Balance Sheet and Income Statement Eth

Corporate Finance
Interpreting Financial Statements

Dr. Markus R. Neuhaus
Dr. Marc Schmidli, CFA
Autumn Term 2013 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch 1

Corporate Finance: Course overview 2013
20.09. Fundamentals M. Neuhaus & M. Schmidli
27.09. No lecture
04.10. Interpreting Financial Statements M. Neuhaus & M. Schmidli
11.10. Mergers & Acquisitions I & II (4 hours) M. Neuhaus & S. Beer
18.10 Investment Management M. Neuhaus & P. Schwendener
25.10 Business Valuation (4 hours) M. Neuhaus & M. Bucher
01.11 Value Management M. Neuhaus, R. Schmid & G. Baldinger
08.11 No lecture
15.11 Legal Aspects Ines Pöschel
22.11 Turnaround Management M. Neuhaus & R. Brunner
29.11 No lecture
06.12 Financial Reporting M. Neuhaus & M. Jeger
13.12 Taxes (4 hours) M. Neuhaus & M. Marbach
20.12 Summary Repetition M. Neuhaus

Markus R. Neuhaus
PricewaterhouseCoopers AG, Zürich
Phone: +41 58 792 40 00

Email: markus.neuhaus@ch.pwc.com
 Grade Chairman
 Qualification Doctor of Law (University of Zurich), Certified Tax Expert
 Career Development Joined PwC in 1985, became Partner in 1992 and CEO from 2003 –
2012, became Chairman in 2012
 Subject-related Exp. Corporate Tax
Mergers & Acquisitions
 Lecturing SFIT: Executive in Residence, lecture: Corporate Finance
Multiple speeches on leadership, business, governance, commercial
and tax law
 Published Literature Author of commentary on the Swiss accounting rules
Publisher of book on transfer pricing
Author of multiple articles on tax and commercial law, M&A, IPO, etc.
 Other professional roles: Member of the board of économiesuisse, member of the board
and chairman of the tax chapter of the Swiss Institute of
Certified Accountants and Tax Consultants
Marc Schmidli
PricewaterhouseCoopers AG, Zürich
Phone: +41 58 792 15 64

Email: marc.schmidli@ch.pwc.com
 Grade Partner
 Qualification Dr. oec. HSG, CFA charterholder
 Career Development Corporate Finance PricewaterhouseCoopers since July 2000
 Lecturing Euroforum – Valuation in M&A situations
Guest speaker at ZfU Seminars, Uni Zurich, ETH, etc.
 Published Literature Finanzielle Qualität in der schweizerischen Elektrizitätswirtschaft
Various articles in „Treuhänder“, HZ, etc.

Contents
 Learning targets
 Pre-course reading
 Lecture „Interpreting Financial Statements“
 Pre-course reading case studies / questions
 Solutions to case studies

Learning targets
 Framework for financial statement analysis

 Understanding the need for financial statement analysis
 Understanding the financial reporting system
 Refreshing principal elements of financial statements (Balance sheet, income and
cash flow statements)
 Analysis of financial statements

 Understand the purpose and use of ratio analysis
 Being able to apply the various ratio analyses
 Being able to evaluate corporate performance by the integrated analysis of ratios

Contents

Pre-course reading
 Books
 Mandatory reading:
 Brigham, Houston (2012): Chapter 4 (pp. 96-130)
 White, Sondhi, Fried (2003): Chapter 3 (pp. 74-99)
 Optional reading:
 Brigham, Houston (2012): Chapter 3 (pp. 56-95)
 Slides
 Slides 1 to 11 – mandatory reading
 Other Slides – optional reading, will be dealt within the lecture

Contents

Agenda I
1. Introduction
 Financial analysis
 Classes of users
 Need for financial statement analysis
2. Ratio analysis
 Significance of ratio analysis
 Sources
 Financial reporting systems and standards
 Important groups of ratio analysis

Agenda II
3. Case study
Beans Incorporation vs. Garlic Incorporation
4. Q&A and discussion

Agenda: Introduction
 Financial analysis
 Classes of users
 Need for financial statement analysis

Financial analysis
 Evaluation of a firm‘s performance and development mainly by

 identifying the key drivers of a firm‘s performance and financial position
 calculating and interpreting important ratios of the firm
 Balanced Scorecard (soft – hard)
 A well rounded financial analysis takes into account not only the financials alone but also
surrounding factors which can have significant influence on the firm’s development.
Financial management does not operate in a vacuum.
Macroeconomic situation,
Environment industry, market
Management, products, margins, Financial

Business technology, knowledge base, competition Analysis
Balance sheet, income statement,
Financial Statements cash flow, stockholders’ equity, budget
Source: White, Sondhi, Fried (2003), 2ff.

Classes of users
 Internal users (such as managers or board members)
 External users of financial information encompass a wide range of interests but can be
classified into three general groups:
 Credit and equity investors
 Government, regulatory bodies, tax authorities
 General public and special interest groups, labor unions and consumer groups
Source: White, Sondhi, Fried (2003), 4.

Need for financial statement analysis
 Internal:  External:
Financial statements provide the Financial statements facilitate the
company with information on its interaction between the company
performance and development over and its business environment by
time and are a crucial basis for most providing third parties with essential
financial decisions (i.e. investment, information on the company’s
financing) development
 Costs  Creditors
 Efficiency  Investors
 Profitability  Shareholders
 Investments  Government
 Financing (needs)
Financial analysis has great significance and impact
on a company‘s development as it influences
expectations on the capital markets

Agenda: Ratio analysis
 Significance of ratio analysis
 Sources
 Financial reporting systems and standards
 Important groups of ratio analysis

Ratio analysis
 Financial statements help predict the future development of a company
Firm A has total debt of $ 1’060m and $ 88m interest charges whereas firm B has total
debt of $ 52m and $ 4m interest charges. Which firm is stronger, better financed? Or
which firm is more liquid or more likely to generate higher cash flows?
 Figures standing alone, such as total debt or interest charges, are not really helpful
 By putting debt into perspective with other appropriate figures, we are able to
predict which firm is more likely to succeed
 such comparisons are ratio analysis
The debt burden can be evaluated

(a) by comparing each firm‘s debt with its assets and
(b) by comparing the interest the company has to pay with the income
it has available
Source: Brigham, Houston (2012), 98f.

„help predict the
Significance of ratio analysis future development
of a company”
 As a company’s value is determined by its ability to generate cash today and in

the future, ratio analysis has great importance
 Share price development
 Credit rating
 However, there is no generally used list of ratios that could be applied to any company
 Groups of ratios1):
 Liquidity ratios
 Asset management ratios
 Debt or financing ratios
 Profitability ratios
 Market value ratios
1) Details later: see page 25ff.

Principal elements of financial statements as primary
source for financial analysis
 Balance sheet
 Income statement
 Statement of cash flows
 Statement of stockholders‘ equity
 Further sources: Broker/analyst reports, Bloomberg, Reuters, Factset etc.
Collectively, these interrelated financial statements provide

relevant and timely information about the past and are
essential for making crucial business decisions about
investment or financing activities today and in the future.
Financial statements are a key component to build trust in the
financial community.
Source: White, Sondhi, Fried (2003), 5.

Financial reporting systems and standards
 Reporting systems and standards compel the company to meet a great number of
requirements in order to ensure that the financial statements are, above all, transparent
and comparable
 The two most commonly used standards are:

 IFRS (International Financial Reporting Standards)
 US GAAP (United States Generally Accepted Accounting Principles)
 Differences are found mainly in the classification of certain events (e.g. whether an
interest payment is reported under operating costs or financing costs etc.) or with regard
to financial instruments. Both aim to provide a “true and fair view”of the company’s
performance.
 In addition, there are local GAAPs (Generally Accepted Accounting Principles). In

Switzerland we have rules in the Code of Obligation which permit hidden reserves and
the FER (Fachempfehlung für Rechnungslegung) which is a light form of IFRS.
Source: White, Sondhi, Fried (2003), 5ff.

Balance sheet
 Snapshot of the company‘s assets Balance Sheet
and liabilities at a certain reporting (chf m)

USD m 2008
2011 2007
2010
date Assets
Cash and cash equivalents 10 80
Accounts receivable 375 315
Inventories 615 415
 Assets = Liabilities + Equity Current assets 1'000 810
Net plant and equipment 1'000 870

Non-current assets 1'000 870
Total assets 2'000 1'680
Liabilities and Equity

Accounts payable 60 30
Notes payable 110 60
Accruals 140 130
Total current liabilities 310 220
Long-term bonds 750 580

Total debt 1'060 800
Common stock (50'000'000 shares) 130 130

Retained earnings 810 750
Total equity 940 880
Total liabilities and equity 2'000 1'680
Source: Brigham, Houston (2012), 62.

Income statement
 Reports on the performance of a firm, the results of its operating activities

 Matching principle = revenues and related costs must be accounted for during the same
period of time. This requires the recognition of expenses incurred to generate revenues
in the same period as the related revenues (revenue recognition, accrual method).
Income Statement
(chf in
USD m millions) 2008
2011 2007
2010
Net Sales 3'000.0 2'850.0

Operating Costs (2'616.2) (2'497.0)
EBITDA 383.8 353.0

Amortization - -
Depreciation (100.0) (90.0)
EBIT 283.8 263.0

Interest (88.0) (60.0)
Taxes (78.3) (81.2)
Net Income 117.5 121.8
Common dividends 57.5 53.0

Addition to retained earnings 60.0 68.8

Statement of cash flow
Statement of Cash Flow

 The cash flow statement represents the cash
generated by a company during the given (chf
USDinmmillions) 2008
2011
accounting period
Operating activities
 Separated into three categories: (I) operating Net Income 117.5
activities, (II) investing activities, (III) financing Additions
activities Depreciation and Amortization 100.0
Increase in accounts payable 30.0
 The investment section illustrates how cash was Increase in accruals 10.0
Substractions
spent whereas section III, financing shows how Increase in accounts receivable (60.0)
those investments were financed Increase in inventories (200.0)
Net cash provided by operating activities (2.5)
 In the long run, cash flows from operating activities
should considerably increase; investments should Long-term investing activities
be equal to depreciation (plus a bit more to Cash used to acquire fixed assets (CAPEX) (230.0)
support stable growth) Financing activities

Increase in notes payable 50.0
Increase in bonds 170.0
 In this example, the company has an operating payments of dividens (57.5)
Net cash provided by financing activities 162.5
problem as the cash flow from operating activities
is negative Net decrease in cash and equivalents (70.0)
Cash and equivalents at beginning of the year 80.0

 CAPEX = capital expenditures Cash and equivalents at end of the year 10.0

Statement of retained earnings
 Changes in retained earnings occur because stockholders allow the management to

retain and invest funds that otherwise would be paid out as dividend
 Thus, the retained earnings position is not cash and is not available for spending
Statement of retained earnings
(chf
USDinmmillions) 2008
2011
Balance of retained earnings as of 2007

2010 750.0
Add: Net income 2008
2011 117.5
Less: Dividend to common stockholders (57.5)
Balance of retained earnings as of 2008
2011 810.0

Important groups of financial ratios
Is the company able to pay its debts as they become due this year?
 Asset management ratios
Does the amount of assets seem to be reasonable in relation to current and projected sales? And
how efficiently does the company use its assets?”
 Debt or financing ratios
To what extent is the company using financial leverage? Risk from capital structure?
How profitable is the company? How much output does the company generate in relation to a
certain input?
How do the earnings and results appear in relation to the stock price?
Be aware – the definition of ratios may vary between different authors or users!
Source: Brigham, Houston (2012), 99ff.

Liquidity ratios
Current assets 1000

Current ratio    3.2x
Current liabilities 310
 If a company is getting into financial difficulties, it will pay its bills more slowly, borrowing money from
banks and from suppliers. This leads to increased current liabilities which causes the current ratio to
decrease. If current liabilities grow faster than current assets, this is a an indication of financial
difficulties.
 The current ratio is also known as liquidity ratio 3.
Current assets - inventories 1000 - 615

Quick ratio    1.2x
 Inventories are a firm’s least liquid current asset and therefore most likely to suffer losses if they have
to be sold in liquidation. A company should be able to pay current liabilities with current assets less
inventories.
 The quick ratio is also known as liquidity ratio 2.
Source: Brigham, Houston (2012), 99f; Volkart (2011), 161f.

Balance sheet and income statement
Balance Sheet Income Statement
(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010
Assets Net Sales 3'000.0 2'850.0

Cash and cash equivalents 10 80 Operating Costs (2'616.2) (2'497.0)
Inventories 615 415 EBITDA 383.8 353.0
Current assets 1'000 810 Amortization - -
Non-current assets 1'000 870 EBIT 283.8 263.0
Interest (88.0) (60.0)
Total assets 2'000 1'680 Taxes (78.3) (81.2)

Accounts payable 60 30 Common dividends 57.5 53.0
Notes payable 110 60 Addition to retained earnings 60.0 68.8
Accruals 140 130


Liquidity ratios
Current assets 1000

Current ratio    3.2x
 If a company is getting into financial difficulties, it will pay its bills more slowly, borrowing money from
banks and from suppliers. This leads to increased current liabilities which causes the current ratio to
decrease. If current liabilities grow faster than current assets, this is a an indication of financial
difficulties.
 The current ratio is also known as liquidity ratio 3.
Current assets - inventories 1000 - 615

Quick ratio    1.2x
 Inventories are a firm’s least liquid current asset and therefore most likely to suffer losses if they have
to be sold in liquidation. A company should be able to pay current liabilities with current assets less
inventories.
 The quick ratio is also known as liquidity ratio 2.
Source: Brigham, Houston (2012), 99ff; Volkart (2011), 161f.

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Asset management ratios
Sales 3000
Inventory turnover ratio    4.9x
Inventory 615
 Inventory turnover indicates whether a company (compared with peer companies) holds too much
inventory, which is very unproductive and represents an investment with a low return
 The inventory turnover ratio can also be calculated by using “Cost of Goods Sold” instead of “Sales”
Receivables Receivables 375

Days sales outstanding     46 days
Averagesales per day Sales / 365 3000
365
 DSO shows the “average collection period” or how long customers usually take to pay their bills. The
higher the DSO, the more money is lost, because the company has to finance the gap with
expensive loans etc.
Sales 3000
Fixed asset turnover ratio    3.0x
Net fixed assets 1000
 The fixed assets turnover ratio indicates how effectively the company is using its fixed assets
compared with peer companies.

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Sales 3000
Inventory 615

365
Sales 3000

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Sales 3000
Inventory 615

365
Sales 3000

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Debt management ratios
Total debt 1060

Total debt to total assets    53.0%
Total assets 2000
 Creditors prefer a low debt to equity ratio whereas stockholders may want more leverage as it can
magnify expected earnings ( pecking order theory). The optimal ratio between debt and assets is
highly dependent on the firm’s business and industry.
EBIT 284
Times - interest - earned ratio    3.2x
Interest 88
 The TIE ratio measures the extent to which operating profit can decline before the firm is unable to
meet its interest costs. Not being able to pay interest costs will bring legal troubles and can result in
bankruptcy.

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Debt management ratios
Total debt 1060

Total debt to total assets    53.0%
Total assets 2000
 Creditors prefer a low debt to equity ratio whereas stockholders may want more leverage as it can
magnify expected earnings ( pecking order theory). The optimal ratio between debt and assets is
highly dependent on the firm’s business and industry.
EBIT 284
Times - interest - earned ratio    3.2x
Interest 88
 The TIE ratio measures the extent to which operating profit can decline before the firm is unable to
meet its interest costs. Not being able to pay interest costs will bring legal troubles and can result in
bankruptcy.

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Profitability ratios
Net income 118
Profit margin    3.9%
Sales 3000
 The profit margin on sales shows the profit per unit of sales
Net income 118

Return on total assets    5.9%
Total assets 2000
 Stockholders want to earn a return on their money invested. This ratio indicates the profitability of a
stockholders’ invested money from an accounting perspective
EBIT 284
Basic earning power    14.2%
Total assets 2000
 This ratio shows the raw earning power of the firm’s assets excluding potential influence from interest
payments or leverage effects.
Net income 118

Return on common equity    12.5%
Common equity 940

(chf m)
USD m 2008
2011 2007
2010 (chf
USD in
m millions) 2008
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Net income 118
Sales 3000
Net income 118

Total assets 2000
EBIT 284
Total assets 2000
Net income 118

Common equity 940

(chf m)
USD m 2008
2011 2007
2010 (chf
USD in
m millions) 2008
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Net income 118
Sales 3000
Net income 118

Total assets 2000
EBIT 284
Total assets 2000
Net income 118

Common equity 940

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Net income 118
Sales 3000
Net income 118

Total assets 2000
EBIT 284
Total assets 2000
Net income 118

Common equity 940

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Market value ratios
Numbers of shares:
Price per share 23 50m
Price/earnings ratio    9.8x Share price: 23
Earnings per share 118
50
 This ratio shows how much an investor is willing to pay per unit of reported earnings. Thus, the P/E
ratio indicates, by comparison with its peers, whether a company is regarded as being risky or
expected to have poor growth.
Price per share 23.00

Market/boo k ratio    1.2x
Book value per share 940
50
 The market to book ratio typically exceeds 1.0 as the balance sheet does not reflect inflation or
goodwill. In addition, this ratio provides an indication whether a company is able to earn high returns.

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Market value ratios
Numbers of shares:
Price per share 23 50m
Price/earnings ratio    9.8x Share price: 23
Earnings per share 118
50
 This ratio shows how much an investor is willing to pay per unit of reported earnings. Thus, the P/E
ratio indicates, by comparison with its peers, whether a company is regarded as being risky or
expected to have poor growth.
Price per share 23.00

Market/boo k ratio    1.2x
50
 The market to book ratio typically exceeds 1.0 as the balance sheet does not reflect inflation or
goodwill. In addition, this ratio provides an indication whether a company is able to earn high returns.

(chf m)
USD m 2008
2011 2007
2010 (chf in
2011 2007
2010

Interest (88.0) (60.0)

Accruals 140 130


Agenda: Case study
Beans Incorporation vs. Garlic Incorporation

Case study: Interpretation of financial statements
 Your client tells you he is interested in investing in a company from the food industry as he sees
great growth potential in this industry
 He has already selected two potential targets and now wants your professional advice on which
company is more likely to report good results in the future
 Please try to give your client your opinion based on what you have learned in this course
 Read the financial statements and calculate the ratios based on 2008 figures
 Compare these ratios with those of the other company and with those of the industry average
Beans Inc. vs. Garlic Inc.

Case study: Beans Incorporation I
Beans Inc.
Income statement Balance sheet
(chf m) 2011
2008 2010
2007 (chf m) 2011
2008 2010
2007
Net sales 3780 3500 Assets

Operating sosts 2650 2500 Cash and cash equivalents 325 80
EBITDA 1130 1000 Accounts receivable 491 455
Amortization 0 0 Inventories 548 508
Depreciation 75 90 Current assets 1'365 1'042
EBIT 1055 910 Net plant and equipment 1'470 1'297
Interest 96 81 Total assets 2'835 2'339
EBT 959 829
Taxes 384 332 Liabilities and equity
Net income 576 497 Accounts payable 302 263
Accruals 75 70
Common dividends 259 224 Total current liabilities 604 525
Addition to retained earnings 317 274 Long-term bonds 590 490
Total debt 1'194 1'015
EBITDA margin 29.9% 28.6% Retained earnings 1'391 1'074
EBIT margin 27.9% 26.0% Total equity 1'641 1'324
Net income margin 15.2% 14.2% Total liabilities and equity 2'835 2'339
EPS 11.51 9.95
Share price 152

Numbers of shares (in m) 50

Case study: Beans Incorporation II
Beans Inc. • By analyzing its financial

statements, what are the
2011
strengths and weaknesses of this
(chf m) 2008
company?
Net income 576
Additions
Depreciation and Amortization 75
• Where do you see risks or
Increase in accounts payable
Increase in accruals
40
5
opportunities?
Substractions
Increase in accounts receivable (36)
Increase in inventories (41)
Net cash provided by operating activities 619
Long-term investing activities

Cash used to acquire fixed assets (248)
Financing activities
Increase in notes payable 34
Increase in bonds 100
Payments of dividends (259)
Net cash provided by financing activities (125)
Net increase in cash and equivalents 245
Cash and equivalents at beginning of the year 80

Cash and equivalents at end of the year 325

Case study: Garlic Incorporation I
Garlic Inc.
Income statement Balance sheet
(chf m) 2011
2008 2010
2007 (chf in millions) 2011
2008 2010
2007
Net sales 3180 3000 Assets

Operating costs 2703 2550 Cash and cash equivalents 148 80
EBITDA 477 450 Accounts receivable 509 480
Amortization 0 0 Inventories 541 450
Depreciation 150 120 Current assets 1'198 1'010
EBIT 327 330 Net plant and equipment 1'318 1'120
Interest 123 91 Total assets 2'516 2'130
EBT 204 239
Taxes 82 96 Liabilities and equity
Net income 123 143 Accounts payable 159 180
Accruals 130 90
Common dividends 55 65 Total current liabilities 416 420
Addition to retained earnings 67 79 Long-term bonds 812 490
EBITDA margin 15.0% 15.0% Retained earnings 1'037 970
EBIT margin 10.3% 11.0% Total equity 1'287 1'220
Net income margin 3.9% 4.8% Total liabilities and equity 2'516 2'130
EPS 2.45 2.87
Share price 32
Numbers of shares (in m) 50

Case study: Garlic Incorporation II
Garlic Inc. • By analyzing its financial

statements, what are the
2011
strengths and weaknesses of this
(chf m) 2008
company?
Net income 123
Additions
Depreciation and amortization 150
• Where do you see risks or
Increase in accounts payable
Increase in accruals
(21)
40
opportunities?
Substractions
Increase in accounts receivable (29)
Increase in inventories (91)
Net cash provided by operating activities 172
Long-term investing activities

Cash used to acquire fixed assets (348)
Financing activities
Increase in notes payable (23)
Increase in bonds 322
Payments of dividends (55)
Net cash provided by financing activities 244
Net increase in cash and equivalents 68
Cash and equivalents at beginning of the year 80

Cash and equivalents at end of the year 148

Case study: Solution guideline
Value Creation
 Asset management ratios Profitability
 Debt ratios
Liquidity Security/Risk
 Try to assess whether the given company shows a healthy relation between profitability, liquidity and
risk
 If a company shows high exposure to risky investments, one expects the profitability to be
accordingly
 Try to come to a conclusion on which company is more likely to pursue an expansive strategy and
strengthen its position within the market
 In terms of ability to generate cash flows, capital structure and working capital management

Case study: Solution guideline II
Ratios Industry average

 Try to compare the companies with each other and
Liquidity
put the results into perspective using the industry
Current ratio 4.2x
average values on the right Quick ratio 2.2x
 Industry average figures can be seen as a guide Asset Management
 Why is the company less profitable than Inventory turnover 10.9x

Days sales outstanding 36 days
average peer companies?
Fixed assets turnover 2.8x
 Why does one company have such a high Debt Management
P/E multiple and what does that mean for the Total debt to total assets 40.0%
Times interest earned 6x
operating business?
Profitability
Profit margin 5.0%

Return on total assets (ROA) 9.0%
 Financial statements can never fully answer Basic earning power 18.0%
such questions. However, they can raise the Return on common equity (ROE) 15.0%
right questions Market Value

Price / earnings (P/E) 11.3x
Market / book (M/B) 1.7x

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Corporate Finance

Interpreting Financial Statements

Autumn Term 2013 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch 1

Autumn Term 2013 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch 2

Phone: +41 58 792 40 00

Phone: +41 58 792 15 64

Autumn Term 2013 Markus Neuhaus I Corporate Finance I neuhauma@ethz.ch 4

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 Framework for financial statement analysis

 Analysis of financial statements

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4. Q&A and discussion

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 Need for financial statement analysis

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 Evaluation of a firm‘s performance and development mainly by

Management, products, margins, Financial

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 Internal users (such as managers or board members)

Source: White, Sondhi, Fried (2003), 4.

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 Significance of ratio analysis

 Financial reporting systems and standards

 Important groups of ratio analysis

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 Financial statements help predict the future development of a company

The debt burden can be evaluated

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 As a company’s value is determined by its ability to generate cash today and in

1) Details later: see page 25ff.

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 Further sources: Broker/analyst reports, Bloomberg, Reuters, Factset etc.

Collectively, these interrelated financial statements provide

Source: White, Sondhi, Fried (2003), 5.

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 The two most commonly used standards are:

 In addition, there are local GAAPs (Generally Accepted Accounting Principles). In

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 Snapshot of the company‘s assets Balance Sheet

and liabilities at a certain reporting (chf m)

Net plant and equipment 1'000 870

Total assets 2'000 1'680

Liabilities and Equity

Long-term bonds 750 580

Common stock (50'000'000 shares) 130 130

Total liabilities and equity 2'000 1'680

Source: Brigham, Houston (2012), 62.

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 Reports on the performance of a firm, the results of its operating activities

Net Sales 3'000.0 2'850.0

EBITDA 383.8 353.0

EBIT 283.8 263.0

Net Income 117.5 121.8

Common dividends 57.5 53.0

Source: Brigham, Houston (2012), 67.

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Statement of Cash Flow