The material discussed includes the presentation of two main tools of financial analysis:

1) ratio analysis, involves valuing the income statement and the company's balance sheet data.

2) cash flow analysis, analysis that relies on the company's cash flow statement

 Both of these tools allow analysts to examine a company's performance and financial condition,
remembering its strategies and objectives and being the goal of financial analysis.

This chapter also discusses how to apply these tools to a company to compare the performance of
the two companies on As Reported and As Adjusted (for the use of off-balance sheet operating
leases).

The starting point for ratio analysis is company ROE. The next step is to evaluate three
drivers of ROE, namely net profit margin, asset turnover, and financial leverage. Net profit
margins reflect the company's operations management, asset turnover reflects the management of
its investments, and financial leverage reflects its funding policy. Each of these fields can be
further examined by examining a number of ratios.

For example, analysis of general income statements allows a detailed examination of the
company's net margins. Likewise, the turnover of major working capital accounts such as
receivables, inventory and trade payables, and the rotation of the company's fixed assets, allows
for further examination of the utilization of company assets. Finally, short-term liquidity ratios,
debt policy ratios, and coverage ratios provide a means to examine a company's financial
leverage. A company's sustainable growth rate - the rate of growth without changing its
operating, investment and funding policies - is determined by its ROE and dividend policy. The
concept of sustainable growth provides a way to integrate various elements of ratio analysis and
to evaluate whether a company's growth strategy is sustainable or not. If the company's plan calls
for growth at a level above the current level, then one can analyze the ratio of which companies
are likely to change in the future.

Cash flow analysis is a complementary ratio analysis in examining the company's

operating activities, investment management, and financial risk. Companies in the United States
are currently required to report cash flow statements that summarize their funding operations,
investments and cash flows. Companies in other countries usually report working capital flows,
but it is possible to use this information to make cash flow statements. Because there are wide
variations across companies in the way cash flow data is reported, analysts often use standard
formats to rearrange cash flow data. We discuss one cash flow model in this chapter. This model
allows analysts to assess whether a company's operations generate cash flow before investing in
operating working capital, and how much cash is invested in the company's working capital. It
also allows analysts to calculate the company's free cash flow after making long-term
investments, which is an indication of the company's ability to meet its debt payments and
dividend payments.

Finally, a cash flow analysis shows how the company finances itself, and whether the
financing pattern is too risky. The insight gained from analyzing a company's financial ratios and
cash flow is very valuable in estimating the company's future prospects.

RATIO ANALYSIS

The value of a company can be determined by profitability and growth. Managers can use
four levers to achieve this:

- Operations management - Funding strategies

  - Investment management - Dividend policy

Or it can be done by:

  - Time-series comparisons - Comparing ratios with some absolute benches

- Cross-sectional comparison

MEASURING OVERALL PROFITABILITY

the starting point for a systematic analysis of company performance is Return On Equity (ROE)

Net income
ROE
shareholders ’ equity

ROE is a comprehensive indicator because it gives an indication of how well managers employ
funds invested by shareholders.
 Net Income Sales
ROA = X
Sales Assets

Decomposing Profitability: Alternative Approach:

NOPAT (Net interest expense after taxÞ)

ROE = –
Equity Equity
NOPAT Net Assets Net interest expense after tax Net Debt
= X - X
Assets Equity Net Debt Equity
NOPAT Net Debt Net interest expense after tax Net Debt
=
Assets (
X 1+
Equity
-) Net Debt
X
Equity

= Operating ROA + (Operating ROA - Effective interest rate after tax)

Operating ROA is a measure of how profitably a company is able to deploy its operating assets
to generate operating profits. This would be a company’s ROE if it were financed,
NOPAT Sales
Operating ROA = X
Sales Net Sales
Gross Profit Margins:
The difference between a firm’s sales and cost of sales is gross profit. Gross profit margin is an
indication of the extent to which revenues exceed direct costs associated with sales, and it is
computed as

Sales−Cost of sales
Gross profit margin =
Sales

Selling, General, and Administrative Expenses:

A company’s selling, general, and administrative (SG&A) expenses are influenced by the
operating activities it has to undertake to implement its competitive strategy, there are two ratios
in providing useful signals here namely net operating profit margin (NOPAT margin) and
EBITDA margin:

NOPAT
NOPAT margin =
Sales

Earningsbefore interest ,taxes , depreciation ,∧amortization

EBITDA margin =
Sales

Tax Expenses
There are two measures one can use to evaluate a firm’s tax expense. One is the ratio of tax
expense to sales, and the other is the ratio of tax expense to earnings before taxes (also known as
the average tax rate)

Evaluating Investment Management: Decomposing Asset Turnover.

A detailed analysis of asset turnover allows the analyst to evaluate the effectiveness of a firm’s
investment management. There are two primary areas of investment management: (1) working
capital management and (2) management of long-term assets, both of which are discussed in
further detail below.

Working Capital Management

is defined as the difference between a firm’s current assets and current liabilities.
However, this definition does not distinguish between operating components (such as accounts
receivable, inventory, and accounts payable) and financing components (such as cash,
marketable securities, and notes payable).

Operating working capital = (Current assets - cash and marketable securities) – (Current
liabilities - Short-term and current portion of long-term debt)

turnover ratios can also be expressed in number of days of activity that the operating working
capital (and its components) can support. These ratios are defined below:

Operating working capital

Operating working capital to sales ratio =
Sales

Sales
Operating working capital turnover =
Operating working capital

Sales
Accounts receivable turnover =
Accounts receivable

Cost of goods sold 12

Inventory turnover =
inventoty

Purchases Cost of goods sold

Accounts payable turnover = or
Accounts payable Accounts payable

Accounts receivable
Days’ receivables =
Average sales per day
 inventory
Days’ inventory =
Average cost of goods sold per day

Accounts payable
Days’ payables =
Average purchases ðor cost of goods soldÞ per day

Long-Term Assets Management

Net long-term assets = (Total long-term assets - Non interest bearing long-term
liabilities)

Sales
Net long-term asset turnover =
Net long−term assets

Sales
PP&E turnover =
Net property , plant ,∧equipment

Evaluating Financial Management:

Analyzing Financial Leverage Financial leverage enables a firm to have an asset base larger than
its equity. The firm can augment its equity through borrowing and the creation of other liabilities
such as accounts payable, accrued liabilities, and deferred taxes. Financial leverage increases a
firm’s ROE as long as the cost of the liabilities is less than the return from investing these funds.
In this respect, it is important to distinguish between interest-bearing liabilities such as notes
payable, other forms of short-term and long-term debt that carry an explicit interest charge, and
other liabilities.

Current Liabilities and Short-Term Liquidity

Current assets
Current ratio =
Current liabilities

CashþShort−ter minvestmentsþAccounts receivable

Quick ratio =
Current liabilities

CashþMarketable securities
Cash ratio =
Current liabilities
¿
Operating cash flow ratio = Cash flow ¿ operations Current liabilities

Debt and Long-Term Solvency

 Total liabilities
Liabilities to equity ratio =
Shareholders ’ equity

Short−term debtþLong−term debt

Debt-to-equity ratio =
Shareholders’ equity

Short−term debt+ Long term debt−Cash∧marketable securities

Net-debt-to-equity ratio =
Shareholders ’ equity

Debt-to-capital ratio =

Interest bearingliabilities Cash∧mark etable securities

Interest bearingliabilities−Cash∧marketable securities+ Shareholders ’ equity

The ease with which a firm can meet its interest payments is an indication of the degree of risk
associated with its debt policy. The interest coverage ratio provides a measure of this construct:

Net income + Interest expense +Tax expense

Interest coverage ðearnings basis =
Interest expense

Interest coverage ðcash flow basis =

Cash flow ¿ operations + Interest expense+ Taxes paid ¿

Interest expense

Sustainable growth rate = ROE x ( 1- Dividend payout ratio)

Cashdividends paid
Divided payout ratio =
Net income

Cash Flow Ratios

The ratio analysis discussion focused on analyzing a firm’s income statement (net profit margin
analysis) or its balance sheet (asset turnover and financial leverage). The analyst can get further
insights into the firm’s operating, investing, and financing policies by examining its cash flows.
Cash flow analysis also provides an indication of the quality of the information in the firm’s
income statement and balance sheet. As before, we will illustrate the concepts discussed in this
section using TJX’s and Nordstrom’s cash flows.

Cash from operations can be calculated as follows:

Working capital from operations

-Increase (or + decrease) in accounts receivable

 - Increase (or + decrease) in inventory

-Increase (or + decrease) in other current assets excluding cash and cash equivalents

+Increase (or - decrease) in accounts payable

+ Increase (or - decrease) in other current liabilities excluding debt.

Analisis Rasio PT. JABABEKA

Financial Ratio
PT Jababeka
Rasio 2014 2015 2016 2017 2018  
Return on Assets 4,6% 3% 4% 1% 1%  
Return on Equity 8,5 7% 8% 3% 1%  
Liabilities to Equity Ratio 82% 96% 90% 91% 95%  
Loans to Equity Ratio 58% 71% 63% 68% 72%  
Liabilities to Assets Ratio 45% 49% 48% 48% 49%  
Loans to Assets Ratio 32% 36% 33% 36% 37%  
Gross Profit Margin 45% 44% 42% 38% 43%  
Qurrent Ratio 504% 635% 645% 719% 715%  
Inventory Turnover 237% 256% 33% 33% 26%  
A/R Turnover 905% 729% 386% 638% 345%  
EBITDA Margin 18% 11% 17% 4% 3%  
PP&E turnover 126% 143% 127% 126% 121%  
Net Profit Margin 14% 11% 15% 5% 2%