Beruflich Dokumente
Kultur Dokumente
Chapter Objectives
2
statements.
To analyze the financial statements using different
techniques like ratio analysis, common size
statement, DuPont Method.
To learn how to write a report on financial statement
analysis.
1/17/2011
Financial Statements
3
performance.
Types of financial statements:
Balance Sheet
Income Statement
Cash flow Statement
Owners Equity Statement
Value Added Statement
Balance Sheet
4
Balance Sheet is
ABC Company
a financial
Balance Sheet
statement that
As on 31st December, 2005
represents
(Figures in Million Taka)
Assets, Liability Assets
Liability + Owners Equity
and Owners
100 Short term loan
Equity; where Cash + Marketable Securities
Asset items Inventory
220 Accounts payable
must be Accounts Receivables
180 Long term bank loan
balanced with
500 Total liabilities
Liability Total Current Assets
+Owners Fixed Assets
100 Total equity
Equity items. Total Assets
600 Total Share Holders + Equity
50
50
150
250
350
600
1/17/2011
Income Statement
5
Income Statement
is a financial
statement that
represents
income, expenses
and net profit or
loss for a certain
period of time.
ABC Company
Income Statement
For the year ended on 31st Dec, 2005
(Figures in Million Taka)
Sales
1000
800
Gross Profit
200
120
80
Less: Interest
20
Less: Tax
30
Net Income
30
Calculation steps:
Prepare the sources and uses statement
Allocate the source and uses items into Operating, Financial and Investing activities.
Rules for Sources and Uses:
Increase in asset items will decrease cash and vice versa.
Increase in liability items will increase cash and vice versa.
Depreciation is always a source of cash.
Net income is source but net loss is use of cash.
Cash Flow Statement: Allocating sources and uses into
Operating activities: Short term asset and liabilities, and income statement items.
Investing activities: Long run investment in fixed asset and financial assets.
Financing activities: Long run collection of fund and related activities.
1/17/2011
31/12/04
31/12/05
Source
40
15
25
Use
54
Depreciation
50
15
Accounts receivables
160
180
20
Inventory
200
270
70
Increase in accruals
600
680
80
(20)
Accounts payable
15
30
15
Increase in inventory
(70)
Accruals
55
60
34
(80)
Notes payable
35
40
Long-term bonds
255
300
45
130
130
Increase in bonds
45
Net income
54
Dividend payment
(29)
Add: Depreciation
50
104
Dividend payment
29
Totals
104
29
199
21
(25)
40
15
199
O/E Statement is
a financial
statement that
shows the
changes in
owners capital
position
generally in
terms of share
capital, retained
earnings,
reserves and
dividends.
1/17/2011
Valued Added
Statement is
the financial
statement that
represents the
contribution
of the
company to
the economy
or society.
P
Performance analysis.
P
Problem identification.
P
1/17/2011
Ratio Analysis
12
Advantages:
Easy to calculate.
Easy way to understand financial health of the company.
Through comparison, problems can be identified easily.
Disadvantages:
Difficult to interpret the results.
Window Dressing System might affect the result.
Ratios are affected by economic variables.
1/17/2011
Asset
Management
Ratios
Market Ratios
Debt
Management/
Leverage
Ratios
Profitability
Ratios
Liquidity Ratio
14
Popular Ratios
Liquidity Ratio measures the
instant ability of the company
to pay short-term liabilities.
It shows the reserve of shortterm asset to pay for shortterm liabilities.
Current Ratio
Quick Ratio or Acid Test Ratio
Cash Ratio
Internal Measure
NWC to Total Asset Ratio
1/17/2011
Current Ratio
15
Current Ratio measures the reserve of current asset for paying current liability.
Current Ratio =
Current Assets
= 1 .5 x
Current Liabilitie s
Interpretation: Company has total current asset of $1.5 to pay for $1 of current
liabilities.
Decision
Current Ratio; Reserve of Current Asset to pay for Current Liabilities.
Current Ratio; Liquidity but the profitability.
Quick Ratio =
1/17/2011
Cash Ratio
17
Cash Ratio measures the reserve of quickest asset for paying current liability. It
measures the instant liquidity of the company.
Cash Ratio =
Cash + M/S
= .50 x
Current Liabilities
Interpretation: Company has quickest asset, (the most liquid asset) of $0.50 to
pay for $1 of current liabilities.
Decision
Cash Ratio; ability to pay liabilities very instantly.
Cash Ratio; Liquidity but the profitability.
1/17/2011
Cash
Inventory
Cash Conversion
Cycle (CCC)
Popular Ratios
Inventory Turnover Ratio
Inventory Turnover Period
Receivables Turnover Ratio
Receivables Turnover Period
Payables Turnover Ratio
Payables Turnover Period
Cash Conversion Cycle
Fixed Asset Turnover Ratio
Total Asset Turnover Ratio
A/R
ITOR
COGS
Inventory
= 4x
Interpretation: Company can sell total finished goods (inventory) 4 times every year.
Decision
ITOR; efficiency in managing inventory.
ITOR; the reserve of inventory and inventory holding cost.
10
1/17/2011
ITOP
Inventory
COGS
360
= 90 days
RTOR shows, how many times receivables is converted to cash within a year. It
means, how many times A/R is collected to cash?
RTOR =
Annual Sales
= 6x
A/R
Interpretation: Company can collect sell on credit from customers 6 times every year.
Decision
RTOR; efficiency in managing receivables.
RTOR; faster is the collection of cash, liquidity and profitability will go up.
11
1/17/2011
RTOP shows, how many days it takes to convert receivables to cash each time.
This is also called Average Collection Period or Days Sales Outstanding.
RTOP =
Receivables
= 60 days
Annual Sales
360
FATOR shows, how much sales is generated by using per unit of fixed asset? It
measures the efficiency of fixed asset management.
FATOR =
Annual Sales
= 3x
Net Fixed Asset
Decision
FATOR; efficiency in managing fixed asset.
High FATOR shows that fixed assets were properly utilized.
12
1/17/2011
TATOR shows, how much sales is generated by using per unit of total asset? It
measures the efficiency of total investment management.
TATOR =
Annual Sales
= 1.2 x
Total Asset
Popular Ratios
Debt to Asset Ratio
(D/A Ratio)
Long-term Debt to
Asset Ratio
Times Interest Earned
(TIE) Ratio
13
1/17/2011
Debt to Asset Ratio shows the percentage of fund collected from outside debt
sources in the capital structure.
D/A Ratio =
Total Debt
= 50.9%
Total Asset
Lt.D/A Ratio =
14
1/17/2011
TIE Ratio =
EBIT
= 3x
Interest
Interpretation: Company can pay interest twice with the current operating income available.
Decision
TIE Ratio; ability to pay interest.
Company with high TIE ratio can easily get loan. Because bank will check companys TIE
Ratio, whether the company is able to pay the interest in time or not.
Profitability Ratio
30
Popular Ratios
Profit Margin on Sales
Profit + Ability = Profitability
(PMOS)
This ratio measures the Return on Asset (ROA)
ability to earn profit.
(also called ROI)
Return on Equity
(ROE)
15
1/17/2011
PMOS =
Net Income
= 3%
Sales
ROA =
Net Income
= 1.5%
Total Asset
16
1/17/2011
ROE ratio measures the income earned on the fund provided by the owners.
ROE =
Net Income
= 5%
Total Equity
Market/Book ratio
measures the value of
the company in the stock
market in terms of
market share. It
represents the value of
the company to the
owners.
Popular Ratios
Earning Per Share (EPS)
Dividend Per Share (DPS)
Price Earning Ratio (P/E
Ratio)
Market/Book Ratio (M/B
Ratio)
17
1/17/2011
EPS
35
EPS =
Net Income
= $10
No. of Shares Outstanding
DPS
36
DPS =
Dividend
= $5
No. of Common Shares Outstandin g
Decision
DPS; profitability for existing shares.
Earning oriented investors will be attracted to purchase the share.
Secondary market activity will go up and the market as well.
18
1/17/2011
P/E Ratio
37
P/E Ratio =
MPS
= 2x
EPS
Interpretation: Investors are willing to spend $2 for each dollar of earning for the company share.
Decision
P/E; investors willingness to purchase the share.
It measures growth opportunity of the company. Investors will pay more if
the growth opportunity is high.
M/B Ratio
38
M/B ratio measures the comparative market and book value for the company.
M/B Ratio =
MPS
= 2x
Book Value per share
Interpretation: Company market value (image in the market) is 2 times higher than the
value in the book (balance sheet).
Decision
M/B Ratio; market image of the company.
Higher M/B might be successful to generate more investment opportunities for the
company when the market becomes clear about its image and activity.
19
1/17/2011
Du Pont Analysis
39
Du Pont Method
40
ROE
Sales Costs - I T
Current Asset +
Fixed Asset
Net Income
Total Equity
Decompose ROE:
1. Sales, 2. Cost, 3. Interest expense, 4. Tax expense, 5. Current Assets, 6. Fixed assets,
7. Share capital, 8. Retained earnings, 9. Other reserves etc.
20
1/17/2011
How to Prepare:
Common-size Balance Sheet: Divide all the BALANCE SHEET items with Total Asset.
Common-size Income Statement: Divide all the INCOME STATEMENT items with Sales.
Result: Percentage result of all the Balance Sheet and Income Statement items having
Total Asset and Sales 100%.
Implication: Percentage result is always easy to understand and interpret.
Performance can be compared variable wise, company wise and year wise.
2002
Sales
1000
100.0%
1200
100.00%
COGS
800
80.0%
900
75.00%
Gross Profit
200
20.0%
300
25.00%
Operating Expense
130
13.0%
180
15.00%
EBIT
70
7.0%
120
10.00%
Interest
15
1.5%
35
2.92%
EBT
55
5.5%
85
7.08%
Tax
22
2.2%
34
2.83%
Net Income
33
3.3%
51
4.25%
21
1/17/2011
Trend Analysis
43
22
1/17/2011
Trend Graph
45
Sales $
Trend Line
Year
23