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3-1
Working with Financial Statements
Chapter 3
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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Chapter Outline
• Statement of Cash Flow
• Standardized Financial Statements
• Ratio Analysis
• The Du Pont Identity
• Why Evaluate Financial Statements?
• Benchmarking
• Potential Problems
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Statement of Cash Flow
• Sources of Cash = cash inflow
• Uses of Cash = cash outflow
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Standardized Financial Statements
• 1. Common-Size Statements: - Common-Size Balance Sheet: reports ever item as % of total assets - Common-Size Income Statement:reports every item as % of sales
• 2. Common-Base Year Statements:reports every item as % of the same item in another year
• 3. Combined Common-Size and Common-Base Year Statements:reports every item as a % of the % of the same item in another year 4
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Standardized Financial Statements
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Ratio Analysis:Categories of Financial
Ratios• 1. Short-term solvency or liquidity ratios
• 2. Long-term solvency or financial leverage ratios
• 3. Asset management or turnover ratios
• 4. Profitability ratios
• 5. Market value ratios
Du Pont Identity6
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1. Short-Term Solvency Ratios
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94.11255
2429
sliabilitiecurrent
assetscurrent ratiocurrent 1.
8996.1255
13002429
sliabilitiecurrent
inventory-assetscurrent ratioquick 2.
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2. Long-Term Solvency or Leverage Ratios
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3314.10079
3340
assets
debtratiodebt 1.
4956.6739
3340
equity
debtratioy debt/equit
4956.16739
10079
equity
debt1
equity
debtequity
equity
assetsmultiplierequity
2363.67392085
2085
equitydebt termlong
debt termlongratiodebt termlong 2.
67.3314.110079
6739
assets
equityratioequity
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2. Long-Term Solvency or Leverage Ratios
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7.4196
922
interest
EBIT(TIE) ratio earnedinterest times3.
56.9196
952922
interest
ondepreciatiEBITratio coveragecash 4.
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3. Asset Management Ratios
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03.21300
2633
inventory
sold goods of costs turnover inventory 1a)
18003.2
365
turnoverinventory
days 365 inventory in sales days' b) 1
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3. Asset Management Ratios
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39.6705
4507
receivable accounts
sales turnover sreceivable a) 2
5738.6
365
turnoversreceivable
days 365 period collection average b) 2
4472.10079
4507
assets total
sales over asset turn total3.
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4. Profitability Ratios
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1047.4507
472
sales
incomenet PMmargin profit 1.
0468.10079
472
assets
incomenet ROA assetson return 2.
07.6739
472
equity
incomenet ROE equity on return 3.
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5. Market Value RatiosAssume: there are 30 mil shares outstanding selling at $350/share
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Assume : g=5%.
25.2273.15
350
30472350
shareper earnings
shareper price PE ratio ingsprice/earn 1.
4%5
25.22
g%
PE PEG 2.
56.163.224
350
306739350
shareper book value
shareper uemarket val ratiobook -to-market 3.
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DuPont Identity
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The DuPont Identity decomposes the ROE into an operating efficiency ratio (day-to-day activities) x asset use efficiency (investment s) x financial leverage (financing)
• ROE = NI/equity• ROE = NI/equity x sales/sales x assets/assets• ROE= NI/sales x sales/assets x assets/equity
profit margin x asset turnover x equity multiplier
4956.1 x 0.4472 x 0.1047 ROE 0.07 ROE
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Why Evaluate Financial Statements?
• Internal uses– Performance evaluation – compensation
and comparison between divisions– Planning for the future – guide in
estimating future cash flows
• External uses– Creditors– Suppliers– Customers– Stockholders
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Benchmarking
• Statements and ratios are not very helpful by themselves; they need to be compared to something.
• Use:- Time and Trend Analysis- Peer Group Analysis
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Potential Problems
• Which ratios are most relevant?• Diversified firms are hard to compare• Differences in international accounting
regulations• Varying accounting procedures, i.e. FIFO
vs. LIFO• Different fiscal years• Extraordinary events
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