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Analyzing Financial Statements

Analyzing Financial Statements. General Rules. 1) Restate balance sheet to work with capital. 2) Use averages (current and previous year) for balance sheet items. 3) Be consistent. Traditional Method. Current assets Cash Receivables Inventory Fixed Assets

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Analyzing Financial Statements

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  1. Analyzing Financial Statements

  2. General Rules • 1) Restate balance sheet to work with capital. • 2) Use averages (current and previous year) for balance sheet items. • 3) Be consistent.

  3. Traditional Method • Current assets • Cash • Receivables • Inventory • Fixed Assets • Net Property Plant and Equipment (NPPE) • Investments • -------------------------------------------------- • Total Assets • --------------------------------------------------

  4. Traditional Method • Current Liabilities • Notes Payable • Accounts Payable • Other Payables • Long Term Liabilities • L.T. Debt • Other Liabilities • Shareholder Equity • -------------------------------------------------- • Total Liabilities and Equity • --------------------------------------------------

  5. Capital Method • Current Assets • Cash • Receivables • Inventory • Less : Operating Current Liabilities • Accounts Payable • Other Payables • -------------------------------------------------- • Operating Working Capital

  6. Capital Method • Operating Working Capital • Fixed Assets • Net Property Plant and Equipment (NPPE) • Investments • -------------------------------------------------- • Total Capital • --------------------------------------------------

  7. Capital Method • Short Term Debt • Notes Payable • Long Term Liabilities • L.T. Debt • Other Liabilities • Shareholder Equity • -------------------------------------------------- • Total Debt and Equity • --------------------------------------------------

  8. Leverage Ratios • Debt Ratio = (Int. Bearing + Leases) / (Capital + Leases) • Debt-Equity Ratio = (Int. Bearing + Leases) / Equity • Times Interest Earned = (EBIT + Depreciation) / Interest • Leverage Ratio = Capital / Equity

  9. Liquidity Ratios • Current Ratio = Current Assets / Current Liabilities • Acid Test Ratio = (Curr Assets – Inv) / Curr Liabs • Working Capital to Assets = Working Capital / Capital

  10. Efficiency Ratios • Total Asset Turnover = Sales / Capital • (TATO) • Sales to W. Capital = Sales / Working Capital • Fixed Asset T/O = Sales / Fixed Assets • Inventory T/O = Cost of Goods Sold / Inventory

  11. Efficiency Ratios • Avg Collection Period = Acc Rec / (Sales / 365) • Avg Payment Period = Acc Payable / (COS / 365) • Inventory Days = 365/(Inv T/O) • Cash Cycle = Inv Days + ACP - APP

  12. Profitability Ratios • Return on Assets (ROA) = Net Pft after Tax / Capital • Return on Equity (ROE) = Net Pft after Tax / Equity • Operating Return on Assets = EBIT / Capital

  13. Profitability Ratios • Net Profit Margin (NPM) = Net Pft after Tax / Sales • Gross Pft Margin (GPM) = Gross Pft / Sales • Expenses to Sales = SGA / Sales

  14. Investment Ratios • Payout Ratio = Divs per Share / Earnings per Share • Retention Ratio = 1 – Payout Ratio • Price–Earnings Ratio (P/E) = Stock Price / EPS • Market to Book Ratio = Stock Price • Book Value per Share

  15. Approaches • Time Series • Cross-section (Comparables -- i.e., Industry or Specific Competitors) • Goals / Targets

  16. Other Methods • Common Size • Balance sheet (as % of capital) • Income statement (as % of sales) • Index Analysis • as % of base year

  17. DuPont Analysis • ROE = Leverage x ROA • ROA = NPM x TATO

  18. Value Drivers • Sales growth • Operating profit margin • Tax rate • Investment rate = [(NPPE + WCAP) / Sales ] • WACC • Competitive advantage period

  19. Value Drivers • ROIC = Net Operating Profit after Tax / Capital • = EBIT (1-T) / Capital • = EBIT (1-T) / Sales x Sales / Capital • = NPM x TATO

  20. Reebok Example • See the Reebok Excel File

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