powerpoint file

Financial Statements & AnalysisFinancial Statements & Analysis

FIL 240

Prepared by Keldon Bauer

Financial Statement Financial Statement FundamentalsFundamentals

• Publicly traded companies must file an annual (10-K) report with the SEC.

• The purpose of the 10-K is to report to owners on the status of their investment.

• The 10-K report contains both verbal and quantitative information about the performance of the firm.

Financial Statement FundamentalsFinancial Statement Fundamentals

• Income Statement (usually 3 years)

• Balance Sheet (usually 2 years)

• Statement of Retained Earnings

• Statement of Cash Flows

• Key operating statistics for 5-10 years

• The purpose is both informative and marketing

Financial Sections Include:

The Balance SheetThe Balance Sheet

• The balance sheet is an attempt to show the sources of investment funds and their uses in the firm at the present time.

• Accountants should be looking out for the interests of the investor.• Conservatism.

• Lower of cost or market.


• Assets are listed in order of liquidity• Ease of conversion to cash• Without significant loss of value

• The less liquid an item on the balance sheet is, the less reliably it reflects its current value over time. • Standard practice of inventory accounting,

depreciation, etc. do not reflect actual value.


• Balance Sheet Identity• Assets = Liabilities + Stockholders’ Equity• Uses = Debt Sources + Equity Sources

• The amount the firm owes on its liabilities is usually exactly what is on its balance sheet.

• The value of the equity is never what appears on the balance sheet.• Equity is what is used to balance the identity.

Market versus Book ValueMarket versus Book Value

• The balance sheet provides the book value of the assets, liabilities and equity.

• Market value is the price at which the assets, liabilities or equity can actually be bought or sold.

• Market value and book value are often very different. Why?

• Which is more important to the decision-making process?

Income StatementIncome Statement

• The income statement acts as a basis of change in the equity section of the balance sheet.• You either pay equity investors back with income,

or increase their book value (reinvest).

• You generally report revenues first and then deduct any expenses for the period.

• Matching principle – GAAP requires revenue to be recognized when it accrues and match the expenses required to generate the revenue.

Ratio AnalysisRatio Analysis

• Financial ratios are the vital signs of the business.• They are used to assess the health of the business.• When they are off the norm, they should be taken

together with all known information to get a correct diagnosis.

• Norms should be seen as a normal range, not just one number.

Ratio AnalysisRatio Analysis

• Ratios also allow for better comparison through time or between companies

• As we look at each ratio, ask yourself what the ratio is trying to measure and why is that information important

• Ratios are used both internally and externally

Categories of Financial RatiosCategories of Financial Ratios

• Short-term solvency or liquidity ratios

• Activity Ratios

• Debt Ratios

• Profitability ratios

• Market value ratios

Liquidity RatiosLiquidity Ratios

• Relate short-term sources of and uses for cash.

• Current Ratio:

sLiabilitieCurrent

AssetsCurrent RatioCurrent

51.412,788

57,666 RatioCurrent

Liquidity RatiosLiquidity Ratios

• Quick (Acid Test) Ratio:

sLiabilitieCurrent

Inventory - AssetsCurrent RatioQuick

62.112,788

37,009)-(57,666 RatioQuick

Asset Management RatiosAsset Management Ratios

• Purpose is to assess how well the firm is managing assets

• Inventory turnover ratio (IT):

56.3009,37

924,131

Inventory

Goods ofCost IT

days 0213.56

365

IT

365 DaysInventory


• Accounts receivable turnover (ART):

05.9735,18

565,169

Rec. Acct.

Sales ART

days 0405.9

365

ART

365 Period Collection Average


• Accounts payable turnover (APT):

22.24448,5

924,131

Payable Accts.

Goods ofCost APT

days 5122.24

365

APT

365 PeriodPayment Average


• Total Asset Turnover (TAT):• Measure of asset use efficiency• Interpret in industry context.

90.1259,89

565,169

Assets Total

Sales TAT

Debt RatiosDebt Ratios

• Relate debt to equity sources of investment funds .

• Debt Ratio:

Assets Total

sLiabilitie Total RatioDebt

%59.1889,259

16,597 RatioDebt

Leverage RatiosLeverage Ratios

• Equity Multiplier:

Equity Total

Assets Total MultiplierEquity

23.1662,72

259,89 MultiplierEquity

Coverage RatiosCoverage Ratios

• Measure of ability to meet debt contracts.

• Times Interest Earned (TIE) Ratio:

ExpenseInterest

EBIT Ratio TIE

75.14753

11,110 Ratio TIE

Leverage RatiosLeverage Ratios

• EBITDA Ratio:

CMLTDExpenseInterest

on)AmortizationDepreciati(EBIT RatioEBITDA

• Can’t calculate example, CMLTD is not disclosed.

Profitability - StandardizingProfitability - Standardizing

• Common-Size Balance Sheets• Compute all accounts as a percent of total assets

• Common-Size Income Statements• Compute all line items as a percent of sales

• Standardized statements make it easier to compare financial information, particularly as the company grows

• They are also useful for comparing companies of different sizes, particularly within the same industry

Profitability RatiosProfitability Ratios

• What’s the bottom line?

• Gross Profit Margin (GPM):

%20.22565,169

641,37

Revenue Total

Profit Gross GPM


• Operating Profit Margin (OPM):

%55.6565,169

110,11

Revenue Total

Profits Operating OPM


• What’s the bottom line?

• Net Profit Margin (NPM):

%27.4565,169

245,7

Revenue Total

IncomeNet NPM


• Earnings per Share (EPS):

6912774

2457

gOutstandin SharesCommon of #

IncomeNet EPS .$

,,$


• Return on Total Assets (ROA):• This is a measure of the return on assets owned.• Therefore, it is a measure of return to all invested

funds.

%12.8259,89

245,7

Assets Total

IncomeNet ROA


• Return on Common Equity (ROE):• This is a measure of return to the equity holder

(whether or not they get a dividend).

%97.9662,72

245,7

Equity Total

IncomeNet ROE

Using the Du Pont IdentityUsing the Du Pont Identity

• ROE = PM * TAT * EM• Profit margin is a measure of the firm’s

operating efficiency – how well does it control costs

• Total asset turnover is a measure of the firm’s asset use efficiency – how well does it manage its assets

• Equity multiplier is a measure of the firm’s financial leverage

Market Value RatiosMarket Value Ratios

• Price Earnings (P/E) Ratio:

Shareper Earnings

Shareper PriceMarket Ratio P/E

Market Value RatiosMarket Value Ratios

• Market /Book (M/B) Ratio:

Shareper ValueBook

Shareper PriceMarket Ratio M/B

BenchmarkingBenchmarking

• Ratios are not very helpful by themselves; they need to be compared to something

• Time-Trend Analysis• Used to see how the firm’s performance is

changing through time• Internal and external uses

• Peer Group Analysis• Compare to similar companies or within industries• SIC and NAICS codes

Time-Series AnalysisTime-Series Analysis

• Evaluation of the firm’s financial performance over time using financial ratios.• Look for trends.

InterpretationInterpretation

• The firm needs to take advantage of opportunities for maximizing shareholder wealth.

• That means you need to understand the real problem, not just the symptoms.

• Students typically describe symptoms• Take a system wide approach.

• What is the root problems?

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Economy & Finance

balance sheet assets

years balance sheet

book value

ratio analysis ratios

current value

actual value

information important

years statement