FinancialStatementAnalysis (II)

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Master in Senior Management

2310
Financial management
Juan Cerón
Financial statements analysis (2/2)
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© Prof. Juan Cerón PhD. All rights reserved - Derechos reservados – Prohibida la reproducción o utilización sin permiso previo del autor – Utilization forbidden without previous expressed consent by the author
Index
00. Introduction
01. Previous steps
02.Financial statements analysis
0201. Vertical analysis
0202. Horizontal analysis
0203. Cash Flow analysis
03. Ratio analysis
2
Ratio analysis Index
01. What are they and what are they for

02. Solvency/leverage ratios
03. Liquidity ratios
04. Efficiency/Activity ratios
05. Profitability ratios
06. Market ratios
07. Annexes: Financial statements
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• Generally speaking, a financial ratio is the relationship between two financial parameters.
Examples, profits and sales, debt and equity etc.
• Basically, they have two purposes:
 They are a simple and powerful way to summarize the financial information included in the financial
statements.
 They allow to compare. The concept “relative” here is key.
• There are no standard values for financial ratios. For example, take the capital structure. Debt has
both advantages and disadvantages. And maybe what is good for company A is not for company
B.
• Ratios seldom provide answers, but they help you to ask the right questions.
• Be careful!, most ratios admit different expressions and different interpretations as well,
depending on the sector. To correctly analyze a ratio, we must know how it was calculated and
the company’s industry.
5
Ratios are used to shed light on five questions:
• How much has the company borrowed? Is the amount of debt likely to result in financial distress?
• Can the company pay its short-term obligations? Can it easily get cash if needed?
• How productively is the company using its assets? Are there any signs that the assets are not
being used efficiently?
• How profitable is the company?
• How highly is the firm valued by investors? Are investors’ expectations reasonable?
6
And so, ratios are usually grouped into five categories:
• Solvency/Leverage: they refer to the financial structure.
• Liquidity: the measure the short-term cash availability.
• Efficiency/Activity: they measure how is the company managing assets and liabilities.
• Profitability: they are related to the return of a company.
• Market ratios: They inform of how investors view the company.
7
02. Solvency or leverage ratios
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 In general, these ratios show the relationship between external funds

and own funds.
 The objective is to assess the company's financial health and its ability
to repay debt and interest.
 An unfavorable ratio can indicate some likelihood that a company will
default on its debt obligations.
9
The role of debt: A personal levered investment

We invest €10,000 buying shares of a company that currently are traded at €1 per share. Therefore, we buy 10,000 shares. A year
later, the shares are trading at 1.5€ and we decide to sell them. We earn €5,000 with an investment of €10,000, an annual return
of 50%.
With leverage:
Now suppose that we ask for a loan of 90,000€ at 10% interest rate. The loan is invested in shares of this company, in addition to
our own 10,000€. We then purchase 100,000 shares for 100,000€. If shares trade at 1.5€ one year after and we sell them, the
proceeds are 150,000 €. We must pay back the loan and the interests, 90,000€+9,000€. At the end of the day, we have 150,000€-
90,000€-9000€ = 51,000 €, and we have earned 51,000-10,000=41000€. That is, a rate of return of 410%
10
What do we mean by “external resources”?
EQUITY
Assets FINANCIAL NON CURRENT

LIABILITIES
OTHER NON CURRENT

LIABILITIES
FINANCIAL CURRENT
LIABILITIES
OTHER CURRENT
LIABILITIES
11
There are two types of ratios related to debt:
 Ratios to measure financial leverage.
 Ratios to measure the capability to pay interests and repay the principal of
debts.
12
02. Solvencia/Endeudamiento
Some measures of solvency or leverage (take care with names!)
Debt ratio = Debt to assets =
Debt to equity (1)=
Debt to equity (2)=
Debt to equity (3)=
Equity multiplier =
13
30/70 = 0.43 Debt/Equity (1)
30/100 = 0.30 Debt/Assets

Debt = Liabilities
100/70 = 1.4 Equity multiplier
14
• Usually, a highly levered firm is related to high risk, because it means that the company has
been aggressive to fund growth.
• If leverage produces more profits than interest expenses, then shareholders gain. If, on the
contrary, debt costs are higher than generated earnings, shareholders lose.
• It is better to use these measures comparing with the industry and the own history of the
company.
15
CONSOLIDATED BALANCE SHEET AT 31-Dec-2001
Carslberg Heineken Carslberg Heineken

Danish Danish
€ (M) € (M)
Khrone (M) Khrone (M)
A) NON-CURRENT ASSETS 25093 61% 58% 4158 A) EQUITY 12513 30% 43% 3139
Parent company
Intangibles 0% 0% 13 8059 20% 38% 2758
Fixed assets 20326 49% 50% 3614 Minority interests 4454 11% 5% 381
Non-current financial assets 4767 12% 7% 531 B) NON-CURRENT LIABILITIES 15744 38% 26% 1843
B) CURRENT ASSETS 15976 39% 42% 3059 Long-term debt 12042 29% 11% 797
Inventories 2865 7% 10% 692 Other long-term liabilities 3702 9% 14% 1046
Accounts receivable 9820 24% 17% 1192 C) CURRENT LIABILITIES 12812 31% 31% 2235
Cash and cash equivalents 3291 8% 16% 1175 Short-term debt 2199 5% 5% 329
Accounts payable and other chor-term liabilities 10613 26% 26% 1906
TOTAL ASSETS (A + B) 41069 100% 100% 7217 TOTAL EQUITY AND LIABILITIES 41069 100% 100% 7217
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Leverage measures
CARLSBERG 2001 HEINEKEN 2001
(Mn kr) (Mn €)
Assets (1) 41069 7217

Financial debt (2) 14241 1126
Liabilities (3) 28556 4078
Equity (4) 12513 3139
Cash and cash equivalent (5) 3291 1175
Debt ratio (3)/(1) 0,69 0,56
Debt to Equity 1 (3)/(4) 2,3 1,3
Debt to Equity 2 (2)/(4) 1,1 0.4
Debt to Equity 3 ((2)–(5))/(4) 0.9 0.0
Equity multiplier (1)/(4) 3.3 2.3
What is the Debt-to-equity ratio in the individual levered operation seen before?
17
• Another important measure related to leverage is the capacity to pay interest due on outstanding debt. A widely used
ratio is “Interest coverage ratio”, calculated as follows:
𝐸𝐵𝐼𝑇𝐷𝐴
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒=
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠
• Banks prefer to lend to companies whose operating profit is sufficient to pay interests.
2022 Mn € TELEFONICA IBERDROLA ECI 2021
EBITDA 12,852 13,228 589

Interest expenses (gross) 3,030 3,042 115
Interest coverage (times) 4.2 4.3 5.1
• Namely, these three companies can cover (four, four and five times) its current interest payments with their available
operating profit. This is a good margin of safety.
• Alternatively, EBIT is used in the numerator.
18
A company pays off a bank loan for 10 M€ and at the same time gets a loan from another
bank for 10 M€ but at a lesser interest rate. How will leverage ratios be affected? And the
Coverage interest ratio?
19
The level of leverage depends on the nature of the business and the industry. Generally
speaking, a D/E ratio below 1 would be seen as relatively safe, whereas values of 2 or
higher might be considered risky.
Capital intensive industries (utilities, car industry, oil companies) are typically highly
levered. By contrast, service companies and technological companies usually present a
lower figure.
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 They analyze if cash and other short-term assets convertible into cash (that is, Current
assets) are sufficient to face short-term liabilities (that is, Current liabilities).
 It is relevant for short-term creditors, both banks and providers, to know whether the
company will be able to pay them.
 In contrast to solvency ratios, focused on long-term outlook, liquidity ratios focus on short-
term.
 A liquidity crisis can arise even at healthy companies if circumstances appear that make it
difficult for them to meet short-term obligations such as repaying their loans and paying
their employees. The main cause of bankruptcies during the global credit crunch of 2007-09
is the best example. Even for most solvent companies was almost impossible to raise short-
term funds: Lehman Brothers and General Motors.
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Liquidity ratios most used
 Working capital
 Current ratio
 Quick ratio / Acid test
 Cash ratio
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WORKING CAPITAL (It is not actually a ratio)
Working capital = Current assets – Current liabilities = Permanent capitals – Non-current assets
Positive working capital is a good sign of financial health.

To properly assess working capital, it is recommended to take a look at the company’s sector data.
Working capital is especially critical for new businesses, because it is the guarantee to operate for a
while.
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Equity
Non-current
assets
Non-current
liabilities
Current assets
Current
liabilities
25
Equity
Non-current
assets
Non-current
liabilities
Working capital
Current assets
Current
liabilities
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Equity
Non-current
assets
Non-current
liabilities
Working capital
Current assets
Current
liabilities
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Assets
Total cash, cash equivalents, and short-term investments

130,334
Microsoft 2021 Accounts receivable, net of allowance for doubtful38,043
accounts of $751 and $78
Inventories 2,636
Other current assets 13,393
WC = 184.406 – 88.657 = 95.749 Total current assets 184,406
WC= 103.134+141.988-149.373 = 95.749 Non current asset 149,373
Total assets 333,779

If Microsoft were to pay off all its near-term
obligations, there would still be an excess of Liabilities and stockholders’ equity
nearly $96,000 Mn easily convertible into cash.
Accounts payable 15,163
Current portion of long-term debt 8,072
Accrued compensation 10,057
Short-term income taxes 2,174
Short-term unearned revenue 41,525
Other current liabilities 11,666
Total current liabilities 88,657
Non current liabilities 103,134
Total liabilities 191,791
Total stockholders’ equity 141,988
Total liabilities and stockholders’ equity 333,779

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Calculate Working capital
CONSOLIDATED BALANCE SHEET AT 31-Dec-2001
Carslberg Heineken Carslberg Heineken

Danish Danish
€ (M) € (M)
Khrone (M) Khrone (M)
A) NON-CURRENT ASSETS 25093 61% 58% 4158 A) EQUITY 12513 30% 43% 3139
Parent company
Intangibles 0% 0% 13 8059 20% 38% 2758
Fixed assets 20326 49% 50% 3614 Minority interests 4454 11% 5% 381
Non-current financial assets 4767 12% 7% 531 B) NON-CURRENT LIABILITIES 15744 38% 26% 1843
B) CURRENT ASSETS 15976 39% 42% 3059 Long-term debt 12042 29% 11% 797
Inventories 2865 7% 10% 692 Other long-term liabilities 3702 9% 14% 1046
Accounts receivable 9820 24% 17% 1192 C) CURRENT LIABILITIES 12812 31% 31% 2235
Cash and cash equivalents 3291 8% 16% 1175 Short-term debt 2199 5% 5% 329
Accounts payable and other chor-term liabilities 10613 26% 26% 1906
TOTAL ASSETS (A + B) 41069 100% 100% 7217 TOTAL EQUITY AND LIABILITIES 41069 100% 100% 7217
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Working capital is more a quantitative than a qualitative concept. Compare these two working capitals.
COMPANY A COMPANY B
CURRENT ASSETS 1380 CURRENT LIABILITIES 875 CURRENT ASSETS 1380 CURRENT LIABILITIES 875
Inventories 300 Shor-term debt 25 Inventories 750 Shor-term debt 450

Accounts receivable 150 Accounts payable 850 Accounts receivable 250 Accounts payable 425
Other receivables 80 Other receivables 80
Short-term financial Short-term financial
investments 250 investments 50
Cash and cash equivalents 600 Cash and cash equivalents 250
WC 505 WC 505
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Following, there are several transactions. How will each affect: (a) cash, and (b) working capital.
Cash WK
i. Payment of an additional dividend of $10 Mn, in cash.

ii. Receive $2,500 from a customer who pays an invoice for a previous sale.
iii. Pay $50,000 to a supplier for a previous purchase.
iv. Get a $10 Mn loan, long term, and apply it to increase inventories.
v. Borrow $10 million short-term and use it to increase inventories.
vi. Sell $5 million of short-term public debt purchased 15 days ago.
vii. Sell goods on credit for $3 Mn.
viii. The previous client pays the $3 Mn.
ix. Take a short-term loan of $10 million and use it to reduce accounts payable.
x. Purchase of raw materials for inventories and pay in cash.
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Inditex Working Capital
31/01/2022 31/01/2021
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The current ratio. It is a different way to express the Working capital:
Current ratio for Microsoft
Current ratio for Inditex
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The Quick ratio or Acid Test
Similar to Current Ratio, but getting rid of Inventories, because is the less liquid component of the Current
assets.
Acid test for Inditex
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Cash ratio
It is even more restrictive than the Quick ratio, because in the numerator only uses cash and cash
equivalents.
Lenders, creditors, and investors use the cash ratio to evaluate the short-term risk of a company.
While a higher cash ratio is generally better, it may also reflect that the company is inefficiently using cash.
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04. Efficiency or activity ratios
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This group of ratios measures the ability of a company to use its assets to generate profits. For example, with
which speed are assets converted in cash.
Normally, an improvement in efficiency will translate into profits.
• Assets turnover = Sales / Average Assets
Measures the efficiency with which firm uses its assets. It shows how many euros of sales each euro invested
in the company's assets generates.
2022 El Corte Inglés Inditex Telefónica

Sales 14,068.7 27716 39,993
Average assets 2021-2022 14,615 27681,5 109,427.5
Sales / Average assets 0.96 1.00 0.37
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Other efficiency ratios often used:
• How many days does the company need to convert inventories into sales: Days of inventory
• How many days to collect from customers. Days of collection
• How many days to pay product suppliers. Days of payment
38
Information from a distributor of TV and video equipment
28 days
days
27 days
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 Profitability ratios assess a company's ability to earn profits related to sales, assets, or
shareholders' equity
 Profitability ratios include margin ratios and return ratios.
 Higher ratios are often more favorable than lower ratios
 They are more useful when compared to those of similar companies, the company's own history,
or average ratios for the company's industry.
41
Most used profitability ratios
 Gross margin
 Operating margin
 Net profit margin
 Earnings per share
 Dividends per share
 Return on Assets
 Return on Equity
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Profit margins measure the ability to generate earnings per euro sold. Different versions depending
on how earnings are measured.
Gross margin = Gross profit / Revenues = (Revenues – Supplies) / Revenues
It shows the gross profitability on each euro of sales. It is the profit after discounting cost of goods sold
(or cost of supplies)
Operating margin = Operating profit (EBIT) / Revenues

It shows the operating profitability on each euro of sales. It tells the profit per euro sold before
considering interest expenses and taxes, that is, expenses that have nothing to do with business
operations.
Net profit margin = Net income / Revenues
It shows the net profit on each euro of sales. Related to the previous ratio, this one informs us how much
is lost from the operating profit to the net income as a result of elements that have nothing to do with the
business operation.
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Gross margin, Operating margin and Net income margin
+Net sales
Millions of € ECI Inditex Telefónica -Cost of goods sold
2022 2021 2022
=Gross profit
Revenue (1) 14,068.7 27,716 39,993 -Wage expense
Cost of sales / Supplies (2) 9,681.9 11,902 12,941 -Other operating costs (utilities, rents)
Operating profit (EBIT) (3) 26.1 4,282 4,056 -Depreciation
Net income (4) 880.4 3,250 2,319 = Operating profit = Earnings before interest
and taxes (EBIT)
Gross margin = ((1)-(2))/(1) 31,1% 57.1% 67.6%
-Interest expenses
Operating margin = (3)/(1) 0.2% 15.4% 10.1%
-Interest revenues
Profit margin = (4)/(1) 6.3% 11.7% 5.8%
+/- Other income
=Income before taxes
ECI has a bigger Profit margin than Operating margin. What could explain this?
-Taxes
By comparing these margins can be check the relevance of expenses not directly
= Net income
related to normal operations: financial, extraordinary and taxes.
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Where can be found
05. Profitability ratios the number of shares?
Earnings per Share
Earnings per share = Net income / number of shares
The Net income to use is that attributable to the parent company.
Ex. Iberdrola’s number of outstanding shares at 31/12/2022 was 6,362,094,000, according to its
Annual Report.
Net income in 2022 attributable to the parent= 4,339 Mn €
Earnings per share in 2022 is 4,339 Mn € / 6,362 Mn = 0.68 €/share
It has no meaning to compare with other companies. It is only useful applied to the history of the
company.
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Dividend per share
Dividend per share = Total dividends paid / Number of shares
Telefónica paid in 2022 0,30 €/share as dividend.
Coca-Cola paid 1.76 $/share in 2022.
It is only useful if we compare the company with itself in previous years.
The proportion of earnings paid out as dividends is called pay-out.
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DIVIDEND IN CASH
Coca-Cola: dividends
Dollars per quarter
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
2 9/ 26/ 26/ 27/ 29/ 29/ 28/ 26/ 26/ 29/ 29/ 29/ 28/ 26/ 27/ 29/ 29/ 28/ 27/ 26/ 27/ 29/ 30/ 29/ 29/
/ / / / / / / / / / / / / / / / / / / / / / / / /
11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11
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Return ratios
Gross margin, Operating margin and Net income margin don’t consider the invested capital. And investors want to
know the profitability of their investments.
Two standard parameters:
• Return On Asset = ROA
• Return On Equity = ROE
48
Return On Asset = ROA

It shows the profit the company generates in a period on the total assets employed. It is an indicator of the success
with which managers have employed the firm’s assets in a period, irrespective of how those assets are financed.
Sometimes, especially in USA, the following version can be found
We are going to use the first one
It is also called Economic Return
49
Return On Asset = ROA
Millions of €
ROA 2022 El Corte Inglés Inditex Telefónica
EBIT 26,1 4,282 4,056
Average Assets (14,244+14,987) / 2 = 14,615 (28,945+26,418) / 2 = 27,681 (109,642+109,213) / 2 = 109,427.5
ROA = EBIT /Average Assets 26.1 / 14,615 = 0.2% 4,281 / 27,681 = 15.5% 4,056 / 109,428 = 3,7%
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DuPont System. This breakdown tells us about the sources of profitability. There are firms that make money because they sell a lot of
units, although with a small margin (fast food chains, retailers, Netflix), some others make money because of the large margin, although
with few sales (5* hotels, luxury products, airplanes manufacturers). And, finally, the champions are those firm with much margin and
much turnover, like Apple.

EBIT 26,1 4,282 4,056
Average Assets 14,615 27,681 109,427.5
ROA 0,2% 15,5% 3,7%
Revenues 14,068.7 27,716 39,993
EBIT/Revenues 0.2% 15,4% 10,1%
Revenues/Average Assets 0,96 1,00 0,37
ROA 0.2% x 0,96 =0,2% 15,4% x 1,0 =15,5% 10,1% x 0,37 =3,7%
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After-tax After-tax
Return on Return on
Industry name Operating Sales/Capital Industry name Operating Sales/Capital
Capital Capital
Margin Margin
Tobacco 40.72% 1.58 64.45% Utility (General) 17.11% 0.35 5.91%
Retail (Building Supply) 12.01% 4.55 54.62% Trucking 4.39% 1.31 5.76%
Advertising 10.45% 4.81 50.20% Green & Renewable Energy 23.07% 0.25 5.73%
Computers/Peripherals 20.24% 2.22 44.93% Telecom (Wireless) 9.61% 0.54 5.18%
Paper/Forest Products 16.56% 2.71 44.89% Oil/Gas (Integrated) 5.98% 0.86 5.12%
Shoe 13.86% 2.96 40.95% Real Estate (General/Diversified) 13.81% 0.36 5.01%
Household Products 17.45% 2.28 39.78% Auto & Truck 5.69% 0.83 4.74%
Steel 14.02% 2.66 37.25% Oilfield Svcs/Equip. 1.27% 2.23 2.82%
Semiconductor Equip 25.43% 1.46 37.24%
Metals & Mining 25.83% 1.40 36.12% R.E.I.T. 20.00% 0.14 2.75%
Healthcare Support Services 3.85% 8.33 32.05% Software (Internet) 2.17% 0.76 1.65%
Building Materials 9.81% 3.10 30.44% Real Estate (Development) 5.03% 0.26 1.29%
Information Services 21.63% 1.34 29.04% Financial Svcs. (Non-bank &
Chemical (Basic) 13.64% 2.00 27.31% Insurance) 12.02% 0.05 0.59%
Beverage (Soft) 19.80% 1.38 27.30% Brokerage & Investment Banking 1.22% 0.30 0.37%
Machinery 13.36% 2.04 27.22% Bank (Money Center) -0.03% 0.27 -0.01%
Telecom. Equipment 19.35% 1.39 26.84% Banks (Regional) -0.22% 0.38 -0.08%
Environmental & Waste Services 12.34% 2.07 25.56% Oil/Gas (Production and
Software (Entertainment) 31.91% 0.80 25.46% Exploration) -2.40% 0.64 -1.54%
Software (System & Application) 25.13% 1.00 25.03% Real Estate (Operations & Services) -2.08% 1.35 -2.80%
Furn/Home Furnishings 9.80% 2.53 24.76% Coal & Related Energy -2.66% 1.52 -4.04%
Business & Consumer Services 8.48% 2.74 23.26% Hotel/Gaming -11.88% 0.39 -4.69%
Hospitals/Healthcare Facilities 11.33% 2.04 23.17% Air Transport -22.41% 0.88 -19.81%
Healthcare Information and Technology 18.85% 1.22 23.06% Total Market 11.18% 0.77 8.61%
Homebuilding 13.26% 1.73 22.92%
Electrical Equipment 11.42% 1.99 22.78%
Data for USA 2020. Source: Damodaran

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Shareholders also want to know the profitability of their investment, not only the overall return of the company
measured by ROA. Shareholders’ return is measured with Return On Equity
Return on Equity = ROE
ROE 2022 El Corte Inglés Inditex Telefónica
Net income 870.1 3,243 2,011
Average equity (6,464+5,590)/2 = 6,027.2 (15,733+14,520)/2=15,126.5 (25,088+22,207)/2 = 23,647

ROE 14,4% 21,4% 8.5%
The Net income to use is that attributable to the parent company.
It is also known as Financial Return
53
We can also disaggregate ROE into three different elements (DuPont approach).
 Operating efficiency, measured with Net profit margin

 Assets efficiency, measured with Assets turnover
 Leverage, measured with ratio Asset/Equity (equity multiplier)
This disaggregation allows investors and managers to identify the activities that explain changes in ROE.
54
Company A Company B
Year 1 Year 2 Year 1 Year 2
Net income 1000 1200 2100 2100
Sales 10000 10000 17500 17500
Profit margin 0.1 0.12 0.12 0.12
Sales 10000 10000 17500 17500
Assets 5000 4800 8750 8750
Assets turnover 2 2.08 2 2
Assets 5000 4800 8750 8750
Equity 2000 2000 5000 3500
Financial leverage 2.5 2.4 1.75 2.5
ROE 50% 60% 42% 60%
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ROE BREAK DOWN FOR DIFFERENT INDUSTRIES
Inditex Walmart Telefonica AT&T Iberdrola Meta Adobe

millions of € 31/01/2022 31/01/2022 31/12/2022 31/12/2021 31/12/2022 31/12/2022 31/12/2022
Initial assets € 26,418 $ 244,860 € 109,213 $ 525,761 € 141,742 $ 165,987 $ 27,241
Final assets € 28,945 $ 243,197 € 109,642 $ 551,622 € 154,667 $ 185,727 $ 27,165
Average assets € 27,682 $ 244,029 € 109,428 $ 538,692 € 148,205 € 175,857 € 27,203
Revenues € 27,716 $ 611,289 € 39,993 $ 168,864 € 53,949 $ 116,609 $ 17,606
Asset turnover
Net income € 3,243 $ 11,680 € 2,011 $ 20,081 € 4,339 $ 23,200 $ 4,756

Net income margin
Average equity book value € 15,127 $ 87,941 € 23,647 $ 166,332 € 40,799 $ 125,296 $ 14,424
Equity multiple (leverage)
ROE
Go to ROEBreakdown.xlsx. Compute ROE and assess
56
ROE by industry. 2021
Source: https://pages.stern.nyu.edu/~adamodar/
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Relationship between ROE and ROA (without considering tax)
If ROE > ROA, means that net cost of liabilities is lower than ROA, that is, the leverage is worth it.
If ROE < ROA, means that net cost of liabilities is greater than ROA, that is, the leverage is not worth it.
If ROE = ROA, means that net cost of liabilities equals ROA, that is, the leverage is neutral.
EBIT 26,1 4,282 4,056
Average Assets (14,244+14,987) / 2 = 14,615 (28,945+26,418) / 2 = 27,681 (109,642+109,213) / 2 = 109,427.5
ROA = EBIT /Average Assets 26.1 / 14,615 = 0.2% 4,281 / 27,681 = 15.5% 4,056 / 109,428 = 3,7%
ROE 2022 El Corte Inglés Inditex Telefónica
Net income 880.4 3,250 2,319
Average equity (6,464+5,590)/2 = (15,733+14,520)/2=15,126,5 (25,088+22,207)/2 = 23,647

6,027,2
ROE 14,6% 21,5% 12,3%
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Exercise KAO
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06. Market ratios
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06. Market ratios
These are ratios commonly used by investors. They combine information from the financial
statement and the stock exchange. The following are three of most used.
 Dividend yield
 PER
 Price / Book value
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06. Market ratios
DIVIDEND YIELD
Profitability of an investment in stocks is double: Price-return, that takes into account only the
change in the stock price, and dividend yield, which is the return related to dividends received. Total
return is the sum of both.
Dividend yield is computed dividing dividends (paid in the last period or promised by the company for
the next period) by the current stock price.
It is useful for comparing companies in the same industry.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠h𝑎𝑟𝑒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑=
𝑆𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒
62
06. Market ratios
Dividend yield as of October 2023

IBEX 35 EUROSTOXX-50 S&P 500
DIVIDEND DIVIDEND SECTOR DIVIDEND
COMPANY YIELD (%) COMPANY YIELD (%) COMPANY YIELD (%)
Annaly Capital
Metrovacesa 18.93 Stellantis NV 9.45 Automobiles and Parts 13.77
Manag
Nordea Nank
Aedas Homes 13.87 8.72 Banks Keycorp 8.78
Abp
Enagás 11.03 BMW 8.34 Automobiles and Parts Altria Group 8.46
Endesa 8.54 BASF 7.66 Chemicals Devon Energy 7.72
Telefónica 8 Intesa Sanpaolo 7.6 Banks Verizon Comms. 7.33
Mapfre 7.65 Daimler AG 7.45 Automobiles and Parts AT & T 7.06
Red Eléctrica 6.87 BNP Paribas 7.22 Banks Kinder Morgan 7.01
Simon Property
Acerinox 6.78 BBVA 7.03 Banks 6.85
Group
Truist Financial
Bankinter 6.6 Enel 6.66 Electricity 6.83
Corp.
Prosegur 6.43 AXA 6.44 Insurance ONEOK Inc 6.74
63
06. Market ratios
Price / Earnings (PER)
 It is the most popular. It measures the relationship between stock market price and earnings.
 If a firm presents a PER=15, it means that investors are willing to pay 15 $ ( or €) for each $ (or
€) of earnings. It also means that the investor will last 15 years to recover the investment.
 Commonly, companies with high expected growth have greater PER
64
06. Market ratios
PER
Iberdrola. 06 / Oct. / 2023
Shares outstanding 6,362,094,000
Market price ( 06/10/2023) 10.14 €
Market cap =6,362,094,000 * 10.140 € = 64,511,633,160 €
Net income 2022 4,339 Mn €
Earnings per share 2022 = 4,339 M€ / 6,362.1 = 0.68 €
PER at 06/10/2023 = 10.14 € / 0.68 € = 64,511 Mn € / 4,339 Mn € = 14.9 times
Industry PER 12.99
PER can be also calculated using expected earnings
65
06. Market ratios
PRICE / BOOK VALUE
P/BV = Current market price / Balance sheet value per share
Book value is calculated by dividing accounting Shareholders Equity (Parent) by the number of outstanding
shares.
Book value of Iberdrola’s share in 2022: 41,119 M€ / 6,362,094,000 = 6.46 €
P/BV = 10.14 € / 6.46 € = 1.56
Industry P/BV 1.96
This multiple links a forward-looking variable (market price) with another that looks into the past, book
value.
66
Portauto, second part
67
07. Annexes: financial statements
eaemadrid.com
68
02. Balance sheet
Telefónica Group Consolidated Balance sheet
Million of euros
69
02. Income statement presentation
70
Iberdrola Group Consolidated Balance sheet. Million of euros
71
Iberdrola
72
Inditex
73
Inditex
74
75
76
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it happen
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Master in Senior Management

Financial statements analysis (2/2)

01. What are they and what are they for

Ratios are used to shed light on five questions:

• How profitable is the company?

And so, ratios are usually grouped into five categories:

• Solvency/Leverage: they refer to the financial structure.

• Liquidity: the measure the short-term cash availability.

• Profitability: they are related to the return of a company.

• Market ratios: They inform of how investors view the company.

 In general, these ratios show the relationship between external funds

The role of debt: A personal levered investment

What do we mean by “external resources”?

Assets FINANCIAL NON CURRENT

OTHER NON CURRENT

There are two types of ratios related to debt:

 Ratios to measure financial leverage.

Some measures of solvency or leverage (take care with names!)

Debt ratio = Debt to assets =

Debt to equity (1)=

Debt to equity (2)=

Debt to equity (3)=

30/70 = 0.43 Debt/Equity (1)

30/100 = 0.30 Debt/Assets

CONSOLIDATED BALANCE SHEET AT 31-Dec-2001

Carslberg Heineken Carslberg Heineken

Assets (1) 41069 7217

2022 Mn € TELEFONICA IBERDROLA ECI 2021

EBITDA 12,852 13,228 589

Liquidity ratios most used

WORKING CAPITAL (It is not actually a ratio)

Positive working capital is a good sign of financial health.

Total cash, cash equivalents, and short-term investments

Total assets 333,779

Total liabilities and stockholders’ equity 333,779

CONSOLIDATED BALANCE SHEET AT 31-Dec-2001

Carslberg Heineken Carslberg Heineken

Inventories 300 Shor-term debt 25 Inventories 750 Shor-term debt 450

i. Payment of an additional dividend of $10 Mn, in cash.

The current ratio. It is a different way to express the Working capital:

Current ratio for Microsoft

Current ratio for Inditex

The Quick ratio or Acid Test

Acid test for Inditex

• Assets turnover = Sales / Average Assets

2022 El Corte Inglés Inditex Telefónica

Other efficiency ratios often used:

 Profitability ratios include margin ratios and return ratios.

 Higher ratios are often more favorable than lower ratios

Most used profitability ratios

Operating margin = Operating profit (EBIT) / Revenues

Net profit margin = Net income / Revenues

Earnings per Share

Earnings per share = Net income / number of shares

The Net income to use is that attributable to the parent company.

Net income in 2022 attributable to the parent= 4,339 Mn €

Earnings per share in 2022 is 4,339 Mn € / 6,362 Mn = 0.68 €/share

Dividend per share

Dividend per share = Total dividends paid / Number of shares

Telefónica paid in 2022 0,30 €/share as dividend.

Coca-Cola paid 1.76 $/share in 2022.

It is only useful if we compare the company with itself in previous years.