1 / 33

Financial Statement Analysis

13. Financial Statement Analysis. Relationship to previous material. Focus has been: What goes into 3 basic financial statements (Income Statement, Balance sheet, Statement of Cash Flows). Now focus is: How statements are analyzed by management, investors, and creditors.

samuru
Télécharger la présentation

Financial Statement Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. 13 Financial Statement Analysis

  2. Relationship to previous material • Focus has been: • What goes into 3 basic financial statements (Income Statement, Balance sheet, Statement of Cash Flows). • Now focus is: • How statements are analyzed by management, investors, and creditors.

  3. Objective of a Business • Create value for its shareholders while maintaining a sound financial position. • Return on investment. • Sound financial position. • Other important objectives include: • Employee satisfaction. • Social responsibility. • Ethical considerations.

  4. Overview • GAAP does not define ratios. • Multiple equally valid approaches to ratios and analysis. • Managers (e.g. division manager, sales manager) should be measured to items that they control. • Investors and top management are most interested in overall performance or broadest measures of performance. • Understanding less broad measures of performance may give additional insight into overall performance

  5. Structure of analysis • From broadest to more specific levels. • Principal value of financial analysis: • Suggests questions not answers. • Ratio comparisons start with supposition that all other things are equal. (They rarely are.)

  6. Categories of ratios which measure: • Overall performance. • Profitability. • Investment utilization. • Financial condition. • Dividend policy.

  7. Making comparisons • Finding the appropriate standard is difficult. • A high ratio (e.g. current ratio, ROI) may be good or bad. It can’t be viewed in isolation. • Is a high CR good or bad? • Is a high ROI always good? • Values of ratios compared across time  longitudinal analysis, or trend analysis.

  8. Overall Measures • Return on investment (ROI) = net income / investment • Possible definitions of investment: assets, owners’ equity, invested capital. • Possible definitions of return: net income, net income -preferred dividends, net income + interest expense (1-tax rate). • Use income generated from pool of funds before considering cost of funds in pool.

  9. Return on assets (ROA) • (net income + interest*(1-tax rate))/ total assets. • How well management is using a pool of capital . • Before considering financing decisions. Some analysts ignore interest adjustment. • Measures how an enterprise uses its funds. • May be used to evaluate individual business units in a large company when managers do not influence financing decision (i.e. how assets are financed).

  10. Return on shareholders’ equity (ROE) • Net income/shareholders’ equity. • Or, (net income -preferred dividends) / Common shareholders’ equity. • Common shareholders’ equity = total shareholders’ equity - preferred stock. • Reflects return on funds invested by shareholders. • Of interest to current and prospective shareholders.

  11. Return on invested capital (ROIC) • (net income + interest(1-tax rate))/ invested capital • Invested capital = permanent capital = capital employed = long-term liabilities + shareholders’ equity = working capital + non-current assets. • Return on funds entrusted to the firm for relatively long time.

  12. Variations • Average or weighted average investment is more representative (e.g. (beginning + ending)  2). • Tangible assets instead of total assets. • To determine tax rate, can use total tax rate or tax rate excluding deferred taxes.

  13. Relationship of ROE to Profit Margin, Asset TO & Leverage • ROE can be viewed as: Pretax margin percentage X Asset Turnover ratio X Financial leverage ratio X Tax retention rate. • ROE = (Pretax profit/sales revenue) X (sales revenues / total assets) X (Total assets/Shareholders’ equity) X (1- Tax rate) • How do we improve ROE?

  14. Price/Earnings (PE) ratio • Measure of overall performance. • Market price per share/EPS • Market price is not controlled by company; reflects all information available to the market. • Reflects how investors judge future performance or prospects of the company. • Commonly compared to other companies in same industry.

  15. Earnings per share • Company ABC has an EPS of $5 per share, Company XYZ has an EPS of $10 per share. • Is one a better company or investment than the other? Is one more profitable than the other?

  16. Profitability measures • Profit margin = net income/net sales = a measure of overall profitability. • Common size financial statements = Vertical analysis: • Express each item on the income statement as a percentage of net sales.

  17. Investment utilization measures • How well are assets managed. • Profitability measures focus on Income Statement. • Investment utilization measures involve balance sheet and income statement amounts.

  18. Investment turnover • Asset turnover = Sales revenue/total assets. • Invested capital turnover = Sales revenue/invested capital. • Equity turnover = Sales revenue/shareholders’ equity.

  19. Capital intensity • Less encompassing than investment turnover. • Capital intensity ratio = sales revenue/PPE = fixed asset turnover.

  20. Working capital measures • Days’ cash = cash/cash costs per day = cash/(cash expenses  365) • Cash expenses = total expenses - depreciation - other non-cash expenses. • Days’ receivables = Receivables/(sales  365) • Days’ inventory = inventory/(cost of goods sold  365) • Inventory turnover = cost of goods sold/inventory

  21. Working capital measures • Days’ payables = operating payables/(pretax cash expenses  365). • Approximate pre-tax cash expenses = all expenses except taxes - depreciation expense. • Working capital turnover = sales revenue/ working capital • Some analysts look at ratio of working capital to sales revenue (inverse of working capital turnover).

  22. Cash conversion cycle • Receivables conversion period (i.e. days’ receivables) + inventory conversion period (i.e. days’ inventory) - payment deferral period (i.e. days’ payables) = operating cycle - payment deferral period. • A measure of liquidity. • Indicates time interval for which additional short-term financing might be needed to support a spurt in sales.

  23. Financial condition ratios • Liquidity. • Solvency.

  24. Liquidity • Ability to meet current obligations. • Tests for size and relationship between current liabilities and current assets. • Liquidity measures: • Current ratio = current assets/current liabilities. • Acid Test (or quick) ratio = monetary current assets / current liabilities • Monetary current assets = current assets - inventory - prepaid assets.

  25. Solvency • Ability to meet interest costs and repayment schedules associated with long-term debt. • Solvency measures • Debt/equity ratio = total liabilities/shareholders’ equity • Alternatively, Debt/equity ratio = long-term liabilities/shareholders’ equity. • Debt/capitalization ratio = long-term debt/total invested capital.

  26. Solvency Measures (Continued) • Total invested capital = long term debt + shareholders’ equity. • Times interest earned = income before interest/interest expense • Ratio of Cash generated by operations to total debt

  27. Dividend policy • Dividend yield = dividends per share/ market price per share • Dividend pay-out = dividends/net income • Provides info on how growth is financed. • Less dividends paid means more earnings are retained to fund growth.

  28. Dividend yield vs. interest yield on bonds • Not a valid comparison. • Investor’s return on bonds kept to maturity: • Interest (adjusted for amortization of premium/discount). • Investor’s return on common stock: • Dividends + change in share price. • Function of expected future earnings. • Earnings reinvested in business.

  29. Growth measures • Key accounting items for which growth is computed: sales, net income, earnings per share. • Average growth = (growth per year for n years)/n • Compound growth rate = based on present value concepts. • May be misleading due to abnormally high or low beginning or ending year.

  30. Implied growth rate =Return on shareholders’ equity X Profit retention rate = ROE X (1 – Dividend payout) • Estimates potential to grow profits without an injection of new capital.

  31. Bases for comparison • Experience. A feel for what is right or reasonable. • Budget. A target developed within the company. Factors to be considered: • How carefully was budget constructed? • What circumstances are different now? • Historical standards. Prior period’s results adjusted for changes in accounting methods. • External benchmarks. Competitor, industry average

  32. Comments on Ratio Analysis • Helps paint a picture. • Try to overcome tendency to look at numbers rather than underlying reasons. • Starting point; identifies questions not answers.

  33. 13 End of Chapter 13

More Related