Financial Analytics

& Management (FAM)

Introduction to Financial Statements

Part I. Understanding information in accounting & financial statements

Part II. Measuring and managing strategic & financial performance

Prof. Dr. Dennis Vink

Full Professor of Finance and Investment
Nyenrode Business Universiteit
Center for Finance
and
Visiting Professor of Finance
Stellenbosch Business School and
Technical University of Denmark

Leadership • Entrepreneurship • Stewardship

info@nyenrode.nl +31 (0)346-291 291 www.nyenrode.nl

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Introduction
• Over 15 years experience in financial management with a focus on
strategic financial management. I have worked with (senior)
executives of several Fortune 500 companies and small medium
sized enterprises, including (top) lawyer firms.

• Advisor Department of Infrastructure (Dutch Government).

• Head of the finance unit, member academic board

• Published in European top finance journals, and for Yale

International Center for Finance (USA) and for EDHEC Business
School/Risk Institute (France) and Princeton Department of
Economics (USA).
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Learning objectives, a management

perspective on….
1) Understanding information in accounting & financial statements:
 Reading and interpreting a balance sheet
 Reading and interpreting a profit & loss statement

2) Measuring and managing strategic & financial performance:

 Being able to select the key financial drivers
 Being able to understand the fundamentals of financial control

3) Building and assessing the financials of a (complex) business case:

 Being able to understand financial risk
 Being able to communicate financial information
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Understanding information in accounting &

financial statements

1. Balance Sheet

2. Profit & Loss Statement (Income Statement)

3. Introduction of Financial Statements by a “Quiz”

 BALANCE SHEET
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Example balance sheet – assets & liabilities

t t-1 t t-1
 BALANCE SHEET
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Major divisions:

> Assets
> Current assets (less than a year)
> Long-term assets (longer than a year)

> Liabilities and Stockholder’s Equity

> Current liabilities
> Long-term liabilities
> Stockholders’ Equity
 BALANCE SHEET
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Example balance sheet - assets (LHS)

t t-1
 BALANCE SHEET
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> Current assets: cash or expected to be turned into

cash within a year
> Cash
> Marketable securities
> Accounts receivable
> Inventories
> Other current assets
 BALANCE SHEET
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> Long-term assets

> Net property, plant, & equipment
> Book value
> Depreciation

> Goodwill
> Impairment

> Other long-term assets

 BALANCE SHEET
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Example balance sheet – liabilities (RHS)

t t-1
 BALANCE SHEET
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Balance sheet - liabilities

> Current liabilities: due to be paid within a year
> Accounts payable
> Notes payable/short-term debt
> Current maturities of long-term debt
> Other current liabilities
> Taxes payable
> Wages payable

> Long-term liabilities

> Long-term debt
> Capital leases
> Deferred taxes
 BALANCE SHEET
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Balance sheet - liabilities (cont'd)

Equity

> Book value of equity

> Book value of assets minus book value of liabilities
> Could possibly be negative

> Market value of equity (market capitalization)

> Market price per share X number of shares outstanding
> Cannot be negative
 BALANCE SHEET
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Market versus book value of equity

 BALANCE SHEET
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Market versus book value of equity, answer..

 BALANCE SHEET
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Another example on market value equity

> Rylan Enterprises has 5 million shares outstanding.
> The market price per share is $22.
> The firm’s book value of equity is $50 million.
> What is Rylan’s market capitalization?
> How does the market capitalization compare to Rylan’s book
value of equity?
 BALANCE SHEET
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Another example, answer..

Solution
> Rylan’s market capitalization is $110 million.
> 5 million shares × $22 share = $110 million.
> The market capitalization is significantly higher than Rylan’s
book value of equity of $50 million.
 BALANCE SHEET
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Balance sheet (some common ratio’s)

Balance sheet analysis:

> Debt-equity ratio

> Measures a firm’s leverage = total debt / total equity

> Market-to-book ratio = market capitalization / book value equity

> Current ratio = current assets / current liabilities

 BALANCE SHEET
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Example on enterprise value

 BALANCE SHEET
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Example on enterprise value, answer…

 INCOME STATEMENT
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The profit & loss statement

Summarizes the profitability of a company during a time period.
Major divisions:
> Sales minus cost of sales
= Gross margin
> minus general administrative and selling expenses
= Operating income or EBIT
> minus interest expense, plus interest income
= Taxable income
> minus taxes
> = Net profit (or net income)
 INCOME STATEMENT
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Example of profit & loss statement

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Quiz 1. Fundamentals of Financial Statements

At the end of the year an accountant has to fabricate

a balance sheet and an income statement for a mid-
sized oil shipping company named “Oil”. He has
asked you to help out. Question: make the profit &
loss and accounting balance sheet for Oil using only
the items on the next page. All items are after
allocation of net profit.
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Quiz 1. Fundamentals of Financial Statements

Cost of sales 500

Long term assets 600
Short term assets 200
Sales 2.000
Salary expenses 250
Debt (interest paying) 500
Depreciation 200
Interest expenses 40
Tax @ 50% 505
Stockholders' equity 300
 FINANCIAL STATEMENT ANALYSIS
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Quiz 2a. Financial Statement Analysis

On behalf of an external rational investor you assess the financials of an anonymised
company. Formulate your judgment based on the company’s financial statements and use
methods of ratio analyses (use the accounting balance sheets and profit & loss statements
of the anonymised company on the next two slides). Additional information: the market-to-
book ratio of this company is 1.7 on January 1 2000.

Present the results of your evaluation in bullet points on a flip-over and give the company a
grade between 0 and 10.0. Grade 0 suggests a very poor financial performance and a 10
suggests an excellent financial performance. Do the same for assessing the financial
health. The results will be evaluated in class where you will be given constructive feedback.

• …
• …
• …
• … YOUR GRADE HERE
• …
 FINANCIAL STATEMENT ANALYSIS
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Case 1 - Accounting balance sheets anonymised company

Consolidated Accounting Balance Sheets

x $1,000 1993 1994 1995 1996 1997 1998 1999

Current assets
Operating cash 1.470 2.078 3.541 3.610 4.732 2.511 2.526
Other current operational assets 27.669 31.146 32.657 32.009 32.762 57.198 62.087
Total current assets 29.139 33.224 36.198 35.619 37.494 59.709 64.613

Property, plant and equipment, net 40.262 57.981 59.600 65.104 62.724 63.451 56.557
Other operating assets, net 1.725 2.391 2.411 2.448 2.606 3.438 6.498

71.126 93.596 98.209 103.171 102.824 126.598 127.668

Current Liabilities
Accounts payable and accrued expenses (non-interest) 12.068 13.915 16.592 17.398 23.266 28.662 38.915
Obligations under capital leases (non-interest) 1.014 553 448 660 5.402 5.266 5.627
Total current liabilities 13.082 14.468 17.040 18.058 28.668 33.928 44.542

Long term debt (interest paying) 18.002 32.419 31.977 31.087 25.676 20.491 16.669

Total stockholders equity 40.042 46.709 49.192 54.026 48.480 72.179 66.457

71.126 93.596 98.209 103.171 102.824 126.598 127.668

 FINANCIAL STATEMENT ANALYSIS
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Case 1 - Profit & loss statements anonymised company

Consolidated Financial Statements of Operations
x $1,000 1993 1994 1995 1996 1997 1998 1999

Net sales 140.328100% 148.802100% 155.333100% 167.155100% 174.206100% 209.203100% 237.043100%

Cost of sales 100.210 71% 109.760 74% 109.125 70% 115.212 69% 114.284 66% 136.225 65% 145.291 61%
Gross profit 40.118 29% 39.042 26% 46.208 30% 51.943 31% 59.922 34% 72.978 35% 91.752 39%

Depreciation 0 0% 3.832 3% 5.578 4% 6.650 4% 7.444 4% 7.900 4% 7.900 3%

Selling, general and administrative expenses 28.270 20% 32.421 22% 30.784 20% 38.881 23% 46.076 26% 55.995 27% 70.723 30%
Total expense 28.270 20% 36.253 24% 36.362 23% 45.531 27% 53.520 31% 63.895 31% 78.623 33%

Income before interest and taxes 11.848 8% 2.789 2% 9.846 6% 6.412 4% 6.402 4% 9.083 4% 13.129 6%

Interest income 757 1% 1.034 1% 1.681 1% 1.676 1% 1.938 1% 2.248 1% 0 0%

Interest expense -104 0% -295 0% -1.525 -1% -1.996 -1% -1.992 -1% -1.888 -1% -681 0%
Income before taxes 12.501 9% 3.528 2% 10.002 6% 6.092 4% 6.348 4% 9.443 5% 12.448 5%

Income taxes -4.844 -3% -1.200 -1% -3.457 -2% -2.209 -1% -2.388 -1% -3.534 -2% -5.209 -2%
Net income 7.657 5% 2.328 2% 6.545 4% 3.883 2% 3.960 2% 5.909 3% 7.239 3%
 FINANCIAL STATEMENT ANALYSIS
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Quiz 2b. Financial Statement Analysis

Additional information: the market-to-book ratio of this company is 1.7 on January 1 2014.

Present the results of your evaluation in bullet points on a flip-over and give the company a
grade between 0 and 10.0. Grade 0 suggests a very poor financial performance and a 10
suggests an excellent financial performance. Do the same for assessing the financial
health. The results will be evaluated in class where you will be given constructive feedback.

• …
• …
• …
• …
• …

YOUR GRADE HERE

 FINANCIAL STATEMENT ANALYSIS
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Case 2 - Accounting balance sheets anonymised company

Consolidated accounting balance sheet

in DKK millions 2007 2008 2009 2010 2011 2012 2013 2014

Current assets
Operating cash 196 107 258 254 189 159 146 120
Other current operational assets 1.519 1.504 1.084 1.054 983 1.289 1.127 1.362
Total current assets 1.716 1.611 1.342 1.308 1.172 1.448 1.272 1.483

Property, plant and equipment, net 618 709 662 606 786 541 516 373
Intangible & financial assets & deferred taxes 632 498 656 734 551 903 969 1.037

2.965 2.817 2.661 2.647 2.508 2.892 2.757 2.892

Current Liabilities
Accounts payable and accrued expenses (non-interest) 826 734 669 714 597 784 610 731
Other (deferred tax; provisions, pension, other) 181 158 97 99 100 112 87 63
Total current liabilities 1.007 892 766 813 696 897 697 793

Short & long term debt (interest paying) 276 442 378 338 274 370 419 495

Total stockholders equity 1.682 1.484 1.517 1.496 1.538 1.626 1.640 1.604

2.965 2.817 2.661 2.647 2.508 2.892 2.757 2.892

 FINANCIAL STATEMENT ANALYSIS
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Case 2 - Profit & loss statements anonymised company

Consolidated Financial Statements of Operations

in DKK millions 2007 2008 2009 2010 2011 2012 2013 2013 2014

Net sales 4.376 100% 4.092 100% 2.790 100% 2.762 100% 2.867 100% 3.008 100% 2.814 100% 2.864 100%
Cost of sales 2.338 53% 2.199 54% 1.684 60% 1.672 61% 1.711 60% 1.792 60% 1.718 61% 1.640 57%
Gross profit 2.038 47% 1.893 46% 1.106 40% 1.090 39% 1.156 40% 1.216 40% 1.096 39% 1.224 43%

Depreciation and amortization 248 6% 299 7% 286 10% 246 9% 239 8% 275 9% 332 12% 342 12%
Selling, general and administrative expenses 1.260 29% 1.399 34% 1.316 47% 878 32% 857 30% 854 28% 951 34% 879 31%
Total expense 1.508 34% 1.698 41% 1.602 57% 1.124 41% 1.096 38% 1.129 38% 1.283 46% 1.221 43%

Income before interest and taxes 530 12% 195 5% -496 -18% -34 -1% 60 2% 122 4% -187 -7% 3 0%

Interest income 27 1% 9 0% 14 0% 9 0% 8 0% 7 0% 10 0% 9 0%
Interest expense -33 -1% -50 -1% -41 -1% -25 -1% -27 -1% -26 -1% -33 -1% -35 -1%
Income before taxes 524 13% 154 4% -524 -19% -50 -2% 40 1% 104 3% -210 -7% -23 -1%

Income taxes 152 3% 41 1% 140 5% 17 1% -12 0% -31 -1% 52 2% -6

Net income 373 9% 113 3% -383 -14% -33 -1% 28 1% 73 2% -159 -6% -29 -1%
 FINANCIAL STATEMENT ANALYSIS
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Quiz 2c. Financial Statement Analysis

Additional information: the market-to-book ratio of this company is 3.0 on January 1 2016.

Present the results of your evaluation in bullet points on a flip-over and give the company a
grade between 0 and 10.0. Grade 0 suggests a very poor financial performance and a 10
suggests an excellent financial performance. Do the same for assessing the financial
health. The results will be evaluated in class where you will be given constructive feedback.

• …
• …
• …
• …
• …

YOUR GRADE HERE

 FINANCIAL STATEMENT ANALYSIS
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Case 3 - Accounting balance sheets anonymised company

Consolidated Accounting Balance Sheets

x $1 billion 2010 2011 2012 2013 2014 2015

Current assets
Operating cash 779 1.067 745 2.171 2.081 965
Other current operational assets 3.116 3.177 4.185 3.535 3.304 3.394
Total current assets 3.895 4.244 4.930 5.706 5.385 4.359

Property, plant and equipment, net 8.915 9.330 9.162 9.059 8.532 7.961
Other operating assets, net 24.689 25.534 41.836 41.529 39.834 32.591

37.499 39.108 55.928 56.294 53.751 44.911

Current Liabilities
Accounts payable and accrued expenses (non-interest) 7.492 7.889 10.670 10.286 9.894 8.012
Obligations under capital leases (non-interest) 0 0 0 0 0 0
Total current liabilities 7.492 7.889 10.670 10.286 9.894 8.012

Long term debt (interest paying) 9.414 8.460 19.226 18.548 16.375 12.544

Total stockholders equity 20.593 22.759 26.032 27.460 27.482 24.355

37.499 39.108 55.928 56.294 53.751 44.911

 FINANCIAL STATEMENT ANALYSIS
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Case 3 - Profit & loss statements anonymised company

Consolidated Financial Statements of Operations

x $1 billion 2010 2011 2012 2013 2014 2015

Net sales 18.020 100% 19.408 100% 21.760 100% 23.213 100% 22.311 100% 22.130 100%
Cost of sales 14.321 79% 15.168 78% 15.565 72% 17.693 76% 16.645 75% 16.351 74%
Gross profit 3.699 21% 4.240 22% 6.195 28% 5.520 24% 5.666 25% 5.779 26%

Depreciation 1.080 6% 1.113 6% 1.182 5% 1.317 6% 1.424 6% 1.395 6%

Selling, general and administrative expenses 0 0% 0 0% 0 0% 0 0% 0 0% 0 0%
Total expense 1.080 6% 1.113 6% 1.182 5% 1.317 6% 1.424 6% 1.395 6%

Income before interest and taxes 2.619 15% 3.127 16% 5.013 23% 4.203 18% 4.242 19% 4.384 20%

Interest income 1.189 7% 1.382 7% 1.683 8% 1.926 8% 1.636 7% 1.493 7%

Interest expense -879 -5% -883 -5% -1.093 -5% -1.417 -6% -1.055 -5% -1.047 -5%
Income before taxes 2.929 16% 3.626 19% 5.603 26% 4.712 20% 4.823 22% 4.830 22%

Income taxes -848 -5% -1.069 -6% -1.126 -5% -1.201 -5% -1.173 -5% -1.273 -6%
Net income 2.081 12% 2.557 13% 4.477 21% 3.511 15% 3.650 16% 3.557 16%
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