales – COGS) / Sales||Gross profit margin on sales|
|Return on Total Assets||(Earnings Before Interest + Taxes) / Total Assets||Return on total investment|
|Return on Equity||Profit After Taxes / Owners Equity||Return on owners investment|
|Fixed Assets Ratio||Sales / Fixed Assets||Turnover on plant and equipment|
|Total Asset Turnover||Sales / Total Assets||Turnover on all assets.|
|Inventory Turnover||COGS / Inventories||Level of inventory|
|Average Collection Period||Accounts Receivable / Sales per Day||Length of time between making a sale and receiving cash for it.|
|Debt Ratios||Total Debt / Total Assets |
Long-Term Debt / Long-Term Debt + Net Worth
|Level of funds provided by creditors|
|Times Interest Earned or Interest Coverage||(Earnings Before Interest + Taxes) / Interest Charges||Ability to meet current debt|
|Days Payable||Accounts Payable / Purchases per Day||Financing provided by suppliers|
|Current Ratio||Current Assets / Current Liabilities||Short term solvency|
|Quick Ratio||(Current Assets – Inventories) / Current Liabilities||Very short-term solvency|