Financial Ratios and Comparables Analysis

8/4/2019 Financial Ratios and Comparables Analysis

1/12

learnppt.com

PowerPoint Diagram Pack

Financial Ratios/ComparablesAnalysis

Check out our site for all your PowerPoint needs!

http://learnppt.com Find our ebook on creating effective and professional presentations. Covers basic

to advanced concepts, including storyboarding, diagramming, and the Consulting Presentation Framework.

http://learnppt.com/powerpoint-- Shop our catalog of Diagram Packs. We try to add more Packs

monthly. All of our diagrams are professionally designed by ex-management consultants from top firms.

Evaluating Financial Ratios (or Comparables) is acrucial method for evaluating the financial andcompetitive health of a company relative to itscompetitive peers. This document provides anoverview to Financial Analysis, as well as deep diveinto 20 widely used Financial Ratios.

Profitability/

EfficiencyRatios

LiquidityRatios

Solvency

Ratios

InvestmentRatios

1

2

3

4


2/12

2Questions & feedback? Email me [email protected]

The diagrams in this pack are to be used by the original buyer only.learnppt.com

Financial analysis Introduction

INPUTS TO FINANCIAL ANALYSIS

The Balance Sheet

The Profit and Loss (P&L)Account

The Cash Flow statement

DIMENSIONS OF FINANCIAL ANALYSIS

Breaks down cost structure into constituents

(see cost structure analytic)

Cost Structure Analysis

Assess evolution of:

Revenues, profits, and costs

Capital base (debt, equity)

Asset base (tangible, intangible)

Cashflow

Assesses/measures specific financial features of

a firm

Ratio/Trends Analysis

Financial analysis consists of analyzing the financial performance of a company, over time and relative to its peers: In particular to understand whether and how companies create value

Used to assess where a companys problems might lie

Can be done internally for own company, or externally for competitors

Ratios are especially useful in comparisons with competitors

Building on three different kind of financial statements, financial analysis allows either trends, ratios or cost structureanalyses

THIS IS A PARTIAL PREVIEW

You can preview the full PowerPoint document anddownload it at http://learnppt.com/powerpoint/


3/12



Financial analysis introduction (cont.)

All of the statements are linked together and relate back to the ongoing activities of the firm.

Transactions in yearCash received and paid

credit given and received

Trading

Revenues Recorded in Year

Expenditure Recorded in Year

Other

Capital Paid In

BorrowingAssets Purchased

ONGOING STREAM OF EVENTS

PROFIT AND LOSS ACCOUNT

Revenues relevant to year =

Expenditure relevant to year = --

OpeningBALANCE SHEET

AssetsFixed Assets

Working capitalFinancing

Owners interestsOutside liabilities

ClosingBALANCE SHEET

AssetsFixed Assets

Working capitalFinancing

Owners interestsOutside liabilities

CASHFLOW STATEMENTOperating activities

Investing activitiesServicing of financing

TaxationFinancing

PROFIT AND LOSS

P&LMatches costs to

associated revenues in a

given year to give arepresentative picture of

profitability. Hence, assets

are Depreciated over time

and charged to P&Lgradually as the asset is

used up over its useful

life to enable the revenues

to be created.

CASHFLOW

Shows the real cash flows associated withincome and expenses in a given year, to show

the actual change in cash position. Costs andrevenues are not matched.

BALANCE SHEET

Summarizes the value ofwhat a company owns less

what it owes, and balancesthem with the sources of

financing (debt andshareholders funds).

Stated at a specified point

in time (not for a period)

Income

Expenses

Profit (loss)




4/12



Financial analysis introduction (cont.)

Definition of Common Financial Terms

Accounts Payable Money owed to suppliers

Accounts Receivable(or Trade Credit)

Money owed by customers

Assets Things owned

Book Value The value at which an item is reported in financial statements (cf. market value)

Capital The amount invested in a venture

Capitalization Sum of all long-term sources of financing to the firm (equals total assets less current

liabilities)

Cash flow The amount of cash generated or consumed by an activity over a certain period of time

Common Shares(or Common Stock)

Securities representing an ownership in a firm

Cost of Goods Sold Cost of sales

Total of all costs required to acquire and prepare goods for sale

Cost ofDebt Yield to maturity on debt (i.e. internal rate of return to maturity)frequently after tax, in

which event it is 1 minus the tax rate times the yield to maturity

Debt (Liability) An obligation to pay cash or to provide other goods or services to another party

Depreciation Reduction in the value of a long-lived asset from use or obsolescence. The decline is

recognized in accounting by a periodic allocation of the original cost of the asset tocurrent operations




5/12



Financial ratio analysis Introduction

Ratios are measures of a firms specific financial features

Financial ratios typically fall into four categories:

What It Is

Financial ratios help us diagnose the financial health of afirm:

Profitability/efficiency ratios measure how well a firm usesits assets to generate profits

Liquidity ratios measure a firms ability to meet short-termliabilities

Solvency ratios are an indicator of a firms financial strength(assess the mix of funds in the balance sheet and measurefirms ability to withstand operating setbacks)

Investment ratios are indicative of the markets perceptionsof a company. They are used mainly by investors to valuea company.

Why We Use It

Strengths:

Can be used to identify potential areas of improvement

Limitations:

Accounting principles can differ making comparisonsdifficult

Need to be wary of management managing year-endfigures

Book values for fixed assets may be out of date

Strengths & Limitations

Key strategic ratios Other ratiosa

Inventory turnover Days inventory

Total asset turnover Days receivable Fixed asset

utilisation

Return on sales: Profit margin

Gross margin Return on net assets Return on equity

Quick ratio

Working capital

Current ratio

Interest cover Debt equity ratio

Dividend yield Earning yield

Dividend cover Dividend per share

Price-earning ratio Earning per share

Profitability/

EfficiencyRatios

LiquidityRatios

SolvencyRatios

InvestmentRatios

1

2

3

4

1 To be used selectively, according to the industry and/or the level of detail required.




6/12



Profitability/Efficiency Ratios

Financial ratio analysis how to do it

Key Strategic Ratios (1/5)

Ratio

Profit Margin

(also known asoperating margin)

Formula

= PBIT

Sales

Where:

PBIT: profit before interestand tax

= Sales cost of goodssold operatingexpenses

= Trading profit

What It Does

Measures bottom line company

profitability Indicates the effectiveness ofsales and production inproducing profit

Constitutes a good ratio forcomparing the performances ofcompetitors in the same industry

Drivers

Sales:

Price Volume

Operating expenses

Gross Margin = Gross profitSales

Where:

Gross profit

= Sales cost of goodssold

Measures percentage ofrevenue remaining after the costof goods sold is covered

Constitutes a weak ratiolooksat variable1 costs only

Price Cost of producing

goods

Return on sales (ROS): Are goods sold at an appropriate price and produced efficiently?

Two ratios reflect ROS:

1 Costs that are altered by a change in output.




7/12



Profitability/Efficiency Ratios (cont.)



Ratio

RONA is also knownas:

Return on Asset(ROA)

Return on CapitalEmployed (ROCE)

Formula

= (Profit Before Interest + Tax)a

Fixed Assets + (CurrentAssets Current Liabilities)b

(Profit Margin x Asset Turnover)

a. Can be defined as profit after tax, but beforededuction of interest.

b. Current assets current liabilities = workingcapital.It represents the amount of day-to-dayoperating liquidity available to business.

What It Does

Measures profitability

Measures how wellassets have beenemployed, irrespectiveof how the company is

financed

Drivers

Profit margin:

Price

Cost

Asset turnover:

SalesCapital employed

Return on Equity (ROE): What is shareholders profit?

Ratio

ROE

Formula

= Profit After TaxOrdinary Fundsa

a. Issued capital + capital reserves + revenuesreserves

Profit after tax used because it is the returnfrom which dividend is subtracted.

What It Does

Measures the return onordinary shareholdersfunds:

Assesses theefficiency with whichthe firm employsowners capita

Measures return forshareholder

Drivers

Profit margin: Price

Cost

Asset turnover:

Sales

Capital employed

Financing:

Debt to equity ratio

Cost of debt

Tax-effectiveness

Return on Net Assets (RONA): How profitable is this company?




8/12



Profitability/Efficiency Ratios (cont.)



Ratio

Current Ratio

Formula

Current AssetsCurrent Liabilities

i.e.: (cash and near-cash assets available tobusiness) over(upcoming cashrequirements)

What It Tells

Indicates a companys short-term financial position:

Compares the assets that willturn into cash within the yearto the liabilities that must bepaid within the year

A company with a low currentratio lacks liquidity in thesense that it cannot reduce itscurrent asset investment tosupply cash to meet maturingobligations:

It must rely instead onoperating income andoutside financing

The most informative feature ofa current ratio is its normal leveland any trend from year to year

Drivers

Nature of the industry:

Some have to carrylarge stocks and,have long productioncycles

Others carry almostno stock and receivemore credit than theygive

Type of current asset:

Some are more liquid

(i.e. easier to sellreadily)

Volatility of workingcapital requirements

Debtor and creditormanagement:

Bargaining power ofcompany

Current Ratio: Will the company have sufficient cash in the immediate future to meet its short-term liabilities?




9/12



Financial analysis illustrative output

Cashflow, $MM, 1983-1994

-100

-

0

- 0

-

0

-2 0

0

20

0

0

0

1

1

1

1

1

1

1

1

0 1

1 1

2 1

1

Tax

Dividends

Interest

Capex (Net)

Changes in working capital

Other / Ex traordinary i tems

Depreciation

PBIT

Net Cashflow

Cumulative Cashflow

Trends inratios can

similarly beplotted

Source: Dawson International




10/12



Financial ratio analysis illustrative output

A Dupont Tree (also known as RONA model) is a useful way to structure and present output.

Margin

Costs

AssetBase

$

Levers ShareholderValue

RONA/Dupont Model

Raw Materials &

Consumables

Maintenance

External Costs

Other Operating

Costs

Carriage

Intra-Group

Materials

Loose Plant, Spares& Tools

Raw Materials

Work in Progress

Finished Goods

Trade Debtors

Trade Creditors

UK External Sales

EU and EFTA Sales

Rest of World

Sales

Intras-Group Sales

Sales

Gross Sales

Cost of Sales

Total Employment

Stock Revaluation

Depreciation and

Grant Costs

Exceptional Items

Other Intra-Group

Costs

Stocks

Short Term

Investments

Debtors

Creditors (


11/12



END OF PARTIAL PREVIEW



12/12



Browse our catalog of PowerPoint Diagram Packshttp://learnppt.com/powerpoint

Join our mailing list and receive the Basic Toolkit for free!http://learnppt.com/mailinglist

Read our eBook How to Become a PowerPoint Guruhttp://learnppt.com/

Financial Ratios and Comparables Analysis

Documents

Transcript of Financial Ratios and Comparables Analysis