financial analysis and forecasting chapter01
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ppt slideshow financial analysis and forecasting chapter01TRANSCRIPT
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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Financial Statement
Analysis
K R SubramanyamJohn J Wild
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1CHAPTER
Overview of Financial Statement Analysis
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Business Analysis
Evaluate Prospects Evaluate Risks
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Information Sources for Business Analysis
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Credit Analysis
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Credit Analysis
Liquidity Ability to meet short-term obligations. Focus: • Current cash flows• Make up of current assets and liabilities• Liquidity of assets
SolvencyAbility to meet long-term obligations Focus:• Long-term profitability• Capital structure
Credit worthiness: Ability to honor credit obligations(downside risk)
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Equity Analysis
Technical analysis / Charting
• Patterns in price or volume history of a stock
• Predict future price movements
Fundamental Analysis Determine Intrinsic value
without reference to price
• Analyze and interpret key factors
– Economy– Industry– Company
Assessment of risk and potential
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Dynamics of Business ActivitiesBusiness Activities Time
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Business Activities
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Business Activities
Financing
Financing activities
• Owner (equity)
• Nonowner (liabilities)
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Investing activities
• Buying resources
• Selling resources
Investing = Financing
Business Activities
FinancingInvesting
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Operating ActivitiesRevenues and expenses from providing
goods and services
Business Activities
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Financial Statements Reflect Business Activities
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Financial Statements
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Balance Sheet
Total Investing = Total Financing = Creditor Financing + Owner Financing
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Income Statement
Revenues – Cost of goods sold = Gross ProfitGross profit – Operating expenses = Operating Profit
Colgate’s Profitability(in $billions)
$12.238 - $5.536 = $6.701 Gross Profit
$6.701 - $4.5411 = $2.160 Operating profit
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Statement of Cash Flows
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Additional Information(Beyond Financial Statements)
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Analysis Preview
Purpose:Evaluation of consecutive financial statements
Output : Direction, speed, & extent of any trend(s)
Types: Year-to-year Change Analysis Index-Number Trend Analysis
Comparative AnalysisYr2Yr1 Yr3
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Analysis Preview1-25
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Analysis Preview
Purpose : Evaluation of internal makeup of financial statements Evaluation of financial statement accounts across companies
Output: Proportionate size of assets, liabilities, equity, revenues, & expenses
Common-Size Analysis
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Analysis Preview
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Analysis Preview
Purpose : Evaluate relation between two or more economically important items (one starting point for further analysis)
Output: Mathematical expression of relation between two or more items
Cautions: Prior Accounting analysis is important Interpretation is key - long v/s short term & benchmarking.
Ratio Analysis
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Ratios Categories
1- Liquidity.2- Capital structure and Solvency.3- Return on investment.4- Operating Performance.5- Assets utilization.6- Market measures
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Ratios1- Liquidity. - Current Ratio. - Acid Test Ratio - Collection Period - Days to sell inventory.2- Capital Structure and Solvency - Total Debt to equity. - Long term debt to Equity. - Time interest Earned.
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Ratios Categories
3- Return on investment. - Return on Assets. - Return on common Equity.4- Operating Performance. - Gross profit Margin. - Operating Profit margin. - Net Profit margin.
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Ratios Categories
5- Assets utilization.- Cash turnover,- Account receivable turnover.- Inventory turnover.- Working Capital Turnover.- PPE turnover.- Total assets Turnover.
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Ratios Categories
6- Market measures - Price to Earnings. - Earning Yield. - Dividend Yield. - Dividend Payout Ratio. - Price to book
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Analysis Preview
Purpose: Estimate intrinsic value of a company (or stock)
Basis: Present value theory (time value of money)
ValuationValuation - an important goal of many types of business analysis
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Analysis Preview
Debt (Bond) Valuation
Bt is the value of the bond at time tIt +n is the interest payment in period t+nF is the principal payment (usually the debt’s face value)r is the investor’s required interest rate (yield to maturity)
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Analysis Preview
Equity Valuation
Vt is the value of an equity security at time tDt +n is the dividend in period t+nk is the cost of capitalE refers to expected dividends
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Analysis Preview Equity Valuation - Free Cash Flow to Equity
Model
FCFt+n is the free cash flow in the period t + n [often defined as cash flow from operations less capital expenditures]k is the cost of capitalE refers to an expectation
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Analysis PreviewEquity Valuation - Residual Income Model
BVt is the book value at the end of period tRit+n is the residual income in period t + n [defined as
net income, NI, minus a charge on beginning book value, BV, or RIt = NIt - (k x BVt-1)]
k is the cost of capital E refers to an expectation