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Financial Analysis. Financial Statements Measuring a Firm’s Financial Condition Class Activity Financial Planning. Financial Statements. Mandatory for public companies Standard format and rules Some discretion Significant differences by country Balance sheet
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Financial Analysis • Financial Statements • Measuring a Firm’s Financial Condition • Class Activity • Financial Planning
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?
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
Leverage Ratios Debt ratio = (Long term debt + leases)/(Long term debt + leases +equity) = 450/(450+540) = .4545... ≈ .45 Debt-equity ratio = (Long term debt + leases)/equity = 450/540 = .8333.. ≈ .83 Times-interest earned = (EBIT + depreciation)/interest = (166.7+53.3)/42.5 = 5.17647.. ≈ 5.18
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 = (110+440)/460 ≈ 1.20 Cash ratio = (Cash + short-term securities)/current liabilities = 110/460 ≈ .24
Efficiency Ratios Sales-to-assets ratio = Sales/((beginning assets+ending assets)/2) = 2200/((1380.8+1450)/2) ≈ 1.55 Days in inventory = Average inventory/(cost of goods sold/365) = ((339.5+350)/2)/(1980/365) ≈ 63.6 days Average collection period = Average receivables/ (sales/365) = ((433.1+440)/2)/(2200/365) ≈ 72.4 days
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)/((1380.8+1450)/2) ≈ 8.3% Return on equity = Earnings available for common stockholders/average equity = 74.5/((509.3+540)/2) ≈ 14.2% Payout ratio = Dividends/earnings = 43.8/74.5 ≈ .6
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
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
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
Next Class • Present Values • Student presentations • Perpetuities and annuities • Compound interest • Read Chapters 2 and 3 in text