Financial Statement Analysis

1
CHAPTER 13

• Financial Statement Analysis

2
Overview

• Purpose
• Tools Used
• Statements
• Ratio Analysis
• Limitations

3
Financial Statements

• Balance Sheet
• Common Sized
• Trend or Indexed
• Income Statement
• Common Sized
• Trend or Indexed
• Statement of Cash Flows

4
Ratio Analysis

• Purpose of Ratio Analysis
• Uses
• Trend analysis
• Comparative analysis
• Combination
• Use by External Analysts
• Important information for investment community
• Important for credit markets

5
Type of Financial Ratios

• Liquidity Ratios
• Activity or Mgmt Efficiency Ratios
• Leverage Ratios
• Profitability Ratios
• Market Price Ratios

6
Liquidity Ratios

• Current Ratio
• Current Assets
• Current Liabilities
• Quick Ratio
• Current Assets - Inventory
• Current Liabilities

7
Activity or Management Efficiency Ratios

• Inventory Turnover
• Sales or Cost of Goods Sold
• Inventory
• Total Asset Turnover
• Sales
• Total Assets

8
Activity or Management Efficiency Ratios

• Average Collection Period
• Accounts Receivable
• Sales Per Day
• Days to Sell Inventory
• Inventory
• Sales Per Day

9
Leverage Ratios

• Times Interest Earned
• Earnings Before Int. Taxes
• Interest Expense
• Fixed Charge Coverage Ratios
• Lease Payments
• Principal Repayments
• Preferred Dividends

10
Leverage Ratios

• Debt to Assets
• Long Term Debt
• Assets
• Debt to Equity
• Long Term Debt
• Shareholders Equity

11
Profitability Ratios

• Net Profit Margin
• Net Income
• Sales
• Operating Return on Assets
• Earnings Before Int. Taxes
• Total Assets

12
Profitability Ratios

• Return on Equity
• Net Income
• Common Equity
• Operating Margin After Depreciation
• Operating Profit
• Sales

13
Market Price Ratios

• Price to Earnings
• Market Price of Stock
• Earnings
• Market-to-Book-Value
• Market Price of Stock
• Book Value Per Share

14
Decomposition of ROE
EBIT Sales
Sales Assets
Assets Equity
Net Profit Pretax Profit
Pretax Profit EBIT
ROE
x
x
x
x
(1) x (2) x
(3) x (4) x (5)
Tax Burden
Interest Burden
x
x Margin x Turnover x Leverage
15
Intels Financial Ratios Over Time
16
Economic Value Added

• Approach to compare accounting profitability with
  the cost of capital
• Definition
• ROA-K (Capital Invested in the firm)
• K opportunity cost for capital
• Ties accounting to return by investors

17
Key Financial Ratios of Growth Industries Inc.
18
Growth Industries Statements of Cash Flow
19
Comparability Problems

• Accounting Differences
• Inventory Valuation
• Depreciation
• Inflation
• International Accounting Conventions

20
Quality of EarningsAreas of Accounting Choices

• Allowance for bad debts
• Non-recurring items
• Reserves management
• Stock options
• Revenue recognition
• Off-balance sheet assets and liabilities

21
Comparative Accounting Rules
22
Adjusted Versus Reported Price-Earnings Ratios