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CHAPTER 13

CHAPTER 13. Financial Statement Analysis. Overview. Purpose Tools Used Statements Ratio Analysis Limitations. Financial Statements. Balance Sheet Common Sized Trend or Indexed Income Statement Common Sized Trend or Indexed Statement of Cash Flows. Ratio Analysis.

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CHAPTER 13

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  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 (1) x (2) x (3) x (4) x (5) Tax Burden Interest Burden x x Margin x Turnover x Leverage

  15. Figure 13.1 Intel’s 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. Table 13-13 Key Financial Ratios of Growth Industries Inc.

  18. Table 13-14 Growth Industries Statements of Cash Flow

  19. Comparability Problems • Accounting Differences • Inventory Valuation • Depreciation • Inflation • International Accounting Conventions

  20. Quality of Earnings:Areas of Accounting Choices • Allowance for bad debts • Non-recurring items • Reserves management • Stock options • Revenue recognition • Off-balance sheet assets and liabilities

  21. Figure 13.2 Comparative Accounting Rules

  22. Figure 13.3 Adjusted Versus Reported Price-Earnings Ratios

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