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Financial Tool Analysis
Financial Tool Analysis
Presenter’s name
Presenter’s title
dd Month yyyy
FINANCIAL ANALYSIS TOOLS:
DESCRIPTION
• Graphics
• Regression
• Common-Size Analysis
• Financial Ratio Analysis
22% 21%
19%
38%
Latin America
North America
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
14.0
8.0
6.0
4.0
2.0
0.0
-40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0
-2.0
-4.0
Sales Growth
• Vertical common-size
- Balance sheet: Each item as a percent of total assets.
- Income statement: Each item as a percent of total net revenues.
- Cash flow: Each line as a percent of sales, assets, or total in and out.
- Highlights composition and identifies what’s important.
• Horizontal common-size
- Percentage increase or decrease of each item from the prior year or
showing each year relative to a base year.
- Highlights items that have changed unexpectedly or have
unexpectedly remained unchanged.
Period 1 Period 2
% of Total % of Total
Assets Assets
Cash 25 15
Receivables 35 57
Inventory 35 20
Fixed assets, net of 5 8
depreciation
Total assets 100 100
Revenue +19%
Receivables +38%
Inventory +58%
• Ratios
- Express one number in relation to another.
- Standardize financial data in terms of mathematical
relationships expressed as percentages, times, or days.
- Facilitate comparisons—trends and across companies.
Computation ≠ Analysis
• Analysis goes beyond collecting data and computing numbers.
• Analysis encompasses computations and interpretations.
• Where practical, directly experience the company’s business.
• Analysis of past performance:
What aspects of performance are critical to successfully competing
in the industry?
How well did the company perform (relative to own history and
relative to competitors)?
Why? What caused the performance?
Does the performance reflect the company’s strategy?
Category Description
Activity Activity ratios. How efficient are the firm’s operations
and the firm’s management of assets?
Category Description
Activity Activity ratios. How efficient are the firm’s operations
and the firm’s management of assets?
Amount of return
Rate of return =
Amount invested
Net income
ROE =
Average equity
Net income
ROE =
Average equity
= ROA × Leverage
and/or
What rate of return has the firm earned on the assets it had available to
use during the year?
Net income
ROA =
Average assets
In other words,
ROA can
be thought
of as: Profit margin × Turnover (efficiency)
To what extent
• . . . was it derived from selling a high margin product or keeping
expenses low—deriving more profits from each $1 of sales? (return
on sales, net profit margin)
• . . . was it derived from generating higher sales from a lower
investment in assets? (efficient use of assets, also known as
turnover or efficiency)
• . . . was it derived from investing a lower amount of equity—by using
more debt in its capital structure? (financial leverage)
Category Description
Activity Activity ratios. How efficient are the firm’s operations
and the firm’s management of assets?
Numerator Denominator
Number of days in
Days of inventory on hand (DOH) Inventory turnover
period
Receivables turnover Revenue Average receivables
Number of days in Receivables
Days of sales outstanding (DSO)
period turnover
Average trade
Payables turnover Purchases
payables
Number of days in
Number of days of payables Payables turnover
period
• Cash cycle: How long does it take for the firm to go from cash to cash?
- Service company: sell service → receive cash.
- Merchandising company: buy inventory → sell inventory → receive
cash and pay for inventory.
- Manufacturing company: buy raw materials → make product → sell
product → receive cash and pay for materials and labor.
Category Description
Activity Activity ratios. How efficient are the firm’s operations
and the firm’s management of assets?
Coverage ratios
Interest coverage EBIT Interest payments
Fixed charge EBIT + Lease Interest payments + Lease
coverage payments payments
Price
P/E =
Earnings per share
Numerator Denominator
Valuation ratios
P/E Price per share Earnings per share
P/CF Price per share Cash flow per share
P/S Price per share Sales per share
P/BV Price per share Book value per share
Total debt to total debt Total debt Total debt plus equity
plus equity
• Cash flow
• Sales forecast
Forecast
Debt
• Expenses
• Gross Profit
• Operating Profit
Forecast
Forecast
Interest
Cash Flow
Expense • Assets
• Liabilities
Forecast
Income and • Cash Flow
Taxes