Financial statement analysis

Financial Statement Analysis

Chpt. 2: problems 2, 4, 6, 8, 10*

(read appendices to chapter 2)

*requires access to S&P Market Insight

Corporation - definition

“An artificial person or legal entity created by, or under the authority of, the laws of a state ... The corporate is distinct from the individuals who comprise it.” (Black’s Law Dictionary)

“An ingenious device for obtaining individual profit without individual responsibility” (Devil’s Dictionary)

Corporate Governance: separation of ownership and control

Management

Shareholders

Board

Goals of Corporate Financial Management

• Maximize share price

• ?

Oracle - 1997

What drives the stock price (value)?

– How do we use the information in financial statements?

– Do accounting earnings correspond to real cash flows?

– How can we better measure cash flow?

Review of financial statementsI. Balance sheet

The balance sheet identityLiquidityMarket value vs. book value

II. Income statementGAAP vs. cash flow timingNon-cash items

III. Statement of cash flows Operating activityInvestment activityFinancing activity

Review of ratio analysisSolvency

Current ratio = CA/CLQuick ratio = (CA-inventory)/CL

Asset utilization (turnover)Total assets turnover = sales/TADays’ sales in inventory = 365/(COGS/inventory)

LeverageDebt to capital ratio ("debt financing ratio")

= Debt/(debt+equity)Debt to equity ratio = debt/equityCOVERAGE RATIO = EBIT/interest

ProfitabilityProfit margin = NI/SReturn on assets: ROA = NI/TA

Return on equityRoe = NI/E = profit margin x turnover x leverage

Sustainable growth model (Chapter 3 not assigned)

g = b[ROE]

where b = retention ratio = 1- payout ratio

Managing earnings

GAAP vs. cash flow timing

Revenue recognition

Capitalize operating expenses (R&D)

Write offs

Reserves

GAAP Accounting

Free cash flowDefinition: After tax operating cash flow minus

reinvestment

Operating CF

= EBIT – taxes + noncash accounting charges

= EBIT(1-T) + depreciation

FCF = OCF - capital spending - working capital spending

= OCF - capex - ΔNWC

FCF = pmts to creditors + FCFE

Free cash flow to equity (FCFE) = cash left over after meeting all financial obligations including debt payments, and after providing for capex & NWC.

FCFE = FCF - Interest(1-T) - principal repayments + new debt issues

AMGEN INC

LTMJun04

Sales 9,481.600Cost of Goods Sold 1,172.300

-----------------Gross Profit 8,309.300Selling, General, & Administrative Exp. 4,036.000

-----------------Operating Income Before Deprec. 4,273.300Depreciation,Depletion,&Amortization 700.400

-----------------Operating Profit 3,572.901

Interest Expense @CFNon-Operating Income/Expense 45.200Special Items 0.000

-----------------Pretax Income 3,602.300Total Income Taxes 1,005.000Minority Interest @CF

-----------------Income Before ExtraordinaryItems & Discontinued Operations 2,597.300Preferred Dividends 0.000

-----------------Available for Common 2,597.300Savings Due to Common Stock Equiv. 0.000

-----------------Adjusted Available for Common 2,597.300Extraordinary Items 0.000Discontinued Operations 0.000

INVESTING ACTIVITIESInvestments - Increase 5,997.097Sale of Investments 7,197.299Short-Term Investments - Change @CFCapital Expenditures 1,554.600Sale of Property, Plant, and Equipment 0.000Acquisitions 0.000Investing Activities - Other (209.500)Investing Activities - Net Cash Flow (563.900)

Latest QJun04 Dec03

ASSETSCash & Short-Term Investments 4,261.797 5,122.900Net Receivables 1,281.200 1,007.900Inventories 725.100 712.600Prepaid Expenses NA 0.000Other Current Assets 568.000 558.800

------------------ ------------------Total Current Assets 6,836.098 7,402.200

Gross Plant, Property & Equipment @NA 5,526.100Accumulated Depreciation @NA 1,726.700

------------------ ------------------Net Plant, Property & Equipment 4,351.199 3,799.400 Investments at Equity NA @CF Other Investments NA 195.900 Intangibles NA 14,171.400 Deferred Charges NA @CFOther Assets 14,872.699 607.600

------------------ ------------------TOTAL ASSETS 26,060.000 26,176.500

LIABILITIESLong Term Debt Due In One Year 2,895.700 0.000Notes Payable NA 0.000Accounts Payable 2,098.700 327.200Taxes Payable @CF 421.100Accrued Expenses NA 1,081.300Other Current Liabilities 0.000 416.700

------------------ ------------------Total Current Liabilities 4,994.398 2,246.300

Long Term Debt 200.000 3,079.500Deferred Taxes 1,454.800 1,461.600Investment Tax Credit @CF 0.000Minority Interest 0.000 0.000Other Liabilities 0.000 0.000

------------------ ------------------TOTAL LIABILITIES 6,649.199 6,787.400

Dec03 Dec02 Dec01 Dec00

LIQUIDITYCurrent Ratio 3.295 4.187 3.847 3.407Quick Ratio 2.729 3.542 3.150 2.804

--------------- ---------------- ---------------- ----------------ACTIVITYInventory Turnover 1.575 0.985 0.416 0.803Receivables Turnover 9.494 8.840 9.061 9.058Total Asset Turnover 0.330 0.357 0.678 0.766Average Collection Period (Days) 37.919 40.726 39.732 39.745Days to Sell Inventory 228.636 365.397 864.419 448.169Operating Cycle (Days) 266.556 406.122 904.151 487.914

--------------- ---------------- ---------------- ----------------PROFITABILITYOperating Margin Before Depr (%) 44.974 45.278 50.860 48.518Operating Margin After Depr (%) 36.758 37.179 44.239 42.682Pretax Profit Margin (%) 37.974 (12.394) 41.993 46.132Net Profit Margin (%) 27.040 (25.202) 27.883 31.369Tax Rate, Effective (%) 28.792 (103.346) 33.600 32.001

Return on Assets (%) 8.632 (5.691) 17.378 21.085Return on Equity (%) 11.653 (7.612) 21.462 26.388Return on Investment (%) 10.056 (6.524) 20.582 25.091

--------------- ---------------- ---------------- ----------------LEVERAGEInterest Coverage Before Tax 58.693 (12.088) 65.118 60.372Interest Coverage After Tax 42.082 (25.614) 43.574 41.372

Long-Term Debt/Common Equity (%) 15.883 16.667 4.274 5.169Long-Term Debt/Shrhldr Equity(%) 15.883 16.667 4.274 5.169

Total Debt/Invested Capital (%) 13.706 14.862 5.935 7.112Total Debt/Total Assets (%) 11.764 12.964 5.012 5.976Total Assets/Common Equity 1.350 1.337 1.235 1.252

--------------- ---------------- ---------------- ----------------DIVIDENDSDividend Payout (%) 0.000 0.000 0.000 0.000Dividend Yield (%) 0.000 0.000 0.000 0.000