7/21/2019 Ch.3 - 13ed Analysis of Fin Stmts.ppt http://slidepdf.com/reader/full/ch3-13ed-analysis-of-fin-stmtsppt 1/67 1 CHAPTER 3 Analysis of Financial Statements
7/21/2019 Ch.3 - 13ed Analysis of Fin Stmts.ppt
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1
CHAPTER 3
Analysis of Financial
Statements
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Topics in Chapter Ratio analysis
Du Pont system
Eects of improin! ratios
"imitations of ratio analysis
#ualitatie factors
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Value = + + +FCF1 FCF2 FCF∞
(1 + WACC)1 (1 +WACC)∞
(1 + WACC)2
Free cash fow(FCF)
$ar%et interest rates
Firm’s business risk $ar%et ris% aersion
Firm’s deb!e"ui# mi$Cost of &e't
Cost of e(uity
Wei%hed a&era%e
cos o' caial(WACC)
e oerain%ro* a'er a$es
e"uired in&esmensin oerain% caial
,
=
-eerminans o' .nrinsic Value/0sin% aio Anal#sis
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)
*erie+ Ratios facilitate comparison of,
*ne company oer time
*ne company ersus other companies Ratios are use& 'y,
"en&ers to &etermine cre&it+orthiness
Stoc%hol&ers to estimate future cash -o+san& ris%
$ana!ers to i&entify areas of +ea%ness an&stren!th
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/ncome Statement2010 2011E
Sales .3))00 403.500
C*6S )70000 .00000
*ther e8penses 420000 512750
Deprec9 115750 120000
Tot9 op9 costs .15750 5.32750
E:/T 14))0 .025)0
/nt9 e8pense 145000 0000
E:T ;1..50< )225)0
Ta8es ;)0=< ;53)2)< 1570.5
>et income ; 7.135< 2.3.)
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:alance Sheets, Assets2010 2011E
Cash 422 1)000
S?T inest9 20000 41532
AR 532150 4000
/nentories 124350 1415)0
Total CA 17)502 250112 >et FA 737470 35)0
Total assets 25.72 3.157.2
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:alance Sheets, "ia'ilities
@ E(uity2010 2011E
Accts9 paya'le 32)000 3.700
>otes paya'le 420000 300000Accruals 2)750 30000
Total C" 132750 103700
"on!?term &e't 1000000 .00000
Common stoc% )50000 150735
Ret9 earnin!s 74532 275215
Total e(uity ..4532 17441.2
Total "@E 25.72 3.157.2
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*ther Data2010 2011E
Stoc% price 5900 12914
of shares 100000 2.0000
EPS ?097. 1901
DPS 0911 0922
:oo% al9 persh9 .9. 4971
"ease payments )0000 )0000
Ta8 rate 09) 09)
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Fie Cate!ories of Fin9
Ratios "i(ui&ity
Asset $!mt
De't $!mt
ProBta'ility
$ar%et alue
7
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"i(ui&ity Ratios Can the company meet its short?
term o'li!ations usin! the
resources it currently has on han&
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Forecaste& Current an&
#uic% Ratios for 20119
CR11 29.9
#R11
09739
CA
C"
250
10)0
250 ? 141510)0
CA ? /n9
C"
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Comments on CR an& #R2011E 2010 2007 /n&9
CR 29. 19)5 293 294
#R 0973 09. 09 190
E8pecte& to improe 'ut still 'elo+ the
in&ustry aera!e9 "i(ui&ity position is +ea%9
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Asset $ana!ement Ratios Ho+ eciently &oes the Brm use
its assets
Ho+ much &oes the Brm hae tie&up in assets for each &ollar ofsales
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1)
/nentory Turnoer Ratio
s9 /n&ustry Aera!e
/n9 turnoer
)9109
Sales/nentories
40351415
2011E 2010 2007 /n&9
/n9 T9 )91 )9. )9 591
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Comments on /nentory
Turnoer /nentory turnoer is 'elo+
in&ustry aera!e9
Firm mi!ht hae ol& inentory orits control mi!ht 'e poor9
>o improement is currently
forecaste&9
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DS*
).9. &ays9
Receia'les
Aera!e sales per &ay
44035G35.
Receia'lesSalesG35.
DS*, aera!e num'er of&ays from sale until cashreceie&9
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Appraisal of DS*
Firm collects too slo+ly an&situation is !ettin! +orse9
Poor cre&it policy9
2011 2010 2007 /n&9DS* ).9. 379. 349) 3290
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Total assetsturnoer
29009
Sales
Total assets
40353.14
Fi8e& assets
turnoer
Sales
>et B8e& assets
9)19403534
(More…)
Fi8e& Assets an& TotalAssets
Turnoer Ratios
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Fi8e& Assets an& TotalAssets
Turnoer Ratios FA turnoer is e8pecte& to e8cee& in&ustry
aera!e9 6oo&9
TA turnoer not up to in&ustry aera!e9Cause& 'y e8cessie current assets ;AGR an&inentory<9
2011E 2010 2007 /n&9
FA T* 9) 592 1090 490
TA T* 290 290 293 29.
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De't $ana!ement Ratios
Does the company hae too much&e't
Can the companyIs earnin!s meetits &e't sericin! re(uirements
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Total lia'ilities Total assetsDe't ratio
)39=10)0 J .00
3.14
E:/T
/nt9e8pense
T/E
5939
.02950 (More…)
Calculate the &e't T/Ean& E:/TDA coera!eratios9
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.9.9
E:/T J Depr9 @ Amort9 J "ease payment /nterest "ease e8pense pmt9J J "oan
pmt9
.0295 J 120 J )00 J )0 J 0
E:/TDA Coera!e ;EC<
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Recapitalization improved situation, butlease payments drag down EC.
2011E 2010 2007
/n&9DGA )39=094= .)9= .090=
T/E 593 091 393 592
EC .9. 09 295 90
De't $ana!ement Ratioss9 /n&ustry Aera!es
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2)
ProBta'ility Ratios
Khat is the companyIs rate ofreturn on, Sales Assets
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2.
ProBt $ar!ins
P$ 395=9 >/Sales 2.3954035
*$ 491=9E:/TSales
.034035
>et proBt mar!in ;P$<,
*peratin! proBt mar!in
;*$<,
(More…)
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Sales LC*6SSales
ProBt $ar!ins ;Continue&<
6P$
6P$ 1495=9 12354035
6ross proBt mar!in;6P$<,
4035 L.004035
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ery 'a& in 2010 'ut proMecte& tomeet or e8cee& in&ustry aera!e in20119
2011E 2010 2007
/n&9P$ 395= ?195= 295= 395=
*P$ 491 093 591 491
6P$ 1495 1)95 1595 1.9.
ProBt $ar!ins s9 /n&ustryAera!es
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:EP
1)93=9
E:/T
Total assets
.02953.14
(More…)
:asic Earnin! Po+er ;:EP<
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:asic Earnin! Po+er s9/n&ustry Aera!e
:EP remoes eect of ta8es an&Bnancial leera!e9 Nseful for
comparison9 ProMecte& to 'e 'elo+ aera!e9
Room for improement9
2011E 2010 2007 /n&9
:EP 1)93= 095= 1)92=149=
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R*A
492=9
>/
Total assets
2.3953.14
(More…)
Return on Assets ;R*A<an& Return on E(uity;R*E<
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R*E
129=9
>/
Common E(uity
2.3951744
(ore3)
Return on Assets ;R*A<an& Return on E(uity;R*E<
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2011E 2010 2007
/n&9
R*A 492= ?393= 590= 790=
R*E 129= ?1491=1393= 190=
:oth 'elo+ aera!e 'ut improin!9
R*A an& R*E s9 /n&ustryAera!es
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Eects of De't on R*Aan& R*E
R*A is lo+ere& 'y &e't??intereste8pense lo+ers net income +hich
also lo+ers R*A9 Ho+eer the use of &e't lo+ers
e(uity an& if e(uity is lo+ere&
more than net income R*E +oul&increase9
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Eects of De't on R*A @R*E>o De't ;unleere&< s9 De't;leere&<
3)
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/mportant /mplications ofDe't Financin! ;Financial
"eera!e<
3.
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The /nternal 6ro+th Rate
The internal !ro+th rate tells usho+ much the Brm can !ro+
assets usin! retaine& earnin!s asthe only source of Bnancin!9
/ntrnl 6rth rate ;R*A 8 Retention
=< 1? ;R*A 8 Retention
=<
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The Sustaina'le 6ro+thRate
The sustaina'le !ro+th rate tells usho+ much the Brm can !ro+ 'y usin!
internally !enerate& fun&s an&issuin! &e't to maintain a constant&e't ratio9
Sustn'l 6rth rate ;R*E 8 Retention=<
1? ;R*E 8 Retention =<
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3
$ar%et alue Ratios
$ar%et alue ratios, !ies m!mtin&ication of +hat inestors thin%
of co9Is past performance @ futureprospects
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$ar%et alue Ratios
$ar%et alue ratios incorporate the, Hi!h current leels of earnin!s an&
cash -o+ increase mar%et alue ratios Hi!h e8pecte& !ro+th in earnin!s an&
cash -o+ increases mar%et alue ratios
Hi!h ris% of e8pecte& !ro+th inearnin!s an& cash -o+ decreases mar%et alue ratios
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)0
$ar%et alue Ratios
PGE $r%t price per share G Earnin! pershare
PE6 ratio ;PriceGEarnin!s< G 6ro+th
PE6 O190 re-ects fairly alue& stoc%
$G: $r%t price p9s9 G :oo% alue p9s9
PGCFPrice p9s9 G CF p9s9
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)1
Price 129149
EPS 19019
PGE 129
>/Shares out9
2.3952.0
Price per shareEPS
129141901
Calculate an& appraise thePGE PGCF an& $G: ratios9
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)2
/n&ustry PGE Ratios,
/n&ustry Tic%er PGE
:an%in! ST/ 1932
Soft+are $SFT 591)Dru! PFE .94
Electric Ntilities DNQ 1091)
Semicon&uctor
s
/>TC )901
Steel >NE 0933
To'acco $* 1930
S@P .00 1)92245icker is 'or #ical *rm in indusr#6 bu 7!8 raio is 'or he
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)3
>/ J Depr9
Shares out9
CF per share
19)72.395 J 12090
2.0
Price per shareCash -o+ per share PGCF
92912914
19)7
$ar%et :ase& Ratios
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))
Com9 e(uity
Shares out9:PS
497191744
2.0
$%t9 price per share:oo% alue per share $G:
19.)9129144971
$ar%et :ase& Ratios;Continue&<
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).
/nterpretin! $ar%et :ase&Ratios
PGE, Ho+ much inestors +ill payfor 1 of earnin!s9 Hi!her is
'etter9 $G:, Ho+ much pai& for 1 of 'oo%
alue9 Hi!her is 'etter9
PGE an& $G: are hi!h if R*E is hi!hris% is lo+9
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$ar%et alue $easures
alue Stoc%s, Firms +G lo+ $r%t to :oo%ratios
6ro+th Stoc%s, Firms +G hi!h $r%t to:oo% ratios $ar%et Capitaliation $r%t alue of
Common E(uity
Enterprise alue $ e(uity J $ &e't Cash mr%t'l securities9 $easuresalue of BrmIs un&erlyin! 'usiness
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)4
2011E 2010 2007/n&9
PGE 1290 ?593 794 1)92
PGCF 92 249. 90 495$G: 19. 191 193 297
Comparison +ith /n&ustryAera!es
i l i li
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E(uity $ultiplier T9 AssetsGCmn E(ty
Firms +ith lar!e amts of &e'tBnancin! ;hi!h leera!e< hae hi!hE(ty $ultiplier
)
E i $ l i li
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E(uity $ultiplier T9 AssetsGCmn E(ty
Firms +ith Small amts of &e'tBnancin! ;lo+ leera!e< hae smallerE(ty $ultiplier
)7
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.0
E8plain the Du PontSystem
The Du Pont system focuses on, E8pense control ;P$<
Asset utiliation ;TAT*< De't utiliation ;E$<
/t sho+s ho+ these factors
com'ine to &etermine the R*E9
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.1
; <; <; < R*E
ProBtmar!in
TAturnoer
E(uitymultiplier
>/
Sales
Sales
TA
TA
CE8 8 R*E
The Du Pont System
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.2
>/
Sales
Sales
TA
TA
CE8 8 R*E
The Du Pont System
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.3
200, 295= 8 293 8 292 1392=2007,?195= 8 290 8 .92 ?1595=2010, 395= 8 290 8 19 1390=/n&9, 395= 8 29. 8 290 190=
>/
Sales
Sales
TA
TA
CE8 8 R*E
The Du Pont System
C Si : l
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.)
Common Sie :alanceSheets,
Dii&e all items 'y TotalAssets Assets 2007 2010 2011E /n&9
Cash 095= 093= 09)= 093=
ST /n9 393= 094= 290= 093=AR 2397= 2197= 2.90= 229)=
/nent9 )94= ))95= )9= )192=
TotalCA
459.= 549)= 4592= 5)91=
>et FA 239.= 3295= 239= 3.97=
TA 10090 10090= 10090= 10090=
Di i& ll i ' T l
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..
Dii&e all items 'y Total"ia'ilities @ E(uity
Assets 2007 2010 2011E /n&9
AP 797= 1192= 1092= 1197=
>otespay9
1395= 2)97= 9.= 29)=
Accruals 793= 797= 109= 79.=
Total C" 329= )590= 2795= 2394="T De't 2290= 3)95= 1)92= 2593=
Total e(9 ).92= 1793= .592= .090=
Total "@E 10090 10090 10090 10090=
A l i f C Si
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.5
Analysis of Common Sie:alance Sheets
Computron has hi!her proportion ofinentory an& current assets than
/n&ustry9 Computron no+ has more e(uity
;+hich means "ESS &e't< than/n&ustry9
Computron has more short?term&e't than in&ustry 'ut less lon!?term &e't than in&ustry9
C Si /
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.4
Common Sie /ncomeStatement,
Dii&e all items 'y Sales2007 2010 2011E /n&9
Sales 10090= 10090= 10090= 10090=
C*6S 39)= .9)= 29)= )9.=*there8p9
797= 1293= 94= )9)=
Depr9 095= 290= 194= )90=
E:/T 591= 093= 491= 491=/nt9 E8p9 19= 390= 191= 191=
E:T )93= ?294= 590= .97=
Ta8es 194= ?191= 29)= 29)=
>/ 295= ?195= 395= 395=
A l i f C Si
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.
Analysis of Common Sie/ncome Statements
Computron has lo+er C*6S ;594<than in&ustry ;)9.< 'ut hi!her
other e8penses9 Result is thatComputron has similar E:/T ;491<as in&ustry9
Percenta!e Chan!e Anal sis
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.7
Percenta!e Chan!e Analysis,= Chan!e from First ear
;2007<Income St. 2007 2010 2011E
Sales 090= 4090= 10.90=
C*6S 090= 4397= 1029.=*ther e8p9 090= 1119= 093=
Depr9 090= .19= .3)97=
E:/T 090= ?7194= 1)09)=
/nt9 E8p9 090= 1195= 290=
E:T 090= ?2092= 193=
Ta8es 090= ?2092= 193=
>/ 090= ?2092= 193=
A l i f P t
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50
Analysis of PercentChan!e /ncome Statement
Ke see that 2011 sales !re+ 10.=from 2007 an& that >/ !re+ 1=
from 20079 So Computron has 'ecome more
proBta'le9
P t Ch
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51
Percenta!e Chan!e:alance Sheets, Assets
Assets 2007 2010 2011E
Cash 090= ?1791= ..95=
ST /nest9 090= ?.9= )49)=AR 090= 090= 1.090=
/nent9 090= 090= 1)090=
Total CA 090= 4392= 139)=>et FA 090= 14295= 1)294=
TA 090= 759.= 1379)=
Percenta!e Chan!e
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52
Percenta!e Chan!e:alance Sheets, "ia'ilities@ E(uityLiab. &Eq.
2007 2010 2011E
AP 090= 1229.= 1)491=>otespay9
090= 25090= .090=
Accruals 090= 1079.= 1479)=
Total C" 090= 14.97= 11.97=
"T De't 090= 20792= .)95=
Total e(9 090= ?1590= 17497=
A l i f P t
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53
Analysis of PercentChan!e :alance Sheets
Ke see that total assets !re+ at arate of 137= +hile sales !re+ at a
rate of only 10.=9 So assetutiliation remains a pro'lem9
Potential Pro'lems an&
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5)
Potential Pro'lems an&"imitations of Ratio Analysis
Comparison +ith in&ustry aera!esis &icult if the Brm operates many&ierent &iisions9
Ae performance
/n-ation
Seasonal factors
Potential Pro'lems an&
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5.
Potential Pro'lems an&"imitations of Ratio Analysis
Kin&o+ &ressin!
Dierent acct! @ op9 practices
Ratio !oo& or 'a&
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55
#ualitatie Factors
There is !reater ris% if, reenues tie& to a sin!le customer reenues tie& to a sin!le pro&uct reliance on a sin!le supplier Hi!h percenta!e of 'usiness is !enerate&
oerseas
Khat is the competitie situation Khat pro&ucts are in the pipeline Khat are the le!al an& re!ulatory issues
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:enchmar%in!
Ratios not ery helpful 'y themselesUnee& to 'e compare& to somethin!
Peer 6roup Analysis Compare to similar co9Is or +Gin in&ustries S/C an& >A/CS co&es
Time?Tren& Analysis Chan!e in performance oer time
/nternal @ E8ternal