Chapter 2: Financial Statement and Cash Flow Analysis

Chapter 2:Financial Statement and Cash Flow Analysis Corporate Finance, 3e Graham, Smart, and Megginson

Financial Statements • Company managers, investors, and outside analysts use financial statements to conduct… • Cash flow analysis • Performance (ratio) analysis • The SEC requires U.S. companies to produce financial statements conforming to Generally Accepted Accounting Principles (GAAP), developed by the Financial Accounting Standards Board (FASB).

Four Key Financial Statements • Balance sheet 2. Income statement 3. Statement of retained earnings 4. Statement of cash flows

Key Measures of Cash Flow Net operating profit after taxes (NOPAT) = EBIT (1 – T) Operating cash flow (OCF) = NOPAT + Depreciation = EBIT (1 – T) + Depreciation Free cash flow (FCF) = OCF –FA – (CA – AP – Accruals)

Decrease in any asset Increase in any liability Net profits after taxes Depreciation and other non-cash charges Sale of stock Increase in any asset Decrease in any liability Net loss Dividends paid Repurchase or retirement of stock Table 2.4 The Inflows and Outflows of Corporate Cash Inflows Outflows

Liquidity Ratios Current ratio = Quick ratio =

Activity Ratios Inventory turnover = Average collection period = Average payment period =

Activity Ratios Fixed asset turnover = Total asset turnover =

Debt Ratios Debt ratio = Equity multiplier = Debt-to-equity ratio =

Debt Ratios Times interest earned =

Profitability Ratios Gross profit margin = Operating profit margin = Net profit margin =

Profitability Ratios Earnings per share (EPS) = Return on total assets (ROA) = Return on common equity (ROE) =

DuPont System of Analysis Net profit margin Total asset turnover  ROA = ROE = ROA  A/E Net profit margin Total asset turnover  A/E  ROE =

Market Ratios Price/earnings (P/E) ratio = Book value per share = Market/book (M/B) ratio =

Chapter 2: Financial Statement and Cash Flow Analysis