Financial Analysis

1
Financial Analysis

• Financial Statements
• Measuring a Firms Financial Condition
• Class Activity
• Financial Planning

2
Financial Statements

• Mandatory for public companies
• Standard format and rules
• Some discretion
• Significant differences by country
• Balance sheet
• Snapshot of current financial condition
• Income statement
• Measures performance over time
• Sources and uses of funds
• Where did funds come from?
• Where did funds go?

3
Sample Balance Sheet
4
Sample Income Statement
5
Sample Sources and Uses of Funds
6
Key Financial Ratios

• Leverage
• How much has the firm borrowed
• How easily can it cover the cost of debt
• Liquidity
• Does it have enough funds to cover its
  obligations
• Can it get funds quickly
• Efficiency
• How productively are assets being used
• Profitability
• What are its profits compared to sales, assets
  and equity
• Market value
• How do investors value the company

7
SampleFinancial Ratios
8
Leverage Ratios

• Debt ratio (Long term debt leases)/(Long term
  debt leases equity) 450/(450540) .4545...
  .45
• Debt-equity ratio (Long term debt
  leases)/equity 450/540 .8333.. .83
• Times-interest earned (EBIT
  depreciation)/interest (166.753.3)/42.5
  5.17647.. 5.18

9
Liquidity Ratios

• Net working capital to total assets (Current
  assets current liabilities)/total assets
  (900-460)/1450 .30
• Current ratio Current assets/current
  liabilities 900/460 1.96
• Quick ratio (Cash short-term securities
  receivables)/current liabilities (110440)/460
  1.20
• Cash ratio (Cash short-term
  securities)/current liabilities 110/460 .24

10
Efficiency Ratios

• Sales-to-assets ratio Sales/((beginning
  assetsending assets)/2) 2200/((1380.81450)/2)
  1.55
• Days in inventory Average inventory/(cost of
  goods sold/365) ((339.5350)/2)/(1980/365)
  63.6 days
• Average collection period Average receivables/
  (sales/365) ((433.1440)/2)/(2200/365) 72.4
  days

11
Profitability Ratios

• Net profit margin (EBIT tax)/sales (166.7
  49.7)/2200 5.3
• Return on assets (EBIT tax)/average total
  assets (166.7 49.7)/((1380.81450)/2) 8.3
• Return on equity Earnings available for common
  stockholders/average equity 74.5/((509.3540)/2)
  14.2
• Payout ratio Dividends/earnings 43.8/74.5
  .6

12
Market-Value Ratios

• Price-earnings ratio Stock price/earnings per
  share 50/5.26 9.5
• Dividend yield Dividend per share/stock price
  3.09/50 6.2
• Market-to-book ratio Stock price/book value per
  share 50/(540/14.16) 1.3

13
Financial Planning

• Common approaches
• Single 5 year plan
• Consensus values
• Deviations from the plan questioned
• Multiple plans
• Best case
• Normal growth
• Retrenchment
• Sensitivity analysis
• Let key assumptions vary
• Shows critical factors

14
Financial Planning Models

• Trade-off
• Simplicity
• Realism
• Beware of information overload
• Much easier to generate financial plans than to
  understand them
• Based on accounting values
• Need to incorporate financial decisions
• Project selection
• Financing strategies
• Maximizing firm value

15
Next Class

• Present Values
• Student presentations
• Perpetuities and annuities
• Compound interest
• Read Chapters 2 and 3 in text