Brooks, Raymond. 2010. Financial management : core concepts. 1st ed, The Prentice Hall series in finance. Boston: Prentice Hall. (Chapters 2, 14)
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Fundamentals of financial statement analysis. (Lecture 1) презентация
Содержание
- 1. Fundamentals of financial statement analysis. (Lecture 1)
- 2. LEARNING OBJECTIVES Understand and conduct horizontal analysis
- 3. I. Overview of Financial Statements
- 4. TYPES OF FINANCIAL STATEMENTS Balance Sheet Income
- 5. BALANCE SHEET Assets Liabilities Equity = +
- 6. INCOME STATEMENT (P/L STATEMENT) It is also
- 7. INCOME STATEMENT (P/L STATEMENT) Total Sales
- 8. CASH FLOWS STATEMENT Cash flows from Operations
- 9. STATEMENT OF OWNER’S EQUITY Statement
- 10. Stockholders’ (Owners’) Equity accounts Owners’ investment
- 11. Stockholders’ (Owners’) Equity accounts Increase in
- 12. (1) Increases in stockholders’ equity:
- 13. II. ANALYSIS OF FINANCIAL STATEMENTS
- 14. APPROACHES TOWARDS FINANCIAL ANALYSIS To conduct
- 15. PERFORMANCE ANALYSIS: BUDGETED VS. ACTUAL
- 16. PERFORMANCE ANALYSIS: BUDGETED VS. ACTUAL
- 17. HORIZONTAL (TREND) ANALYSIS Type 1: Percentage changes
- 18. Illustration: Amazon.com, Inc. Step 1 Compute the
- 19. Illustration: Amazon.com, Inc. Comparative Consolidated Statements of Operations—Horizontal Analysis (partial exhibit)
- 20. Illustration: Amazon.com, Inc. Consolidated Balance Sheets—Horizontal Analysis (partial exhibit)
- 21. Illustration Prepare a horizontal analysis of
- 22. HORIZONTAL (TREND) ANALYSIS Type 2: Trend
- 23. HORIZONTAL (TREND) ANALYSIS Type2: Trend Percentages Amazon.com,
- 24. HORIZONTAL (TREND) ANALYSIS Type 3: Used to
- 25. HORIZONTAL (TREND) ANALYSIS Cogswell Cola’s Abbreviated Income Statements ($ in thousands)
- 26. VERTICAL ANALYSIS Shows relationship of a financial-statement
- 27. Illustration: Amazon.com, Inc. Comparative Consolidated Statements of Operations—Vertical Analysis (partial exhibit)
- 28. Illustration: Amazon.com, Inc. Consolidated Balance Sheets—Vertical Analysis (partial exhibit)
- 29. COMMON-SIZE FINANCIAL STATEMENTS Type of vertical analysis
- 30. Calculate the common-size percentages for the following income statement:
- 31. FINANCIAL RATIO ANALYSIS Financial ratios are
- 32. FINANCIAL RATIO ANALYSIS Firm’s performance can be
- 33. PROFITABILITY RATIOS
- 34. NET INCOME AS A % OF SALES (NET PROFIT MARGIN)
- 35. RETURN ON ASSETS (ROA)
- 37. RETURN ON EQUITY (ROE)
- 39. LIQUIDITY RATIOS / SHORT-TERM SOLVENCY RATIOS
- 40. CURRENT RATIO
- 41. QUICK RATIO OR ACID RATIO TEST
- 42. SOLVENCY RATIOS / FINANCIAL LEVERAGE RATIOS
- 43. FINANCIAL LEVERAGE RATIOS In the area of
- 45. ACTIVITY / ASSET MANAGEMENT RATIOS These ratios
- 46. TOTAL ASSETS TURNOVER RATIO / MANAGEMENT EFFICIENCY RATIO
- 47. FIXED ASSET TURNOVER RATIO
- 48. INVENTORY TURNOVER
- 49. INVENTORY TURNOVER A lower inventory turnover
- 50. INVENTORY TURNOVER
- 51. INVENTORY TURNOVER A low turnover is
- 52. RECEIVABLE TURNOVER
- 53. RECEIVABLE TURNOVER Accounts receivable turnover measures the
- 54. Example: Total sales of Company A during
- 55. INVESTMENT VALUATION RATIOS / MARKET VALUE
- 56. EARNINGS PER SHARE
- 57. PRICE PER EARNINGS (P/E) RATIO
- 58. PRICE / EARNING TO GROWTH RATIO (PEG RATIO)
- 59. PRICE / EARNING TO GROWTH RATIO
- 60. MARKET TO BOOK VALUE (PRICE TO BOOK RATIO)
- 61. To be useful, ratios should be analyzed
- 62. THE END
LEARNING OBJECTIVES Understand and conduct horizontal analysis Create, understand, and interpret common-size financial statements. Calculate and interpret financial ratios. Compare different company performances, using financial ratios, historical financial ratio trends, and
Слайд 1LECTURE 1. FUNDAMENTALS OF FINANCIAL STATEMENT ANALYSIS
Olga Uzhegova, DBA
2015
FIN 3121
Principles of Finance
Слайд 2LEARNING OBJECTIVES
Understand and conduct horizontal analysis
Create, understand, and interpret common-size financial
statements.
Calculate and interpret financial ratios.
Compare different company performances, using financial ratios, historical financial ratio trends, and industry ratios.
Calculate and interpret financial ratios.
Compare different company performances, using financial ratios, historical financial ratio trends, and industry ratios.
Слайд 4TYPES OF FINANCIAL STATEMENTS
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Changes
in the Owner’s Equity
Слайд 5BALANCE SHEET
Assets
Liabilities
Equity
=
+
Statement of financial position
Statement of financial Condition
The balance sheet provides
a snapshot of a firm’s
financial position at a particular date.
assets ≡ liabilities + owners’ equity
financial position at a particular date.
assets ≡ liabilities + owners’ equity
Слайд 6INCOME STATEMENT (P/L STATEMENT)
It is also known as Profit/Loss Statement, Operating
Statement, or Statement of Operations
It measures the results of firm’s operation over a specific period.
The bottom line of the income statement shows the firm’s profit or loss for a period.
It measures the results of firm’s operation over a specific period.
The bottom line of the income statement shows the firm’s profit or loss for a period.
Слайд 7INCOME STATEMENT (P/L STATEMENT)
Total Sales / Revenues
Cost of Goods Sold (COGS)
Gross
Profit
Operating Expenses
Operating Income
Other Income/Other expenses
Earnings before Interest and Taxes ( EBIT)
Interest Income / Interest Expenses
Earnings Before Taxes (EBT) or Pre-Tax Income
Taxes
Net Income
Operating Expenses
Operating Income
Other Income/Other expenses
Earnings before Interest and Taxes ( EBIT)
Interest Income / Interest Expenses
Earnings Before Taxes (EBT) or Pre-Tax Income
Taxes
Net Income
-
=
-
=
+/-
=
-
=
+/-
=
Слайд 8CASH FLOWS STATEMENT
Cash flows from Operations
Cash flows from Investments
Cash
flows from Financing
Net change in cash
Cash Flows Statement shows:
how cash was generated, and
how it was used.
Net change in cash
Cash Flows Statement shows:
how cash was generated, and
how it was used.
+
+
=
Слайд 9STATEMENT OF OWNER’S EQUITY
Statement of Changes in the Owner’s Equity
is a financial statement that presents a summary of the changes in owners’ equity accounts over the reporting period. It reconciles the opening balances of equity accounts with their closing balances.
Figures used to compile this statement are derived from previous and current Balance Sheets and from the current Income Statement.
Figures used to compile this statement are derived from previous and current Balance Sheets and from the current Income Statement.
Слайд 10
Stockholders’ (Owners’) Equity accounts
Owners’ investment in the corporation through the ownership
of stock
Owners’ claims to the assets of a corporation
Common Stock
Net income (loss) earned over the company’s lifetime, minus dividends
Retained Earnings
Dividends
Distribution to stockholders
Слайд 11
Stockholders’ (Owners’) Equity accounts
Increase in stockholders’ equity from delivering goods or
services to customers (revenues are embedded in Balance sheet through Retained earnings and classified as Income statement accounts)
Owners’ claims to the assets of a corporation
Revenues
Expenses
Decrease in stockholders’ equity due to the cost of operating the business (expenses are embedded in Balance sheet through Retained earnings and classified as Income statement accounts)
Слайд 12
(1) Increases in stockholders’ equity: Sale of stock and net
income (revenue greater than expenses).
(2) Decreases in stockholders’ equity: Dividends and net loss (expenses greater than revenue).
(2) Decreases in stockholders’ equity: Dividends and net loss (expenses greater than revenue).
Слайд 14APPROACHES TOWARDS FINANCIAL ANALYSIS
To conduct financial analysis it is possible
to
Compare actual with budgeted values
Compare a firm’s current performance against that of its own performance (and/or of the performance of other companies in the industry) over a certain time period by looking at the growth (decline) rate in various key items such as sales, costs, and profits (trend analysis). Once trends are established, future performance could be predicted.
Recast the income statement and the balance sheet into common-size statements by expressing each income statement item as a percent of sales and each balance sheet item as a percent of total assets.
Conduct ratio analysis. This allows for more in-depth diagnosis through individual item analyses and comparisons
Setting up a standard of comparison is a benchmarking.
Compare actual with budgeted values
Compare a firm’s current performance against that of its own performance (and/or of the performance of other companies in the industry) over a certain time period by looking at the growth (decline) rate in various key items such as sales, costs, and profits (trend analysis). Once trends are established, future performance could be predicted.
Recast the income statement and the balance sheet into common-size statements by expressing each income statement item as a percent of sales and each balance sheet item as a percent of total assets.
Conduct ratio analysis. This allows for more in-depth diagnosis through individual item analyses and comparisons
Setting up a standard of comparison is a benchmarking.
Слайд 17HORIZONTAL (TREND) ANALYSIS
Type 1: Percentage changes from year-to-year
Two steps:
Compute dollar (or
any currency) amount of change from one period to the next
Divide dollar (or any currency) amount of change by base-period amount
Divide dollar (or any currency) amount of change by base-period amount
Слайд 18Illustration: Amazon.com, Inc.
Step 1 Compute the dollar amount of change from
2011 to 2012
Step 2 Percentage change for the period
Amazon.com’s net sales (in millions) increased by 27.1% during 2012, computed as follows:
Слайд 19Illustration: Amazon.com, Inc.
Comparative Consolidated Statements of Operations—Horizontal Analysis (partial exhibit)
Слайд 20Illustration: Amazon.com, Inc.
Consolidated Balance Sheets—Horizontal Analysis (partial exhibit)
Слайд 21
Illustration
Prepare a horizontal analysis of the comparative income statements of Ama
Music Co.
Слайд 22HORIZONTAL (TREND) ANALYSIS
Type 2: Trend Percentages
Base year selected and set equal
to 100%
Amount of each following year stated as a percent of base
Amount of each following year stated as a percent of base
Слайд 23HORIZONTAL (TREND) ANALYSIS
Type2: Trend Percentages
Amazon.com, Inc., showed income from operations as
follows:
Trend percentages are computed by dividing each successive year’s amount by the 2008 amount
Слайд 24HORIZONTAL (TREND) ANALYSIS
Type 3: Used to find an average growth (declining)
rate and to find an expected value of an account
Слайд 26VERTICAL ANALYSIS
Shows relationship of a financial-statement item to its base
Income statement,
base is total revenue
Balance sheet, base is total assets
Balance sheet, base is total assets
Слайд 27Illustration: Amazon.com, Inc.
Comparative Consolidated Statements of Operations—Vertical Analysis (partial exhibit)
Слайд 28Illustration: Amazon.com, Inc.
Consolidated Balance Sheets—Vertical Analysis (partial exhibit)
Слайд 29COMMON-SIZE FINANCIAL STATEMENTS
Type of vertical analysis
Report only percentages (no dollar
amounts)
Assists in the comparison of different companies
Expresses financial results in terms of a common denominator
Assists in the comparison of different companies
Expresses financial results in terms of a common denominator
Слайд 31FINANCIAL RATIO ANALYSIS
Financial ratios are relationships between different accounts from
financial statements (due to this they are relative values)
Financial ratios allow for meaningful comparisons across time, between competitors, and with industry averages.
Financial ratios allow for meaningful comparisons across time, between competitors, and with industry averages.
Слайд 32FINANCIAL RATIO ANALYSIS
Firm’s performance can be analyzed by using five key
sets of financial ratios:
Profitability ratios: How well has the company performed overall?
Liquidity ratios: Can the company meet its obligations over the short term?
Solvency ratios (also known as financial leverage ratios): Can the company meet its obligations over the long term?
Activity ratios are designed to show how effectively a company employs the resources
Investment Valuation Ratios / Market value ratios: How does the market (investors) view the company’s financial prospects?
Profitability ratios: How well has the company performed overall?
Liquidity ratios: Can the company meet its obligations over the short term?
Solvency ratios (also known as financial leverage ratios): Can the company meet its obligations over the long term?
Activity ratios are designed to show how effectively a company employs the resources
Investment Valuation Ratios / Market value ratios: How does the market (investors) view the company’s financial prospects?
Слайд 43FINANCIAL LEVERAGE RATIOS
In the area of financial leverage, Company A is
in a much better position than Company B, since it has relatively less debt and a significantly greater ability to cover its interest obligations by using either its EBIT (times interest earned ratio) or its net cash flow (cash coverage ratio).
Слайд 45ACTIVITY / ASSET MANAGEMENT RATIOS
These ratios measure how efficiently a firm
is using its assets to generate revenues or how much cash is being tied up in other assets such as receivables and inventory.
Total Assets Turnover Ratio
Fixed Asset Turnover Ratio
Inventory Turnover
Account Receivable Turnover
Total Assets Turnover Ratio
Fixed Asset Turnover Ratio
Inventory Turnover
Account Receivable Turnover
Слайд 49INVENTORY TURNOVER
A lower inventory turnover ratio may be an indication
of over-stocking which may pose risk of obsolescence and increased inventory holding costs.
A very high value of this ratio may be accompanied by loss of sales due to inventory shortage.
Inventory turnover is different for different industries. Businesses which trade perishable goods have very higher turnover compared to those dealing in durables. Hence a comparison would only be fair if made between businesses of same industry.
A very high value of this ratio may be accompanied by loss of sales due to inventory shortage.
Inventory turnover is different for different industries. Businesses which trade perishable goods have very higher turnover compared to those dealing in durables. Hence a comparison would only be fair if made between businesses of same industry.
Слайд 51INVENTORY TURNOVER
A low turnover is usually a bad sign because
products tend to deteriorate as they sit in a warehouse.
Companies selling perishable items have very high turnover.
For more accurate inventory turnover figures due to fluctuation in the level of inventory throughout the year, the average inventory figure [(beginning inventory + ending inventory)/2] is used when computing inventory turnover. Average inventory accounts for any seasonality effects on the ratio.
Companies selling perishable items have very high turnover.
For more accurate inventory turnover figures due to fluctuation in the level of inventory throughout the year, the average inventory figure [(beginning inventory + ending inventory)/2] is used when computing inventory turnover. Average inventory accounts for any seasonality effects on the ratio.
Слайд 53RECEIVABLE TURNOVER
Accounts receivable turnover measures the efficiency of a business in
collecting its credit sales. Generally a high value of accounts receivable turnover is favorable and lower figure may indicate inefficiency in collecting outstanding sales. Increase in accounts receivable turnover overtime generally indicates improvement in the process of cash collection on credit sales.
However, a normal level of receivables turnover is different for different industries. Also, very high values of this ratio may not be favourable, if achieved by extremely strict credit terms since such policies may repel potential buyers.
However, a normal level of receivables turnover is different for different industries. Also, very high values of this ratio may not be favourable, if achieved by extremely strict credit terms since such policies may repel potential buyers.
Слайд 54Example: Total sales of Company A during the year ended December
31, 2013 were $984,000. Customers returned goods invoiced at $31,400 during the year. Average accounts receivable during the period were $23,880. Calculate accounts receivable turnover ratio and explain it.
Solution Net Sales = $984,000 − $31,400 = $952,600 Receivables Turnover = $952,600 ÷ $23,880 ≈ 39.89 times
365/39,89 ≈ 9 days is required to collect all receivables
Solution Net Sales = $984,000 − $31,400 = $952,600 Receivables Turnover = $952,600 ÷ $23,880 ≈ 39.89 times
365/39,89 ≈ 9 days is required to collect all receivables
RECEIVABLE TURNOVER
Слайд 55INVESTMENT VALUATION RATIOS /
MARKET VALUE RATIOS
Investment valuation ratios are
used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation.
Key ratios are:
Earning per Share
Price to Earnings Ratio (P/E Ratio)
Price / Earning to Growth Ratio (PEG Ratio)
Market to Book value (Price to Book Ratio)
Typically, if a firm has a high price-to-earnings and a high market-to-book value ratio, it is an indication that investors have a good perception about the firm’s performance.
However, if these ratios are very high, it could also mean that a firm is overvalued.
Key ratios are:
Earning per Share
Price to Earnings Ratio (P/E Ratio)
Price / Earning to Growth Ratio (PEG Ratio)
Market to Book value (Price to Book Ratio)
Typically, if a firm has a high price-to-earnings and a high market-to-book value ratio, it is an indication that investors have a good perception about the firm’s performance.
However, if these ratios are very high, it could also mean that a firm is overvalued.
Слайд 59PRICE / EARNING TO GROWTH RATIO
(PEG RATIO)
Example: Company A is
currently trading with a P/E ratio of 30. Typically, this would be considered an "expensive" stock.
Assume that an expected growth in earnings per share of +40% for the next year.
In this case, Company A’s PEG ratio would be:
PEG Ratio = 30 / +40% = 0.75
A rule of thumb is that any PEG ratio below 1.0 is considered to be a good value. So even though XYZ is highly valued based on the P/E ratio, the PEG ratio says that it is undervalued relative to its growth potential.
Assume that an expected growth in earnings per share of +40% for the next year.
In this case, Company A’s PEG ratio would be:
PEG Ratio = 30 / +40% = 0.75
A rule of thumb is that any PEG ratio below 1.0 is considered to be a good value. So even though XYZ is highly valued based on the P/E ratio, the PEG ratio says that it is undervalued relative to its growth potential.
Слайд 61To be useful, ratios should be analyzed over a period of
years to consider all relevant factors
Any one year, or even any two years, may not represent the company’s performance over the long term
Any one year, or even any two years, may not represent the company’s performance over the long term
Limitations of Ratio Analysis
