Analyzing Financial Statements

1. Analyzing Financial Statements

2. General Rules • 1) Restate balance sheet to work with capital. • 2) Use averages (current and previous year) for balance sheet items. • 3) Be consistent.

3. Traditional Method • Current assets • Cash • Receivables • Inventory • Fixed Assets • Net Property Plant and Equipment (NPPE) • Investments • -------------------------------------------------- • Total Assets • --------------------------------------------------

4. Traditional Method • Current Liabilities • Notes Payable • Accounts Payable • Other Payables • Long Term Liabilities • L.T. Debt • Other Liabilities • Shareholder Equity • -------------------------------------------------- • Total Liabilities and Equity • --------------------------------------------------

5. Capital Method • Current Assets • Cash • Receivables • Inventory • Less : Operating Current Liabilities • Accounts Payable • Other Payables • -------------------------------------------------- • Operating Working Capital

6. Capital Method • Operating Working Capital • Fixed Assets • Net Property Plant and Equipment (NPPE) • Investments • -------------------------------------------------- • Total Capital • --------------------------------------------------

7. Capital Method • Short Term Debt • Notes Payable • Long Term Liabilities • L.T. Debt • Other Liabilities • Shareholder Equity • -------------------------------------------------- • Total Debt and Equity • --------------------------------------------------

8. Leverage Ratios • Debt Ratio = (Int. Bearing + Leases) / (Capital + Leases) • Debt-Equity Ratio = (Int. Bearing + Leases) / Equity • Times Interest Earned = (EBIT + Depreciation) / Interest • Leverage Ratio = Capital / Equity

9. Liquidity Ratios • Current Ratio = Current Assets / Current Liabilities • Acid Test Ratio = (Curr Assets – Inv) / Curr Liabs • Working Capital to Assets = Working Capital / Capital

10. Efficiency Ratios • Total Asset Turnover = Sales / Capital • (TATO) • Sales to W. Capital = Sales / Working Capital • Fixed Asset T/O = Sales / Fixed Assets • Inventory T/O = Cost of Goods Sold / Inventory

11. Efficiency Ratios • Avg Collection Period = Acc Rec / (Sales / 365) • Avg Payment Period = Acc Payable / (COS / 365) • Inventory Days = 365/(Inv T/O) • Cash Cycle = Inv Days + ACP - APP

12. Profitability Ratios • Return on Assets (ROA) = Net Pft after Tax / Capital • Return on Equity (ROE) = Net Pft after Tax / Equity • Operating Return on Assets = EBIT / Capital

13. Profitability Ratios • Net Profit Margin (NPM) = Net Pft after Tax / Sales • Gross Pft Margin (GPM) = Gross Pft / Sales • Expenses to Sales = SGA / Sales

14. Investment Ratios • Payout Ratio = Divs per Share / Earnings per Share • Retention Ratio = 1 – Payout Ratio • Price–Earnings Ratio (P/E) = Stock Price / EPS • Market to Book Ratio = Stock Price • Book Value per Share

15. Approaches • Time Series • Cross-section (Comparables -- i.e., Industry or Specific Competitors) • Goals / Targets

16. Other Methods • Common Size • Balance sheet (as % of capital) • Income statement (as % of sales) • Index Analysis • as % of base year

17. DuPont Analysis • ROE = Leverage x ROA • ROA = NPM x TATO

18. Value Drivers • Sales growth • Operating profit margin • Tax rate • Investment rate = [(NPPE + WCAP) / Sales ] • WACC • Competitive advantage period

19. Value Drivers • ROIC = Net Operating Profit after Tax / Capital • = EBIT (1-T) / Capital • = EBIT (1-T) / Sales x Sales / Capital • = NPM x TATO

20. Reebok Example • See the Reebok Excel File