Financial Statment Review

8/8/2019 Financial Statment Review

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Financial Statement AnalysisFinancial Statement Analysis


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Financial Statement Analysis:Financial Statement Analysis:

Lecture OutlineLecture Outline Review of Financial Statements

Ratios

Types of RatiosExamples

The DuPont Method

Ratios and Growth

SummaryStrengths

Weaknesses

Ratios and Forecasting


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Stock PriceStock Price

Risk ofRisk ofCashflowsCashflows

Timing ofTiming ofCashflowsCashflows

ExpectedExpectedCashflowsCashflows

Stock PriceStock Price

MarketMarketConditionsConditions

NPVNPV

MVAMVA

EVAEVA


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Financial AnalysisFinancial Analysis Assessment of the firms past, present

and future financial conditions

Done to find firms financial strengthsand weaknesses

PrimaryTools:

Financial StatementsComparison of financial ratios to past,

industry, sector and all firms


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Financial StatementsFinancial Statements Balance Sheet

Income Statement Cashflow Statement

Statement of Retained Earnings


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Sources of DataSources of Data Annual reports

Via mail, SEC or company websites

Published collections of data

e.g., Dun and Bradstreet or Robert Morris

Investment sites on the web

Examples

http://moneycentral.msn.com/investor

http://www.marketguide.com


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The Main Idea

The Main Idea

Value for the firm comes from cashflows

Cashflows can be calculated as:

y (Revt - Costt - Dept)x(1-X) + DeptOR

y (Revt - Costt)x(1-X) + XxDeptOR

y Revtx(1-X) - Costtx(1-X) + XxDept


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Review: Major Balance SheetReview: Major Balance Sheet

ItemsItemsAssets

Current assets:

Cash & securities

Receivables

Inventories

Fixed assets:

Tangible assets

Intangible assets

Liabilities and Equity

Current liabilities:

Payables

Short-term debt

Long-termliabilities

Shareholders'equity


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Example to e

xplain

Example to e

xplain

Assets:

Current Assets: $7,681.00

Non-Current Assets: $3,790.00

Total Assets: $11,471.00

Liabilities:

Current Liabilities: $5,192.00

LT Debt & Other LT Liab.: $971.00

Equity: $5,308.00

Total Liab. and Equity: $11,471.00


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Review: Major IncomeReview: Major Income

Statement ItemsStatement Items Gross Profit = Sales - Costs of Goods Sold

EBITDA

= Gross Profit - Cash Operating Expenses EBIT = EBDIT - Depreciation - Amortization

EBT = EBIT - Interest

NI or EAT = EBT- Taxes

Net Income is a primary determinant of thefirms cashflows and, thus, the value of thefirms shares


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Income StatementIncome StatementSales $25,265.00

Costs of Goods Sold -$19,891.00

Gross Profit $5,374.00

Cash operating expense -$2,761.00

EBITDA 2,613.00

Depreciation & Amortization -$156.00

Other Income (Net) -$6.00

EBIT $2,451.00Interest -$0.00

EBT $2,451.00

Income Taxes -$785.00

Special Income/Charges -$194.00

Net Income (EAT) $1,666.00


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Objectives ofRatio AnalysisObjectives ofRatio Analysis Standardize financial information for

comparisons

Evaluate current operations

Compare performance withpastperformance

Compare performance against otherfirms or industry standards

Study the efficiency of operations

Study the risk of operations


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Rationale Behind RatioRationale Behind Ratio

AnalysisAnalysis A firm has resources

It converts resources into profits through

production of goods and services sales of goods and services

Ratios Measure relationships between resources and

financial flows

Show ways in which firms situation deviates from Its own past

Other firms

The industry

All firms-


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Types ofRatiosTypes ofRatios Financial Ratios:

Liquidity Ratios

Assess ability to cover current obligations

Leverage Ratios

Assess ability to cover long term debt obligations

Operational Ratios:

Activity(Turnover) Ratios

Assess amount of activity relative to amount of

resources used

Profitability Ratios

Assess profits relative to amount of resources used

Valuation Ratios: Assess market price relative to assets or earnings


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Current Ratio:

Quick(Acid Test) Ratio:

11

1

sia i itieCurrent

setsCurrent As

:RatioCurrent!!!

1.40000,107,1$

00.391$00.681,7$

sLiabilitieCurrent

sInventorie-setsCurrent As

:RatioTestAcid !

!!

LiquidityR

atioEx

amples: DellLiquidityR

atioEx

amples: Dell


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Ratio Comparison: Current

Ratio

Ratio Comparison: Current

Ratio


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Debt Ratio:

%A etTota

iabi itieTota

:RatioDebt !!!

Leverage Ratio Examples:Leverage Ratio Examples:

DellDell


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Ratio Comparison: Debt

Ratio

Ratio Comparison: Debt

Ratio

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

DebtRa

tio

Dell 54.70% 73.07% 69.70% 66.25% 53.73%

Industry 62.96% 60.00% 52.38% 62.96%

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00


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6.59%25,265.00$2,451.00$

SalesEBIT:MarginProfitNet !!!

%001660$

0$660$Div-:)(RatioR t tio !

!!V

Profitability Ratio Examples:Profitability Ratio Examples:

DellDell Net Profit Margin:

Retention Ratio


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Return on Assets (ROA):

Return on Equity(ROE):

%52.4111,471.00$1,666.00$

AssetsTotalIncomeNet:ROA !!!

31.39%5,308.00$

1,666.00$

EquityCommonTotal

IncomeNet:ROE !!!

Profitability Ratio Examples:Profitability Ratio Examples:

DellDell


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0%

10%

20%

30%

40%

50%

60%

70%

80%

ROE

Dell 28.13% 64.27% 73.01% 62.90% 31.39%

Industry 22.30% 30.60% 25.50% 18.00%


Ratio Comparison:

ROER

atio Comparison:R

OE


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0%

5%

10%

15%

20%

25%

ROA

Dell 12.66% 17.31% 22.12% 21.23% 14.52%

Industry 6.80% 10.90% 7.20% 5.70%


Ratio Comparison:

ROA

Ratio Comparison:

ROA


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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

ProfitMargin

Dell 5.14% 6.68% 7.66% 8.00% 6.59%

Industry 3.40% 4.74% 3.79% 2.85%


Ratio Comparison: Profit Margin

Ratio Comparison: Profit Margin


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Total Asset Turnover Ratio:

InventoryTurnover Ratio:

202,47 .00$

25,265.00$AssetsTotal

Sales:TurnoverAssetTotal.

!!

64.62391.00$

25,265.00$

Inventory

Sales:TurnoverInventory !!

Activity (Turnover) RatioActivity (Turnover) Ratio

Examples: DellExamples: Dell


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0%

50%

100%

150%

200%

250%

300%

350%

AssetTur

nover

Dell 2.47 2.59 2.89 2.65 2.20

Industry 2.00 2.30 1.90 2.00


Ratio Comparison: Asset

Turnover

Ratio Comparison: Asset

Turnover


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The DuPont System

The DuPont System

Method to breakdown ROE into:

ROA and Equity Multiplier

ROA is further broken down as:

Profit Margin and Asset Turnover

Helps to identify sources of strength and

weakness in current performance Helps to focus attention on value drivers


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The DuPont System

The DuPont System

Profit Margin Total Asset Turnover

ROA Equity Multiplier

ROE


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The DuPont System

The DuPont System

Pr fit r i t l t r r

it lti li r

EquityCommon

AssetsTotal

AssetsTotal

IncomeNetMultiplierEquityROAROE

v

v


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The DuPont System

The DuPont System


it lti li r

AssetsTotal

Sales

Sales

IncomeNetTurnoverAssetTotalMarginProfitROA

v

v


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The DuPont System

The DuPont System


it lti li r

EquityC

tt l

tt l

l

l

tultipliEquityurnoverAssetot lrginProfitE

vv

vv


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The DuPont System: Dell

The DuPont System: Dell

MultiplierEquityROA

MultiplierEquityTurnoverAssetTotalMarginProfit

EquityCommon

AssetsTotal

AssetsTotal

Sales

Sales

IncomeNetROE

v

vv

vv

31.39%

2.16111452.0

2.16112.20250.0659 $5,308.00

$11,471.00

$11,471.00

$25,265.00

$25,265.00

$1,666.00ROE

v

vv

vv


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A Note on Sustainable GrowthA Note on Sustainable Growth

and Stock Returnsand Stock Returns In the long run

Sustainable growth and long run capital

gains (g) = ROE x V

Recall the relationship between stockreturns (r), capital gains (g) andforward dividend yields (D

1/P

0):

r = g + D1/P0 = g + Do(1+g)/P0

Note: r & g must be quarterly if D isquarterly and annual if D is annual


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Example: PredictedExample: Predicted

Sustainable Growth for DellSustainable Growth for Dell Based on the most

recent numbers:

ROE = 31.39 &V = 100

g = 0.3139 x 1 =

31.39

r = 0.3139 + 0/P =

31.39

Based on 5 yearaverages:

ROE = 51.94 &V = 100

g = 0.5194 x 1 =

51.94

r = 0.3139 + 0/P =

51.94


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Summary of FinancialR

atiosSummary of FinancialR

atios Ratios help to:

Evaluate performance

Structure analysisShow the connection between activities andperformance

Benchmark with

Past for the companyIndustry

Ratios adjust for size differences


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Limitations ofR

atio AnalysisLimitations ofR

atio Analysis A firms industry category is often

difficult to identify

Published industry averages are onlyguidelines

Accounting practices differ across firms

Sometimes difficult to interpret

deviations in ratios Industry ratios may not be desirable

targets

Seasonality affects ratios


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How Might Ratios Help Me onHow Might Ratios Help Me on

the IEM?the IEM? Analysis ofAAPL, IBM and MSFT, and

comparisons to the S&P500 companies canhelp to:

Assess the (absolute and relative) financial state ofeach company

Show each companys strengths and weaknesses

Predict sustainable growth rate

Combined with current information, this canhelp to:Assess likely future performance

Predict future valuation and earnings growth

Predict returns

Financial Statment Review

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