Financial Analysis Topic 5

Techniques

Alexei Alvarez, CFA, FRM

Fabricio Chala, CFA, FRM
Ratio Analysis

❖ Useful to express the relationship between accounts that can be used

to analyse a firm and compare it with others.
❖ Advantages
❖ Estimate financial statements and evaluate management
❖ Identify questions to be answered
❖ Evaluate the flexibility of the firm to pay its sources of financing
❖ Evaluate change in the company or industry over time
❖ Pitfalls
❖ They are not useful if evaluated separately: needs to be against the past or
industry
❖ Comparing firms is difficult: (i) accounting standards, (ii) finding
comparable
❖ Finding the optimal level of a ratio is complicated and industry
dependent
Categories of Financial Ratios

Activity • How efficiently a company performs day-to-day tasks

• Measure the company’s ability to meet its short-term

Liquidity obligations

Solvency • Measure a company’s ability to meet long-term obligations

Profitability • Ability to generate profits from the resources

• Measure the quantity of an asset or flow associated with

Valuation ownership of a specific claim
Activity Ratios

Receivables Turnover

Measure the receivables average rotation period

❖ Optimal: close to the industry average
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

Days of Sales Outstanding

Average number of days the company takes to collect its receivables

❖ Optimal: close to the industry average
❖ High: excessive capital tied to assets|| Low: stringent credit policy
365
𝐷𝑎𝑦𝑠 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 =
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
Activity Ratios

Inventory Turnover

Measure the firm’s inventory management efficiency

❖ Optimal: close to the industry average
𝐶𝑂𝐺𝑆
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Days of Inventory on Hand

Average number of days that inventories are kept in storage

❖ Optimal: close to the industry average
❖ High: too much capital or obsolete inventory | Low: inadequate inventory level
365
𝐷𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 ℎ𝑎𝑛𝑑 =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
Activity Ratios

Payables Turnover

Measure the use of credit provided by suppliers

❖ Optimal: close to the industry average
𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
∗Purchases = COGS + ∆Inventories

Number of days of payables

Average number of days a firm takes to pay suppliers’ credit

❖ Optimal: close to the industry average
❖ High: problems with suppliers | Low: terms vs. industry?
365
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠 =
𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
Activity Ratios

Total asset turnover

Measures how effective is the usage of all of the firm’s assets

❖ Optimal: close to the industry average
❖ High: few assets/low sales or depreciated assets| Low: too much capital invested
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Fixed asset turnover

Measures how effective is the usage of the firm’s fixed assets

❖ Measures how effective is the usage of the all the firm’s assets
❖ High: future CapEx due to depreciated assets | Low: too much capital invested
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐹𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠
Activity Ratios

Working capital turnover

Sales per unit of working capital

❖ Optimal: close to the industry average
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
❖ Firms in some industries may have very low or even negative working capital needs.
Can you think of any examples?
Liquidity Ratios

Current Ratio
A higher ratio implies that the firm should have less difficulties in honoring its short-term
liabilities.
A lower ratio is not necessarily a bad signal, why?
 Optimal: close to the industry average
 High: inefficient given the high amount of capital invested in working capital
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

Quick Ratio

Does not include inventories and other current assets (not so liquid)
 Optimal: close to the industry average
𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Liquidity Ratios

Cash Ratio

Most conservative measure

❖ Optimal: close to the industry average
❖ High: less probability of defaulting on bills vs. inefficiency given the excess of cash
𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑠𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Liquidity Ratios

Cash Conversion Cycle

Length of time, in days, that it takes for a company to convert resource inputs (inventories) into
cash, adjusting for the number of days it takes to pay suppliers.
 Optimal: close to the industry average
 High: undesirable as it indicates an excessive amount of invested capital
𝐷𝑎𝑦𝑠 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
𝐶𝑎𝑠ℎ 𝐶𝑜𝑛𝑣𝑒𝑟𝑠𝑖𝑜𝑛 𝐶𝑦𝑐𝑙𝑒 = ൞ +𝐷𝑎𝑦𝑠 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑜𝑛 ℎ𝑎𝑛𝑑
−𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑜𝑓 𝑝𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Payment to
supplier
Number of days payables Cash Conversion Cycle

DOH DSO
Purchase of Sale of merchandise & Payment from
inventory Billing to customer customer
Solvency Ratios

Debt-to-Equity

The definition of “debt” can vary among firms and industries

It should include short and long-term interest-bearing debt
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡−𝑡𝑜−𝑒𝑞𝑢𝑖𝑡𝑦 =
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦

Debt-to-Capital

❖ Capital includes short and long-term debt, preferred shares and common shares
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡−𝑡𝑜−𝑐𝑎𝑝𝑖𝑡𝑎𝑙 =
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡 + 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝑒𝑞𝑢𝑖𝑡𝑦
Solvency Ratios

Debt-to-Assets

𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
𝐷𝑒𝑏𝑡−𝑡𝑜−𝑎𝑠𝑠𝑒𝑡𝑠 =
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Financial Leverage

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

𝐹𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Interest Coverage Ratio

𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
Solvency Ratios

Fixed Charge Coverage

𝐸𝐵𝐼𝑇 + 𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

𝐹𝑖𝑥𝑒𝑑 𝑐ℎ𝑎𝑟𝑔𝑒 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 + 𝐿𝑒𝑎𝑠𝑒 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠

A large number of leasing obligations will reduce this ratio significantly relative to the
"interest coverage ratio".

 It is a useful ratio for industries where large amount of assets are acquired under
leasing agreements
Profitability Ratios

Net Profit Margin

Measures management effectiveness in turning sales efforts into earnings

 It must be measured using earnings from continuing operations
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑁𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Gross Profit Margin

❖ It can be increased by raising prices (non-sustainable: competition) or reducing costs

𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Profitability Ratios

Operating Profit Margin

It can be increased by raising prices (non-sustainable: competition) or reducing costs

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒 𝐸𝐵𝐼𝑇
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Profitability Ratios

Pretax Margin
𝐸𝐵𝑇
𝑃𝑟𝑒𝑡𝑎𝑥 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒

Return on Assets

❖ Profitability relative to funds invested in the company by common shareholders,

preferred shareholders and suppliers of debt financing.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
❖ Technically, we should add back interest in the numerator
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒(1 − 𝑡)
𝑅𝑂𝐴 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
Profitability Ratios

Operating Return on Assets

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑖𝑛𝑐𝑜𝑚𝑒
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑅𝑂𝐴 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Return on Total Capital

𝐸𝐵𝐼𝑇
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
Profitability Ratios

Return on Equity
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑒𝑞𝑢𝑖𝑡𝑦

Return on Common Equity

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑐𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦
Profitability Ratios
DuPont Analysis

DuPont Analysis is a technique that decomposes ROE into drivers of profitability

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑅𝑂𝐸 = × ×
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑞𝑢𝑖𝑡𝑦

Net Profit Asset Financial

Margin Turnover Leverage

❖ Higher Profit Margin and Asset Turnover will generate a higher ROE
❖ Leverage will not always increase ROE, why?
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
𝑅𝑂𝐸 = × × × ×
𝐸𝐵𝑇 𝐸𝐵𝐼𝑇 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑒𝑞𝑢𝑖𝑡𝑦

Tax Interest EBIT Asset Financial

Burden Burden Margin Turnover Leverage
Profitability Ratios
DuPont Analysis Decomposition

ROE

ROA Leverage

Net Profit Total Asset

Margin Turnover

Tax Interest EBIT

Burden Burden Margin
Standardized Financial Statements

❖ Allow analyst to compare the performance of the firm both

with its peers (cross-section) and with its own past (time series)
Vertical Analysis
𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡
𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Income Statement

McDonald's Corp (MCD UN): Income Statement

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
- Cost of Goods & Services 61.3 % 60.0 % 60.4 % 60.8 % 61.2 % 61.9 % 61.5 %
Gross Profit 38.7 % 40.0 % 39.6 % 39.2 % 38.8 % 38.1 % 38.5 %
- Operating Expenses 8.6 % 9.0 % 8.0 % 8.0 % 7.6 % 9.1 % 10.4 %
+ Selling, General & Admin 9.8 % 9.7 % 8.9 % 8.9 % 8.5 % 9.1 % 9.6 %
+ Other Operating Expense -1.2 % -0.7 % -0.9 % -0.9 % -0.9 % 0.1 % 0.8 %
Operating Income (Loss) 30.1 % 31.0 % 31.6 % 31.2 % 31.2 % 29.0 % 28.1 %
- Non-Operating (Income) Loss 1.6 % 2.0 % 1.9 % 1.9 % 2.0 % 2.1 % 2.3 %
+ Interest Expense 2.0 % 1.8 % 1.7 % 1.8 % 1.8 % 2.0 % 2.5 %
+ Other Non-Op (Income) Loss -0.4 % 0.2 % 0.2 % 0.1 % 0.2 % 0.1 % -0.2 %
Pretax Income 28.5 % 29.1 % 29.7 % 29.3 % 29.2 % 26.9 % 25.8 %
- Income Tax Expense (Benefit) 8.5 % 8.5 % 9.3 % 9.5 % 9.3 % 9.5 % 8.0 %
Net Income, GAAP 20.0 % 20.5 % 20.4 % 19.8 % 19.9 % 17.3 % 17.8 %
Source: Bloomberg
Balance Sheet

McDonald's Corp (MCD UN): Balance Sheet

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Assets
Cash and Equivalents 7.2 % 5.9 % 7.5 % 7.1 % 6.6 % 7.6 % 6.1 % 20.3 %
Accounts and Notes Receivable 3.3 % 3.5 % 3.7 % 4.0 % 3.9 % 3.6 % 3.5 % 3.4 %
Inventories 0.4 % 0.4 % 0.3 % 0.4 % 0.3 % 0.3 % 0.3 % 0.3 %
Prepaid Expenses and Other 1.4 % 1.5 % 2.2 % 1.9 % 3.1 % 2.2 % 2.3 % 1.5 %
Total Current Assets 12.4 % 11.3 % 13.7 % 13.3 % 13.9 % 13.8 % 12.2 % 25.4 %
Property Plant & Equipment - Net 71.2 % 71.2 % 69.0 % 69.2 % 69.7 % 70.3 % 71.7 % 60.9 %
Goodwill 7.9 % 8.0 % 8.1 % 8.0 % 7.9 % 7.8 % 8.0 % 6.6 %
Investment In Affiliates/Joint Ventures 4.3 % 4.0 % 4.2 % 4.3 % 3.9 % 3.3 % 2.9 % 2.1 %
Other Noncurrent Assets 4.3 % 5.4 % 5.1 % 5.1 % 4.5 % 4.8 % 5.1 % 4.9 %
Total Non-current Assets 87.6 % 88.7 % 86.3 % 86.7 % 86.1 % 86.2 % 87.8 % 74.6 %
Total Assets 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
 Balance Sheet
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Liabilities
Accounts Payable - Trade 2.2 % 2.1 % 3.0 % 2.9 % 3.2 % 3.0 % 2.5 % 2.3 %
Current Portion of Long-Term Debt 0.1 % 0.1 % 0.0 % 1.1 % 0.0 % 0.0 % 0.0 % 0.0 %
Accrued Expenses and Other 0.0 % 0.0 % 4.3 % 4.1 % 3.9 % 3.5 % 3.4 % 3.6 %
Interest Accrued/Payable 0.6 % 0.6 % 0.6 % 0.7 % 0.6 % 0.6 % 0.7 % 0.6 %
Other Current Liabilities 0.0 % 0.9 % 0.9 % 1.0 % 1.0 % 1.0 % 1.0 % 0.8 %
Income Taxes Accrued/Payable 0.9 % 0.7 % 0.3 % 0.8 % 0.8 % 0.6 % 0.5 % 0.4 %
Accrued Expenses 5.1 % 5.5 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %
Total Current Liabilities 8.9 % 9.9 % 9.1 % 10.6 % 9.6 % 8.7 % 8.0 % 7.8 %
Deferred Income Taxes (Liabilities) 3.3 % 4.2 % 4.2 % 4.1 % 4.3 % 4.5 % 4.7 % 4.5 %
Other Noncurrent Liabilities 5.0 % 4.5 % 5.0 % 4.9 % 4.3 % 4.6 % 6.0 % 5.5 %
Long Term Debt 35.8 % 34.9 % 36.0 % 36.8 % 38.5 % 38.6 % 43.6 % 63.6 %
Total Non-current Liabilities 44.1 % 43.7 % 45.1 % 45.7 % 47.2 % 47.6 % 54.4 % 73.5 %
Total Liabilities 53.0 % 53.6 % 54.2 % 56.4 % 56.8 % 56.3 % 62.4 % 81.3 %

Stockholder Equity
Common Stock 16.2 % 16.1 % 16.3 % 16.7 % 16.4 % 16.4 % 18.3 % 17.3 %
Treasury Stock -71.3 % -75.6 % -78.6 % -85.7 % -86.4 % -87.9 % -102.8 % -108.5 %
Retained Earnings 101.7 % 103.5 % 105.7 % 111.3 % 111.0 % 114.0 % 126.5 % 117.5 %
Accumulated OCI 0.4 % 2.5 % 2.4 % 1.4 % 2.3 % 1.2 % -4.4 % -7.6 %
Total Shareholders Equity 47.0 % 46.4 % 45.8 % 43.6 % 43.2 % 43.7 % 37.6 % 18.7 %

Total Liabilities and SE 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Standardized Financial Statements

Horizontal Analysis
𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑖𝑛 𝑡
𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 =
𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑖𝑛 𝑡0
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑖𝑛 𝑡
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 =
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑠ℎ𝑒𝑒𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡 𝑖𝑛 𝑡0
Income Statement

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Revenue 1.00 1.06 1.19 1.21 1.24 1.21 1.12
- Cost of Goods & Services 1.00 1.03 1.17 1.20 1.23 1.22 1.12
Gross Profit 1.00 1.10 1.22 1.23 1.24 1.19 1.11
- Operating Expenses 1.00 1.11 1.11 1.13 1.10 1.28 1.36
+ Selling, General & Admin 1.00 1.04 1.07 1.10 1.07 1.11 1.09
+ Other Operating Expense 1.00 0.60 0.84 0.86 0.87 -0.07 -0.74
Operating Income (Loss) 1.00 1.09 1.25 1.26 1.28 1.16 1.04
- Non-Operating (Income) Loss 1.00 1.34 1.46 1.48 1.58 1.63 1.67
+ Interest Expense 1.00 0.95 1.00 1.08 1.12 1.21 1.38
+ Other Non-Op (Income) Loss 1.00 -0.42 -0.64 -0.37 -0.53 -0.27 0.39
Pretax Income 1.00 1.08 1.24 1.25 1.26 1.14 1.01
- Income Tax Expense (Benefit) 1.00 1.06 1.30 1.35 1.35 1.35 1.05
Net Income, GAAP 1.00 1.09 1.21 1.20 1.23 1.05 1.00
Source: Bloomberg
Balance Sheet

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015

Assets
Cash and Equivalents 1.00 0.87 1.16 1.13 1.13 1.36 1.01 3.72
Accounts and Notes Receivable 1.00 1.14 1.27 1.43 1.48 1.42 1.30 1.39
Inventories 1.00 0.95 0.99 1.05 1.09 1.11 0.99 0.90
Prepaid Expenses and Other 1.00 1.10 1.68 1.50 2.65 1.96 1.90 1.36
Total Current Assets 1.00 0.97 1.24 1.25 1.40 1.44 1.19 2.74
Property Plant & Equipment - Net 1.00 1.06 1.09 1.13 1.22 1.27 1.21 1.14
Property Plant & Equipment - Gross 1.00 1.07 1.11 1.15 1.24 1.30 1.26 1.21
Accumulated Depreciation 1.00 1.09 1.14 1.18 1.27 1.34 1.34 1.34
Goodwill 1.00 1.08 1.16 1.19 1.25 1.28 1.22 1.12
Investment In Affiliates/Joint
1.00 0.99 1.09 1.17 1.13 0.99 0.82 0.65
Ventures
Other Noncurrent Assets 1.00 1.33 1.32 1.36 1.30 1.42 1.42 1.52
Total Non-current Assets 1.00 1.07 1.11 1.15 1.22 1.27 1.20 1.13
Total Assets 1.00 1.06 1.12 1.16 1.24 1.29 1.20 1.33
Balance Sheet
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Liabilities
Accounts Payable - Trade 1.00 1.03 1.52 1.55 1.84 1.75 1.39 1.41
Current Portion of Long-Term Debt 1.00 0.57 0.26 11.53 0.00 0.00 0.00 0.00
Accrued Expenses and Other NA NA 1.00 0.98 0.99 0.91 0.84 1.00
Interest Accrued/Payable 1.00 1.13 1.15 1.26 1.25 1.28 1.34 1.34
Other Current Liabilities NA 1.00 0.99 1.22 1.34 1.38 1.19 1.11
Income Taxes Accrued/Payable 1.00 0.80 0.44 1.04 1.18 0.85 0.66 0.61
Accrued Expenses 1.00 1.14 0.00 0.00 0.00 0.00 0.00 0.00
Total Current Liabilities 1.00 1.18 1.15 1.38 1.34 1.25 1.08 1.16
Deferred Income Taxes (Liabilities) 1.00 1.35 1.41 1.42 1.62 1.74 1.72 1.80
Other Noncurrent Liabilities 1.00 0.97 1.13 1.14 1.08 1.18 1.47 1.47
Long Term Debt 1.00 1.04 1.13 1.19 1.34 1.39 1.47 2.37
Total Non-current Liabilities 1.00 1.05 1.15 1.20 1.33 1.39 1.49 2.22
Total Liabilities 1.00 1.07 1.15 1.23 1.33 1.37 1.42 2.05

Stockholder Equity
Common Stock 1.00 1.05 1.13 1.19 1.26 1.30 1.35 1.42
Treasury Stock 1.00 1.13 1.24 1.39 1.51 1.59 1.73 2.03
Retained Earnings 1.00 1.08 1.17 1.27 1.36 1.44 1.50 1.54
Accumulated OCI 1.00 7.38 7.43 4.44 7.86 4.22 -15.00 -28.43
Total Shareholders Equity 1.00 1.05 1.09 1.08 1.14 1.20 0.96 0.53

Total Liabilities and SE 1.00 1.06 1.12 1.16 1.24 1.29 1.20 1.33
Valuation Ratios

❖ Valuation ratios are used to analyse common stocks

❖ The most important ones are:
𝑆𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒
𝑃𝑟𝑖𝑐𝑒−𝑡𝑜−𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑆𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒
𝑃𝑟𝑖𝑐𝑒−𝑡𝑜−𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 =
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑆𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒
𝑃𝑟𝑖𝑐𝑒−𝑡𝑜−𝑆𝑎𝑙𝑒𝑠 =
𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑆𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒
𝑃𝑟𝑖𝑐𝑒−𝑡𝑜−𝐵𝑜𝑜𝑘 =
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
Dividends

❖ Dividends are always declared on a per share basis (dividends per share)
❖ Remember that:
∆𝑅𝑒𝑡𝑎𝑖𝑛𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑎𝑖𝑑
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 1 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
Sustainable growth rate

❖ A firm’s sustainable growth rate is related to the portion of the

earnings that are reinvested in the business and its profitability.
𝑆𝑢𝑠𝑡𝑎𝑖𝑛𝑎𝑏𝑙𝑒 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 = 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 × 𝑅𝑂𝐸

Company A B C
Earnings per Share 3.0 4.0 5.0
Dividends per Share 1.5 1.0 2.0
Return on Equity 14% 12% 10%
Key concepts
❖ Receivables turnover
❖ Days of Sales Outstanding
❖ Inventory turnover
❖ Days of Inventory on Hand
❖ Payables Turnover
❖ Days of Payables
❖ Working capital turnover
❖ Cash conversion cycle
❖ Interest coverage ratio
❖ Fixed charge coverage
❖ Return on Assets
❖ Return on Equity
❖ Net Profit Margin
❖ Asset Turnover
❖ Leverage
❖ Tax Burden
❖ Interest Burden
❖ EBIT Margin
❖ Dividend payout ratio
❖ Sustainable growth rate