financial analysis finance defined basic business forms corporate governance accounting...
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Financial Analysis
• Finance defined
• Basic business forms
• Corporate governance
• Accounting representation
• Cash Flow
• Financial Analysis
• Growth
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Finance• “The science of the motion of money”
– Finance and accounting– Finance and economics– Finance and management
• Body of knowledge• Basic areas in finance
– Investments and financial institutions– Corporate finance
• NWC• LT financing• Long term investment
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Forms of organizations
• Sole proprietorship, partnership, corporation– Advantages– Disadvantages
• Focus of the course: CORPORATION• Snapshot of a corporation
– Right side– Left side
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Corporate Governance• 4 actors:
– Shareholders– Creditors– Officers– Stakeholders
• 1 GOAL?• Agency problems = Cost
– Direct (compensations and perquisites)– Indirect (monitoring and non-optimal decision making)
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Financial position
• Income Statement (over a period)NI=(Sales-COGS-Dpr-Int) X (1-T)
• Retained Earnings(over a period)
End RE=Beg. RE +NI - Div
• Balance Sheet (At one point in time)– Assets=Liabilities + Equity = Liability + Stocks + RE
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Cash flow• Define sources and uses of cash• Another (smarter) way to look at cash flow:
– Cash flow from assets=CF to creditors +CF to owners
• Cash from asset =Operating cash flow = EBIT-T+Dpr
- Use of NWC = End NWC-Beg.NWC
- Long term asset spending = End NFA - Beg.NFA + Dpr
• Cash to creditor = Interest paid –net new borrowing• Cash to owners = dividends paid- net new equity raised• Calculate and interpret (from Hermetic Inc.)
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Sources and Uses of Cash
Change Sources UsesCash 5AR 50INV 65GFA 145AP 50NP 65LTD 20Stock 0NI 126.55DPR 30DIV 26.55Total 291.55 291.55
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Another way to look at Cash flows
Cash flow from ASSETS Cash flow to creditors & owners
EBIT 200TAXES -53.45 Interest expenses 20DPR 30 Change in LTD -20
Cash flow from operations 176.55 Cash flow to creditors 0
Change in CA 120 Dividends 26.55Change in CL -115 Change in stocks 0
NWC spending 5 Cash flow to owners 26.55
Change in NFA 115Depreciation 30
Capital spending 145
Total 26.55 26.55
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Financial Statements Analysis
• ISREBSCF• Common size analysis• Ratio analysis
– Cross sectional analysis– Time serie analysis
• 5 families– ST Liquidity– LT Liquidity– Activity– Profitability– Market
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Ratio analysis• ST Liquidity:
– Current ratio=CA/CL– Acid test=(CA-Inv.)/CL
• LT Liquidity: – Debt-to-equity ratio=D/E– Cash coverage ratio= (EBIT+Dpr)/Int
• Activity:– Short-term asset turnover– Asset turnover=Sales/Asset
• Profitability– Profit margin=NI/Sales– ROA=NI/Asset– ROE=NI/Equity
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Dupont Equation
• ROE=NI/Sales x Sales/Assets x Assets/Equity• ROE=Profit x Asset x Equity
Margin Turnover Multiplier– Operating efficiency
– Asset use efficiency
– Financial leverage
• ROE=ROA x Equity multiplier• Differentiate ROE and ROA• Remedy to “paralysis by analysis”
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Growth
• Internal growth: Debt is constant– g= ROA x b/(1-ROA x b)
• Sustainable growth: Debt to equity is constant– g=ROE x b/(1-ROE x b)
• Differentiate between internal and sustainable growth.
• What are the factors that affect growth? • Forecasting tool
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Cases Study
Sunset Board
S&S Air