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Working With Financial Statements

Working With Financial Statements. 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

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Working With Financial Statements

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  1. Working With Financial Statements

  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 DuPont 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 DuPont Identity • Using Financial Statement Information

  4. Sample Balance Sheet Numbers in millions

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

  6. Sources and Uses • Sources • Cash inflow – occurs when we “sell” something • Decrease in asset account (Sample B/S) • Accounts receivable, inventory, and net fixed assets • Increase in liability or equity account • Accounts payable, other current liabilities, and common stock • Uses • Cash outflow – occurs when we “buy” something • Increase in asset account • Cash and other current assets • Decrease in liability or equity account • Notes payable and long-term debt

  7. 企業中現金流量的來源 現金流入 現金流出 營運活動 應付帳款付現 所得稅支出 營運活動 現金銷貨 應收帳款收現 現金 投資活動 資產的購入 投資活動 資產的處分 融資活動 股利支付 貸款償還 融資活動 發行普通股 發行公司債

  8. 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

  9. Sample Statement of Cash Flows Numbers in millions

  10. 財務報表分析之特質與方法

  11. Standardized Financial Statements • 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

  12. Ratio Analysis • 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 is important • Ratios are used both internally and externally

  13. 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

  14. Computing Liquidity Ratios • Current Ratio = CA / CL • 2256 / 1995 = 1.13 times • Quick Ratio = (CA – Inventory) / CL • (2256 – 1995) / 1995 = .1308 times • Cash Ratio = Cash / CL • 696 / 1995 = .35 times • NWC to Total Assets = NWC / TA • (2256 – 1995) / 5394 = .05 • Interval Measure = CA / average daily operating costs • 2256 / ((2006 + 1740)/365) = 219.8 days

  15. Computing Long-term Solvency Ratios • Total Debt Ratio = (TA – TE) / TA • (5394 – 2556) / 5394 = 52.61% • Debt/Equity = TD / TE • (5394 – 2556) / 2556 = 1.11 times • Equity Multiplier = TA / TE = 1 + D/E • 1 + 1.11 = 2.11 • Long-term debt ratio = LTD / (LTD + TE) • 843 / (843 + 2556) = 24.80%

  16. Computing Coverage Ratios • Times Interest Earned = EBIT / Interest • 1138 / 7 = 162.57 times • Cash Coverage = (EBIT + Depreciation) / Interest • (1138 + 116) / 7 = 179.14 times

  17. Computing Inventory Ratios • Inventory Turnover = Cost of Goods Sold / Inventory • 2006 / 301 = 6.66 times • Days’ Sales in Inventory = 365 / Inventory Turnover • 365 / 6.66 = 55 days

  18. Computing Receivables Ratios • Receivables Turnover = Sales / Accounts Receivable • 5000 / 956 = 5.23 times • Days’ Sales in Receivables = 365 / Receivables Turnover • 365 / 5.23 = 70 days

  19. Computing Total Asset Turnover • Total Asset Turnover = Sales / Total Assets • 5000 / 5394 = .93 • It is not unusual for TAT < 1, especially if a firm has a large amount of fixed assets • NWC Turnover = Sales / NWC • 5000 / (2256 – 1995) = 19.16 times • Fixed Asset Turnover = Sales / NFA • 5000 / 3138 = 1.59 times

  20. Computing Profitability Measures • Profit Margin = Net Income / Sales • 689 / 5000 = 13.78% • Return on Assets (ROA) = Net Income / Total Assets • 689 / 5394 = 12.77% • Return on Equity (ROE) = Net Income / Total Equity • 689 / 2556 = 26.96%

  21. Computing Market Value Measures • Market Price = $87.65 per share • Shares outstanding = 190.9 million • PE Ratio = Price per share / Earnings per share • 87.65 / 3.61 = 24.28 times • Market-to-book ratio = market value per share / book value per share • 87.65 / (2556 / 190.9) = 6.56 times

  22. 財務比率分析（續） • 經濟附加價值(EVA) • 用以衡量公司稅後營業淨利和全部資金成本的差額。 EVA=投入總資本（資本報酬率－平均資金成本） =1,614.22 (20% －16%)=64.57（億） • 負的EVA表示資本報酬率不足以支付股東與債權人提供資金索取的代價，若不及時改善，公司將不斷的侵蝕老本，不利於股價表現。

  23. 財務比率分析（續） • 市場價值比率 以每股市價來說明企業的營運績效，包括本益比 、股利收益率及市價對帳面價值比及市場附加價值等。

  24. 財務比率分析（續） • 市場附加價值(MVA) • 投資人原始投入資金與目前市場價值之間的差額。 MVA=股東權益市場價值－股東權益帳面價值 =75×76億7,090萬股－120,770百萬 =4,545億4,750 萬元 • MVA數值的大小，隱含著投資人對該公司經營能力的認同度。 • MVA為公司未來各年預計EVA的折現值。

  25. Deriving the DuPont Identity • ROE = NI / TE • Multiply by 1 and then rearrange • ROE = (NI / TE) (TA / TA) • ROE = (NI / TA) (TA / TE) = ROA * EM • Multiply by 1 again and then rearrange • ROE = (NI / TA) (TA / TE) (Sales / Sales) • ROE = (NI / Sales) (Sales / TA) (TA / TE) • ROE = PM * TAT * EM

  26. 杜邦等式分析

  27. Using the DuPont 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

  28. Balance Sheet Data Cash = 138,356 Inventory = 61,807 Other CA = 12,284 Fixed Assets = 94,601 EM = 1.654 Computations TA = 307,048 TAT = 2.393 Income Statement Data Sales = 734,868 COGS = 505,152 SG&A = 141,520 Interest = (760) Taxes = 34,702 Computations NI = 54,254 PM = 7.383% ROA = 17.668% ROE = 29.223% Expanded DuPont Analysis – Aeropostale Data

  29. Aeropostale Extended DuPont Chart x x   + +

  30. Why Evaluate Financial Statements? • 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

  31. 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 • SIC and NAICS codes

  32. Real World Example - I • Ratios are figured using financial data from the 2003 Annual Report for Home Depot • Compare the ratios to the industry ratios in Table 3.12 in the book • Home Depot’s fiscal year ends Feb. 1 • Be sure to note how the ratios are computed in the table so that you can compute comparable numbers. • Home Depot sales = $64,816 MM

  33. Real World Example - II • Liquidity ratios • Current ratio = 1.40x; Industry = 1.8x • Quick ratio = .45x; Industry = .5x • Long-term solvency ratio • Debt/Equity ratio (Debt / Worth) = .54x; Industry = 2.2x. • Coverage ratio • Times Interest Earned = 2282x; Industry = 3.2x

  34. Real World Example - III • Asset management ratios: • Inventory turnover = 4.9x; Industry = 3.5x • Receivables turnover = 59.1x (6 days); Industry = 24.5x (15 days) • Total asset turnover = 1.9x; Industry = 2.3x • Profitability ratios • Profit margin before taxes = 10.6%; Industry = 2.7% • ROA (profit before taxes / total assets) = 19.9%; Industry = 4.9% • ROE = (profit before taxes / tangible net worth) = 34.6%; Industry = 23.7%

  35. 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

  36. 財務報表分析的限制 會計數字無法反映實際價值 通貨膨脹的影響 標竿選擇的問題 會計方法的選擇影響比較效度 會計數字的品質問題 多角化投資的影響

  37. Work the Web Example • The Internet makes ratio analysis much easier than it has been in the past • Click on the web surfer to go to www.investor.reuters.com • Choose a company and enter its ticker symbol • Click on Ratios and then Financial Condition and see what information is available

  38. 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?

  39. End of Chapter

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