BF4013

Key Points
1.0 Financial Statement Analysis

1. Financial analysis is the use of financial statements to analyze a firm’s financial position and
its performance

2. To make financial information that is sources from financial statement be more useful,
financial ratios that restate the financial figures in relative terms are used to identify the
financial strengths and weaknesses of a firm.

3. Profitability ratio: To analyze whether the management of a firm is generating adequate

profits from the use of the firm’s capital and assets.

a. Profit Margin = Profit/ Net Sales

b. Assets Turnover = Sales / Average assets
c. Return on Assets (ROA) = Net income / Average assets
d. Return on ordinary shareholders equity (ROE) = Net Income/Shareholders Equity
e. Earning Per Share = Net income/Total ordinary share issued
f. Price Earning Ratio = Market Price of Ordinary Share/ Earnings per share
g. Payout Ratio = Dividend paid/net income

4. Leverage/Solvency Ratios: investigating how a firm being finances and provide indication
whether a firm is able to meet the interest payments.
a. Debt to Total Assets Ratio = Total Debts / Total Assets
b. Debt to Equity Ratio = Total Debts / Total Equity
c. Time Interest Earned Ratio = Income before tax and interest/Interest Expense
d. Cash- Debts Coverage Ratio = Net cash from operating activities / average liabilities

5. Liquidity ratios: to find out to what extent to which the firm has adequate cash flows or assets
that ear to cash that would be sufficient to meet the short-term liabilities of the firm.

a. Current Ratio = Current Assets / Current Liabilities

b. Quick Ratio = Current Assets - Inventories / Current Liabilities
c. Receivable Turnover Ratio = Credit sales / Average Net Receivables
d. Receivable Turnover Days = 365 days / Receivable Turnover Ratio
e. Inventory Turnover Ratio = COGS / Average Inventory
f. Inventory Turnover Days = 365 days / Inventory Turnover

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2.0 TIME VALUE OF MONEY

1. Future Value Future Value (FV) is a formula used in finance to calculate the
value of a cash flow at a later date than originally received.
2. FVN = PV (1 + i)N
3. Present value (PV) is the current value of a future sum of money or stream
of cash flows given a specified
4. PRESENT VALUE = PV = FVN / (1 + i)N
5. Annuities
i. An ordinary annuity is one where the payments are made at the
end of each period
ii. An annuity due is one where the payments are made at the
beginning of each period
6.

3.0 CAPITAL BUDGETING

i. Accounting Rate of Return

= Average Annual Net Income / (Initial Investment /2)

ii. Payback Period

= Initial Investment / Annual Net Cash Flow

iii. Time Value of Money

a. NPV
b. IRR

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4.0 COST OF CAPITAL

i. Cost of Debt
- The measure can give investors an idea of the riskiness of the company in
compared to others because higher risk companies generally have a
higher cost of debt. (IRR Formula)
- Cost of debt after tax (kd after tax)

ii. Cost of Equity

- Return a company requires to decide if an investment meets capital
return requirements
- cost of preferred stock Effective price that pays in return for the income
it gets from issuing and selling the stock.
- formula = Kp = D (dividend) / P0 (price) - F
- Cost of Common Stock - Dividend discount model or DMM & Capital asset
pricing model or CAPM
- Formulas:

CAPM :

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iii. Weighted Average Cost of Capital (WACC)
- A firms WACC is the cost of capital of the
company's mixtures of debt and stock (preferred
and common stock)

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Cash Flow format

Cash flows from operating activities

Net income

Adjustments for:

Depreciation and amortization

Provision for losses on accounts receivable

Gain on sale of facility

Increase in trade receivables

Decrease in inventories

Decrease in trade payables

Cash generated from operations

Cash flows from investing activities

Purchase of property, plant, and equipment

Proceeds from sale of equipment

Net cash used in investing activities

Cash flows from financing activities

Proceeds from issue of common stock

Proceeds from issuance of long-term debt

Dividends paid

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Net cash used in financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

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