ch. 8
DESCRIPTION
TRANSCRIPT
- 1. Analysis of Financial Statements Chapter 8
2. Financial Statement Analysis
- Involves
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- Comparing firms performance with others in same industry
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- Evaluating trends in the firms financial position over-time
- Managers want to estimate effect of actions
- Accounting
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- Keeps score
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- Does not address stock price impact
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- INTERPRET not make
3. Ratio Analysis
- Standardize numbers
- Facilitate comparison
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- different sizes
- Highlight (red flag)
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- strengths
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- weaknesses
- Anticipate future
- Planning starting point
4. Ratio Analysis
- Consider
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- What aspects are we analyzing?
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- What goes into a particular ratio?
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- What is unit of measure?
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- What is the benchmark?
5. Ratio Categories and Purposes
- Liquidity
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- Can we make required payments?
- Asset management
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- Right amount for sales
- Debt management
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- Right mix of debt and equity
- Profitability
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- How efficiently firms uses assets and manages operations
- Market value
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- Investor beliefs
6. Ratio Example: BUD
- Liquidity
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- Current Ratio Current Assets/Current Liabilities = ?
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- Quick Ratio (CA - Inv)/CL = ?
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- Consider together
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- Why inventory?
7. Ratio Example: BUD
- Asset Management
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- Inventory Turnover Sales/Inventories =?
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- Days Sales Outstanding Receivables/Avg. Sales Per Day= Receivables/(Sales/360)= ?
8. Ratio Example: BUD
- Others
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- Fixed Assets Turnover Ratio
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- Sales/Net Fixed Assets
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- Total Assets Turnover Ratio
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- Sales/Total Assets
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- Which one is best?
9. Ratio Example: BUD
- Debt Management
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- Financial leverage
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- If firms earns more on investments financed thru debt than it pays in interest, the return on capital is magnified or leveraged
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- Balance higher expected returns and risk
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- Debt Ratio Total Debt/Total Assets = ?
10. Ratio Example: BUD
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- Times Interest Earned EBIT/Int. Exp. = ?
- Profitability
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- Profit Margin on Sales
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- Net income available for common/Sales
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- Basic Earning Power
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- EBIT/Total Assets
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11. Ratio Example: BUD
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- Return on Assets Net Income/Total Assets = ?
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- Return on Equity Net Income/Common Equity= ?
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- Common -- but problems?
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- Debt?
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- Int exp lowers NI, so ROA decreases
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- Debt also lowers equity, but if equity lowered more than NI, ROE increases
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12. More on profitability ratios
- Example: If firm improves ROE does EVA improve?
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- Correlated but
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- ROE ignores risk
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- ROE does not consider amount of invested capital
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- ROE goals can lead managers to do the wrong thing
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- Need to combine projects return with risk and size to determine effect on s/h wealth
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- ROE just return
13. Ratio Example: BUD
- Market Value Ratios
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- Price/Earnings Ratio (P/E) Price Per Share/Earnings Per Share
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- High or low?
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- How comparable?
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- Market-to-Book Ratio Market Price Per Share/Book Value Per Share where BVPS = Common Equity/Shares Outstanding
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- Proxy for growth
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14. Ratio Example: BUD
- What do we mean by book value?
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- Book Value = Money that has been paid in to the firm by stockholders or retained by the firm
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- Market Valueis the present value of all of the cash flows that are expected to accrue to the shareholders into the future
- Why does BV not equal MV?
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- BV is the amount of capital that has been paid in over time (historical figure--backward looking)
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- MV is the present value of all of the expected future cash flows (forward looking)
15. Effect of Changes
- What happens if DSO reduced to 18 days?
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- When 23.2 days
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- Receivables = Averages Sales Per Day x DSO
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- Average Sales Per Day = 30.739
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- Receivables= 713.14
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- When 18 days
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- Average Sales Per Day = 30.739
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- Receivables =553.30
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16. Effect of Changes
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- Cash!!!!
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- What can we do with it?
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- Repurchase stock
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- Higher ROE and EPS
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- Expand
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- Higher profits
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- Reduce debt
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- Better debt ratio, lower interest expense, higher net income
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- Impact on stock price?
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17. DuPont System
- Shows how ROE is affected by
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- ________ efficiency (profit margin)
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- ________ efficiency (turnover)
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- Financial _______ (equity multiplier)
- Decompose ROE
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- ROE = Net Income/Common Equity = Net Income/Common Equity x Total Assets/Total Assets = Net Income/Total Assets x Total Assets/Total Equity = ROA x Equity Multiplier
18. DuPont System
- Decompose ROA
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- ROA = Net Income/Total Assets = Net Income/Total Assets x Sales/Sales = Net Income/Sales x Sales/Total Assets = Profit Margin x Total Asset Turnover
- DuPont Identity
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- ROE = Profit Margin x Total Asset Turnover x Equity Multiplier
19. Ratio Analysis
- Who uses?
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- Internal
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- Creditors
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- Potential investors/analysts
- Must have benchmark
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- Time series
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- Peer group
20. Ratio Analysis
- Problems
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- Defining peers/benchmarks
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- Average performance is not necessarily good
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- Conglomerates
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- Accounting practices
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- Historical data
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- Seasonal variation/one-time events
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- Window dressing
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- Mixed signals
21. Times Series for Anheuser-Busch
- Ratio definitions from Compustat PC Plus
- Examine/compare/look for trends
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- Liquidity
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- Turnover
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- Profitability
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- Leverage
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- Market
22. Times Series for Anheuser-Busch Ratio Category: _____________ Strengths Weaknesses Interesting 23. Cross-Sectional Analysis
- Peer group
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- Strengths?
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- Weaknesses?
- Compare
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- Liquidity
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- Turnover
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- Profitability
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- Leverage
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- Market
24. Cross-Sectional Analysis Ratio Category: _____________ Strengths Weaknesses Interesting 25. Common Size Statements
- For balance sheet
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- LHS: divide all items by total assets
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- RHS: divide all items by total liabilities and equity
- For income statement
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- Divide all items by sales
- For percentage change analysis
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- Find percentage change from first year
26. Financial Statement Analysis
- Would you invest in one or more of them?
- Would you loan to them?
- What should Petes do differently?
27. Market Efficiency and Financial Statement Analysis
- What does Efficient Market Hypothesis imply regarding the validity of financial statement analysis?
- Does ratio analysis provide any value?
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- From beginning
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- Standardize numbers?
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- Facilitate comparison?
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- Highlight strengths and weaknesses?
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- Anticipate future?
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- Planning starting point?
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