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Financial Statement Analysis: Curriculum Designed For Use With The Iowa Electronic Markets
Financial Statement Analysis: Curriculum Designed For Use With The Iowa Electronic Markets
Stock Price
Expected Cashflows NPV MVA EVA Market Conditions
Timing of Cashflows
Stock Price
Risk of Cashflows
Financial Analysis
Assessment of the firms past, present and future financial conditions Done to find firms financial strengths and weaknesses Primary Tools:
Financial Statements Comparison of financial ratios to past, industry, sector and all firms
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Financial Statements
Balance Sheet Income Statement Cashflow Statement Statement of Retained Earnings
Sources of Data
Annual reports
Via mail, SEC or company websites
http://moneycentral.msn.com/investor http://www.marketguide.com
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Value for the firm comes from cashflows Cashflows can be calculated as:
(Revt - Costt - Dept)x(1-t) + Dept OR (Revt - Costt)x(1-t) + txDept OR Revtx(1-t) - Costtx(1-t) + txDept
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Fixed assets:
Tangible assets Intangible assets
Assets:
Current Assets: Non-Current Assets: Total Assets: $7,681.00 $3,790.00 $11,471.00 $5,192.00 $971.00 $5,308.00 $11,471.00
Liabilities:
Current Liabilities: LT Debt & Other LT Liab.: Equity: Total Liab. and Equity:
Gross Profit = Sales - Costs of Goods Sold EBITDA = Gross Profit - Cash Operating Expenses EBIT = EBDIT - Depreciation - Amortization EBT = EBIT - Interest NI or EAT = EBT- Taxes Net Income is a primary determinant of the firms cashflows and, thus, the value of the firms shares
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Standardize financial information for comparisons Evaluate current operations Compare performance with past performance Compare performance against other firms or industry standards Study the efficiency of operations Study the risk of operations
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Ratios
Measure relationships between resources and financial flows Show ways in which firms situation deviates from
Types of Ratios
Financial Ratios:
Liquidity Ratios
Assess ability to cover current obligations Assess ability to cover long term debt obligations
Leverage Ratios
Operational Ratios:
Activity (Turnover) Ratios
Assess amount of activity relative to amount of resources used Assess profits relative to amount of resources used Assess market price relative to assets or earnings
Profitability Ratios
Valuation Ratios:
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Current Ratio:
Current Ratio : Current As sets $7,681.00 1.48 Current Liabilitie s $5,192.00
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Current Ratio
1.5 1 0.5 0
Jan-00 1.48
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Debt Ratio:
Total Liabilitie s $6,163.00 Debt Ratio : 53.73% Total Assets $11,471.00
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Debt Ratio
Jan-00 53.73%
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Retention Ratio
EPS - Div $0.66 $0 Retention Ratio ( ) : 100% EPS $0.66
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ROE
Jan-00 31.39%
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ROA
15% 10% 5% 0%
Jan-00 14.52%
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Profit Margin
Jan-00 6.59%
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Asset Turnover
Jan-00 2.20
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Helps to identify sources of strength and weakness in current performance Helps to focus attention on value drivers
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ROE ROA Equity Multiplier Net Income Total Assets Total Assets Common Equity
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ROA Profit Margin Total Asset Turnover Net Income Sales Sales Total Assets
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ROE Profit Margin Total Asset Turnover Equity Multiplier Net Income Sales Total Assets Sales Total Assets Common Equity
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$1,666.00 $25,265.00 $11,471.00 ROE $25,265.00 $11,471.00 $5,308.00 0.0659 2.2025 2.1611 0.1452 2.1611 31.39%
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Recall the relationship between stock returns (r), capital gains (g) and forward dividend yields (D1/P0):
r = g + D1/P0 = g + Do(1+g)/P0
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Benchmark with
Past for the company Industry
A firms industry category is often difficult to identify Published industry averages are only guidelines Accounting practices differ across firms Sometimes difficult to interpret deviations in ratios Industry ratios may not be desirable targets Seasonality affects ratios
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Analysis of AAPL, IBM and MSFT, and comparisons to the S&P500 companies can help to:
Assess the (absolute and relative) financial state of each company Show each companys strengths and weaknesses Predict sustainable growth rate