Beruflich Dokumente
Kultur Dokumente
Analysis
Chapter 3
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Users of Financial Information
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The Orientation of Financial
Analysis
Accounting is concerned with creating
financial statements
Finance is concerned with using the data
contained within financial statements to
make decisions
The orientation of financial analysis is critical
and investigative
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The Statement of Cash Flows
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How the Statement of Cash Flows
WorksPreliminary Examples
Requires two consecutive balance sheets
and one income statement from which
the statement of cash flows is generated
Takes net income for the period and
makes adjustments
Then takes the balance sheet items and
examines the changes
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Business Cash Flows
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Business Cash Flows
Standard Presentation
Statement of Cash Flows organized to show
Operating activities
Running business on day-to-day basis
Investing activities
When firm buys or sells things to do business
Includes long-term purchases and sales of financial
assets
Financing activities
When firm borrows money, pays off loans, sells stock or
pays dividends
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Constructing the Statement of
Cash Flows
Belfry Company Belfry Company
Balance Sheet Income Statement
For the period ended 12/31/X2 For the period ended 12/31/X2
Assets Sales $ 10,000
12/31/X1 12/31/X2 COGS $ 6,000
Cash 1,000 1,400 Gross margin $ 4,000
Accounts receivable 3,000 2,900
Inventory 2,000 3,200 Expense $ 1,600
CURRENT ASSETS 6,000 7,500 Depreciation $ 500
Fixed assets EBIT $ 1,900
Gross 4,000 6,000 Interest $ 400
Accumulated deprec. (1,000) (1,500) EBT $ 1,500
Net 3,000 4,500 Tax $ 500
TOTAL ASSETS 9,000 12,000 Net Income $ 1,000
Liabilities
Accounts payable 1,500 2,100
Accruals 500 400 Also assume firm paid
CURRENT LIABILITIES
Long-term debt
2,000
5,000
2,500
6,200
a $500 dividend and
Equity
TOTAL CAPITAL
2,000
7,000
3,300
9,500
sold stock for $800
TOTAL LIABILITIES AND EQUITY 9,000 12,000
during the year.
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Constructing the Statement of
Cash Flows
Operating Activities
Involve the Income Statement and current
Balance Sheet accounts
Involves activities firm does on a day-to-day
basis such as
Buying inventory Focus of activities
is generating net
Producing and selling product incomethe
Paying expenses and taxes beginning of a
cash flow
Collecting credit sales statement.
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Constructing the Statement of
Cash Flows
Investing Activities
Typically include purchasing Fixed Assets
Examine the change in GROSS Fixed Assets, not
net
Because the net value includes an adjustment for
depreciation
Depreciation has already been included under operating
activities
Thus, for Belfry the cash from investing activities is
Purchase of Fixed Assets ($2,000)
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Constructing the Statement of
Cash Flows
Financing Activities
Deal with the capital accounts, long-term
debt and equity
Thus, for Belfry the cash from financing
activities is
Increase in long-term debt $1,200
Sale of stock $800
Dividend paid ($500)
Cash from financing activities $1,500
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Constructing the Statement of
Cash Flows
The Equity and Cash Accounts
The change in equity is not included because the
changes are reflected elsewhere in the Statement of
Cash Flows
Net Income is included in Cash Flows from Operations
Sale of stock and dividends are considered under financing
activities
The change in the cash account isnt considered
because the sum of cash flows from operations,
financing activities and investing activities must
equal the change in the cash account
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Constructing the Statement of
Cash Flows
Thus, for Belfry, the final portion of the
Statement is
Beginning Cash Balance $1,000
Net cash flow 400
Ending Cash Balance $1,400
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Constructing the Statement of
Cash Flows
Belfry Company
Statement of Cash Flows
For the period ended 12/31/X2
CASH FROM OPERATING ACTIVITIES
Net income $ 1,000
Depreciation $ 500
Net changes in current accounts $ (600)
Cash from operating activities $ 900
CASH FROM INVESTING ACTIVITIES
Purchase of fixed assets $ (2,000) While the firm was
CASH FROM FINANCING ACTIVITIES profitable, it still had to
Increase in long-term debt $ 1,200
borrow money and sell
Sale of stock $ 800
Dividend paid $ (500) stock to finance the
Cash from financing activities $ 1,500 increase in Fixed Assets.
NET CASH FLOW $ 400
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Ratio Analysis
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Comparisons
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Common Size Statements
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Ratios
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Ratios
Categories of Ratios
Liquidityindicate firms ability to pay its bills in the
short run
Asset Managementshow how the company uses
its resources to generate revenue, profit and to
avoid cost
Debt Managementshow how effectively the firm
has used borrowed funds and whether or not it has
a high amount of leverage
Profitabilityallow assessment of the companys
ability to make money
Market Valuegive an indication of how investors
feel about the companys financial future 23
Liquidity Ratios
Current Ratio
Current Assets
Current Ratio
Current Liabilities
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Liquidity Ratios
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Asset Management Ratios
Inventory Turnover
cost of goods sold
Inventory Turnover
inventory
Gives an indication of the quality of inventory
as well as how it is managed
Measures how many times a year the firm
uses up an average stock of goods
A higher turnover implies doing business
with less tied up in inventory
Should use average inventory balance
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Asset Management Ratios
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Asset Management Ratios
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Debt Management Ratios
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Debt Management Ratios
Debt-to-equity ratio
Can be stated several ways (as a
percentage, or as a x:y value)
Debt-to-Equity LT debt : Common Equity
or
LT Debt
Debt-to-Equity
Common Equity
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Debt Management Ratios
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Debt Management Ratios
Cash Coverage
EBIT depreciation
Cash coverage
Interest Expense
TIE ratio has problems
Interest is a cash payment but EBIT is not exactly
a source of cash
By adding depreciation back into the numerator
we have a more representative measure of cash
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Debt Management Ratios
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Profitability Ratios
Return on Assets
Net Income
ROA
Total Assets
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Profitability Ratios
Return on Equity
Net Income
ROE
Stockholders' Equity
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Du Pont Equations
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Du Pont Equations
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Sources of Comparative
Information
Generally compare a firm to an industry
average
Dun and Bradstreet publishes Industry Norms and
Key Business Ratios
Robert Morris Associates publishes Statement
Studies
U.S. Commerce Department publishes Quarterly
Financial Report
Value Line provides industry profiles and individual
company reports
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Limitations/Weaknesses of Ratio
Analysis
Ratio analysis is not an exact science and
requires judgment and experienced
interpretation
Examples of significant problems
Diversified companiesbecause the interpretation of ratios
is dependent upon industry norms, comparing
conglomerates can be problematic
Window dressingcompanies attempt to make balance
sheet items look better than they would otherwise through
improvements that dont last
Accounting principles differsimilar companies may report
the same thing differently, making their financial results
artificially dissimilar
Inflation may distort numbers
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