1 / 28

Working With Financial Statements

Working With Financial Statements. 3. Prepared by Anne Inglis, Ryerson University. Key Concepts and Skills. Understand sources and uses of cash and the Statement of Cash Flows Know how to standardize financial statements for comparison purposes

natalie-sloan
Download Presentation

Working With Financial Statements

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Working With Financial Statements 3 Prepared by Anne Inglis, Ryerson University

  2. Key Concepts and Skills • Understand sources and uses of cash and the Statement of Cash Flows • Know how to standardize financial statements for comparison purposes • Know how to compute and interpret important financial ratios • Be able to compute and interpret the Du Pont Identity • Understand the problems and pitfalls in financial statement analysis

  3. Chapter Outline • Cash Flow and Financial Statements: A Closer Look • Standardized Financial Statements • Ratio Analysis • The Du Pont Identity • Using Financial Statement Information • Summary and Conclusions

  4. Sample Balance Sheet Numbers are in thousands

  5. Sample Income Statement Numbers are in thousands, except EPS & DPS

  6. Sources and Uses of Cash 3.1 • Sources • Cash inflow – occurs when we “sell” something • Decrease in asset account • Increase in liability or equity account • Uses • Cash outflow – occurs when we “buy” something • Increase in asset account • Decrease in liability or equity account

  7. Statement of Cash Flows • Statement that summarizes the sources and uses of cash • Changes divided into three major categories • Operating Activity – includes net income and changes in most current accounts • Investment Activity – includes changes in fixed assets • Financing Activity – includes changes in notes payable, long-term debt and equity accounts as well as dividends

  8. Sample Statement of Cash Flows Numbers are in thousands

  9. Standardized Financial Statements 3.2 • Common-Size Balance Sheets • Compute all accounts as a percent of total assets • Common-Size Income Statements • Compute all line items as a percent of sales • Standardized statements make it easier to compare financial information, particularly as the company grows • They are also useful for comparing companies of different sizes, particularly within the same industry

  10. Ratio Analysis 3.3 • Ratios also allow for better comparison through time or between companies • As we look at each ratio, ask yourself what the ratio is trying to measure and why is that information important • Ratios are used both internally and externally

  11. Categories of Financial Ratios • Short-term solvency or liquidity ratios • Long-term solvency or financial leverage ratios • Asset management or turnover ratios • Profitability ratios • Market value ratios

  12. Computing Liquidity Ratios • Current Ratio = CA / CL • 1,801,690 / 1,780,785 = 1.01 times • Quick Ratio = (CA – Inventory) / CL • (1,801,690 – 388,947) / 1,780,785 = .793 times • Cash Ratio = Cash / CL • 3,171 / 1,780,785 = .002 times

  13. Computing Long-term Solvency Ratios • Total Debt Ratio = (TA – TE) / TA • (4,931,444 – 1,761,044) / 4,931,444 = .6429 times or 64.29% • The firm finances a little over 64% of its assets with debt. • Debt/Equity = TD / TE • (4,931,444 – 1,761,044) / 1, 761,044 = 1.800 times • Equity Multiplier = TA / TE = 1 + D/E • 1 + 1.800 = 2.800

  14. Computing Coverage Ratios • Times Interest Earned = EBIT / Interest • 820,183 / 52,841 = 15.5 times • Cash Coverage = (EBIT + Depreciation) / Interest • (820,183 + 362,325) / 52,841 = 22.38 times

  15. Computing Inventory Ratios • Inventory Turnover = Cost of Goods Sold / Inventory • 1,762,721 / 388,947 = 4.53 times • Days’ Sales in Inventory = 365 / Inventory Turnover • 365 / 4.53 = 81 days

  16. Computing Receivables Ratios • Receivables Turnover = Sales / Accounts Receivable • 4,335,491 / 1,095,118 = 3.96 times • Days’ Sales in Receivables = 365 / Receivables Turnover • 365 / 3.96 = 92 days

  17. Computing Total Asset Turnover • NWC Turnover = Sales / NWC • 4,335,491 / (1,801,690 - 1,780,785) = 207.390 times • Fixed Asset Turnover = Sales / Net Fixed Assets • 4,335,491 / 3,129,754 = 1.385 times • Total Asset Turnover = Sales / Total Assets • 4,335,491 / 4,931,444 = .88 times • Measure of asset use efficiency • Not unusual for TAT < 1, especially if a firm has a large amount of fixed assets

  18. Computing Profitability Measures • Profit Margin = Net Income / Sales • 471,916 / 4,335,491 = .1088 times or 10.88% • Return on Assets (ROA) = Net Income / Total Assets • 471,916 / 4,931,444 = .0957 times or 9.57% • Return on Equity (ROE) = Net Income / Total Equity • 471,916 / 1,761,044 = .2680 times or 26.8%

  19. Computing Market Value Measures • Market Price = $60.98 per share • Shares outstanding = 205,838,910 • EPS = Net Income / Shares Outstanding • 471,916,000 / 205,838,910 = 2.29 • PE Ratio = Price per share / Earnings per share • 60.98 / 2.29 = 26.6 times • Market-to-book ratio = market value per share / book value per share • 60.98 / (1,761,044,000 / 205,838,910) = 7.1 times

  20. Table 3.8 – Common Financial Ratios

  21. Table 3.8 – Common Financial Ratios

  22. Deriving the Du Pont Identity 3.4 • ROE = NI / TE • Multiply by 1 and then rearrange • Multiply by 1 again and then rearrange

  23. Using the Du Pont Identity • ROE = PM * TAT * EM • Profit margin is a measure of the firm’s operating efficiency – how well does it control costs • Total asset turnover is a measure of the firm’s asset use efficiency – how well does it manage its assets • Equity multiplier is a measure of the firm’s financial leverage

  24. Using Financial Statement Information 3.5 • Internal uses • Performance evaluation – compensation and comparison between divisions • Planning for the future – guide in estimating future cash flows • External uses • Creditors • Suppliers • Customers • Stockholders

  25. Benchmarking • Ratios are not very helpful by themselves; they need to be compared to something • Time-Trend Analysis • Used to see how the firm’s performance is changing through time • Internal and external uses • Peer Group Analysis • Compare to similar companies or within industries • NAICS codes, Financial Post Datagroup, Dominion Bond Rating Service (DBRS) and Dun & Bradstreet Canada

  26. Potential Problems • There is no underlying theory, so there is no way to know which ratios are most relevant • Benchmarking is difficult for diversified firms • Globalization and international competition makes comparison more difficult because of differences in accounting regulations • Varying accounting procedures, i.e. FIFO vs. LIFO • Different fiscal years • Extraordinary events

  27. Quick Quiz • What is the Statement of Cash Flows and how do you determine sources and uses of cash? • How do you standardize balance sheets and income statements and why is standardization useful? • What are the major categories of ratios and how do you compute specific ratios within each category? • What are some of the problems associated with financial statement analysis?

  28. Summary 3.6 • You should be able to: • Identify sources and uses of cash • Understand the Statement of Cash Flows • Understand how to make standardized financial statements and why they are useful • Calculate and evaluate common ratios • Understand the Du Pont identity • Describe how to establish benchmarks for comparison purposes and understand some key problems that can arise

More Related