Module 2

4/6/2021
FINANCE FOR
MANAGERS
2021
PhD. Son Duong Tran - School of Management
FINANCIAL
STATEMENT ANALYSIS
2021
PhD. Son Duong Tran - School of Management
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The big picture
FCF: free cash flow

WACC: cost of capital
risk tăng -> WACC tăng -> value giảm
3 major decision:
_ Invesment
_ Funding
_ Distribution
Finance for managers PhD. S.D. Tran 5 April 2021 3
NỘI DUNG
1.1 Financial Statements, Taxes and Cash

flow
1.2 Financial statement analysis
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1.1 Financial Statements, Taxes and Cash flow
The Balance Sheet
book value
quarterly : 30 days
semi-annual : 45 days
annual : 90 days ( 3 months ) - release at
the end of march, outdated by external
companies
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Liquidity
The Balance Sheet
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Debt vs Equity
Book value vs. Market value
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Book value vs. Market value - Example
Book value vs. Market value - Example
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Balance sheet- Example
Income Statement
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Income Statement
Income Statement
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Profit vs. Cash flows
Cash flows Statement

The statement of cash flows, or the cash flow
statement, is a financial statement that
summarizes the amount of cash and cash
equivalents entering and leaving a company.
The cash flow statement (CFS) measures how

well a company manages its cash position,
meaning how well the company generates cash
to pay its debt obligations and fund its operating
expenses.
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1. Receipts from sales of goods and services
2. Interest payments
3. Income tax payments
4. Payments made to suppliers of goods and services used in
production
5. A purchase of an asset
6. A sale of an asset
7. Making merger or acquisition
8. Buy short-term marketable securities
9. Depreciation
10. Payments of dividends
11. Payments for repurchase of company shares
12. Cash Dividends paid
13. Repayment of debt principal
14. Borrowings
15. Issuing new shares
16. Stock dividends
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Operating vs. non operating assets
Operating vs. non operating incomes
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Non-Operating Income
• Interest/Dividend Income;
• Gain from sale/disposal of assets (financial or non-financial);
• Gain from derivative instruments for hedging purposes;
• Gain from translation of foreign currency transactions; etc.
Non-Operating Expenses
• Interest expenses & other financing costs;

• One-time unusual expenses like restructuring cost, litigation cost, payment
towards contingent liabilities;
• Loss from sale/disposal of assets (financial or non-financial);
• Impairment loss;
• Loss from derivative instruments for hedging purposes;
• Loss from translation of foreign currency transactions; etc.
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Unusual and/or infrequent items in IS

APB Opinion No. 30, paragraph 26, states “extraordinary items are events and
transactions that are distinguished by their unusual nature and by the infrequency
of their occurrence.” The extraordinary items should be reported as a separate
component of net income after income from continuing operations on the face of
the income statement. APB Opinion No. 30 also states that a “material event or
transaction that is unusual in nature or occurs infrequently but not both, and
therefore does not meet both criteria for classification as an extraordinary item,
should be reported as a separate component of income from continuing
operations” (FASB 1973, 6). Researchers commonly refer to these items as
“special items” presumably due to Compustat’s use of this label. We refer to the
special items and/or extraordinary items as unusual and/or
infrequent items
Unusual and/or infrequent items in IS
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1.2 Financial statement analysis
Uses of Financial Statement Information
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Ratio Analysis
Ratio Analysis
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Categories of Financial Ratios
Liquidity Ratios
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Debt Management Ratios
6 April
Finance for managers PhD. S.D. Tran 33
2021
Assets Management Ratios
6 April
2021
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Assets Management Ratios (cont.)
6 April
2021
Assets Management Ratios (cont.)
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Profitability Ratios
ROE’s key drivers
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ROE’s key drivers
Market Value Ratios

P/E
𝑷 𝑴𝑬 Net income
𝑷/𝑬 = = • EPS = ------------------------------------------
𝑬𝑷𝑺 𝑵𝑰 Share outstanding
P/B Common dividend

• DPS = --------------------------------------- = EPS x d
Share outstanding
𝑷 𝑴𝑬
𝑷/𝑩 = = Book value of equity (E)
𝑩𝑽𝑷𝑺 𝑬 • BVPS = ----------------------------------------
Share outstanding
P/CF Net income + Depreciation
• CFPS = -------------------------------------------
Share outstanding
𝑷
𝑷/𝑪𝑭 =
𝑪𝑭𝑷𝑺
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Problems with Ratio Analysis
Altman Z-Score
The Altman Z-score is the output of a credit-
strength test that gauges a publicly-traded
manufacturing company's likelihood of
bankruptcy. The Altman Z-score is based on
five financial ratios that can calculate from
data found on a company's annual 10-K report.
It uses profitability, leverage, liquidity,
solvency, and activity to predict whether a
company has a high probability of becoming
insolvent
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Altman Z-Score (cont.)
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Risk analysis
Business risk versus financial risk
Business risk (pure
Financial risk (relevant
business issue, irrelevant
to debt ratio):
to debt ratio)
• Uncertainty in future • Additional business risk
EBIT, NOPAT, and concentrated on
ROIC. common stockholders
• Depends on business when financial leverage
factors such as is used.
competition, operating • Depends on the amount
leverage, etc. of debt and preferred
stock financing.
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Business Risk: Uncertainty in EBIT, NOPAT, and ROIC
 Uncertainty about demand (unit sales).
 Uncertainty about output prices.
 Uncertainty about input costs.
 Product and other types of liability.
 Degree of operating leverage (DOL).

What is operating leverage, and how does it
affect a firm’s business risk?
• Operating leverage is the change in EBIT
caused by a change in quantity sold.
• The higher the proportion of fixed costs
relative to variable costs, the greater the
operating leverage.
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What is operating leverage, and how does it
affect a firm’s business risk?
Higher operating leverage leads to more business
risk: small sales decline causes a larger EBIT decline.
Rev. Rev.
$ $
TC } EBIT
TC
F
F
QBE Sales Sales
Operating vs. Financial leverage

DTL = DOL X DFL
EPS
DFL
EBIT
DOL
DTT
RRKD RRTC
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Operating vs. Financial leverage
%  NI %  EPS
DTL  DOL  DFL  
% S % S
Q (P  V ) EBIT  F %  EBIT
DOL   
Q (P  V )  F EBIT % S
Q (P  V )  F EBIT
DFL  
Q (P  V )  F  I EBIT  I
EBIT %  NI %  EPS
DFL   
EBT %  EBIT %  EBIT
Q&A
THANK YOU
52
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4/6/2021

The big picture

FCF: free cash flow

Finance for managers PhD. S.D. Tran 5 April 2021 3

1.1 Financial Statements, Taxes and Cash

1.2 Financial statement analysis

Finance for managers PhD. S.D. Tran 5 April 2021 4

1.1 Financial Statements, Taxes and Cash flow

Finance for managers PhD. S.D. Tran 5 April 2021 5

The Balance Sheet

Finance for managers PhD. S.D. Tran 5 April 2021 6

Finance for managers PhD. S.D. Tran 5 April 2021 7

The Balance Sheet

Finance for managers PhD. S.D. Tran 5 April 2021 8

Finance for managers PhD. S.D. Tran 5 April 2021 9

Book value vs. Market value

Finance for managers PhD. S.D. Tran 5 April 2021 10

Book value vs. Market value - Example

Finance for managers PhD. S.D. Tran 5 April 2021 11

Book value vs. Market value - Example

Finance for managers PhD. S.D. Tran 5 April 2021 12

Balance sheet- Example

Finance for managers PhD. S.D. Tran 5 April 2021 13

Finance for managers PhD. S.D. Tran 5 April 2021 14

Finance for managers PhD. S.D. Tran 5 April 2021 15

Finance for managers PhD. S.D. Tran 5 April 2021 16

Profit vs. Cash flows

Finance for managers PhD. S.D. Tran 5 April 2021 17

Cash flows Statement

The cash flow statement (CFS) measures how

Finance for managers PhD. S.D. Tran 5 April 2021 18

Cash flows Statement

Finance for managers PhD. S.D. Tran 5 April 2021 19

Cash flows Statement

Finance for managers PhD. S.D. Tran 5 April 2021 20

Operating vs. non operating assets

Finance for managers PhD. S.D. Tran 5 April 2021 21

Operating vs. non operating incomes

Finance for managers PhD. S.D. Tran 5 April 2021 22

Operating vs. non operating incomes

Finance for managers PhD. S.D. Tran 5 April 2021 23

Operating vs. non operating incomes

• Interest expenses & other financing costs;

Finance for managers PhD. S.D. Tran 5 April 2021 24

Unusual and/or infrequent items in IS

Finance for managers PhD. S.D. Tran 5 April 2021 25

Unusual and/or infrequent items in IS

Finance for managers PhD. S.D. Tran 5 April 2021 26

1.2 Financial statement analysis

Finance for managers PhD. S.D. Tran 5 April 2021 27

Uses of Financial Statement Information

Finance for managers PhD. S.D. Tran 5 April 2021 28

Finance for managers PhD. S.D. Tran 5 April 2021 29

Finance for managers PhD. S.D. Tran 5 April 2021 30

Categories of Financial Ratios

Finance for managers PhD. S.D. Tran 5 April 2021 31

Finance for managers PhD. S.D. Tran 5 April 2021 32

Debt Management Ratios

Assets Management Ratios

Assets Management Ratios (cont.)

Assets Management Ratios (cont.)

Finance for managers PhD. S.D. Tran 5 April 2021 36

Finance for managers PhD. S.D. Tran 6 April 2021 37