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Financial Analysis

Financial Analysis. Finance defined Basic business forms Corporate governance Accounting representation Cash Flow Financial Analysis Growth. Finance. “The science of the motion of money” Finance and accounting Finance and economics Finance and management Body of knowledge

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Financial Analysis

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  1. Financial Analysis • Finance defined • Basic business forms • Corporate governance • Accounting representation • Cash Flow • Financial Analysis • Growth

  2. Finance • “The science of the motion of money” • Finance and accounting • Finance and economics • Finance and management • Body of knowledge • Basic areas in finance • Investments and financial institutions • Corporate finance • NWC • LT financing • Long term investment

  3. Forms of organizations • Sole proprietorship, partnership, corporation • Advantages • Disadvantages • Focus of the course: CORPORATION • Snapshot of a corporation • Right side • Left side

  4. Corporate Governance • 4 actors: • Shareholders • Creditors • Officers • Stakeholders • 1 GOAL? • Agency problems = Cost • Direct (compensations and perquisites) • Indirect (monitoring and non-optimal decision making)

  5. Financial position • Income Statement (over a period) NI=(Sales-COGS-Dpr-Int) X (1-T) • Retained Earnings(over a period) End RE=Beg. RE +NI - Div • Balance Sheet (At one point in time) • Assets=Liabilities + Equity = Liability + Stocks + RE

  6. Cash flow • Define sources and uses of cash • Another (smarter) way to look at cash flow: • Cash flow from assets=CF to creditors +CF to owners • Cash from asset = Operating cash flow = EBIT-T+Dpr - Use of NWC = End NWC-Beg.NWC - Long term asset spending = End NFA - Beg.NFA + Dpr • Cash to creditor = Interest paid –net new borrowing • Cash to owners = dividends paid- net new equity raised • Calculate and interpret (from Hermetic Inc.)

  7. Sources and Uses of Cash

  8. Another way to look at Cash flows

  9. Financial Statements Analysis • ISREBSCF • Common size analysis • Ratio analysis • Cross sectional analysis • Time serie analysis • 5 families • ST Liquidity • LT Liquidity • Activity • Profitability • Market

  10. Ratio analysis • ST Liquidity: • Current ratio=CA/CL • Acid test=(CA-Inv.)/CL • LT Liquidity: • Debt-to-equity ratio=D/E • Cash coverage ratio= (EBIT+Dpr)/Int • Activity: • Short-term asset turnover • Asset turnover=Sales/Asset • Profitability • Profit margin=NI/Sales • ROA=NI/Asset • ROE=NI/Equity

  11. Dupont Equation • ROE= NI/Sales x Sales/Assets x Assets/Equity • ROE= Profit x Asset x Equity Margin Turnover Multiplier • Operating efficiency • Asset use efficiency • Financial leverage • ROE=ROA x Equity multiplier • Differentiate ROE and ROA • Remedy to “paralysis by analysis”

  12. Growth • Internal growth: Debt is constant • g= ROA x b/(1-ROA x b) • Sustainable growth: Debt to equity is constant • g=ROE x b/(1-ROE x b) • Differentiate between internal and sustainable growth. • What are the factors that affect growth? • Forecasting tool

  13. Cases Study Sunset Board S&S Air

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