TOPIC: EVALUATING FINANCIAL PERFORMANCE OBJECTIVES: •DETERMINE HOW THE FIRM HAS PERFORMED OVER TIME AND RELATIVE TO OTHER FIRMS. •EXPLORE METHODS TO IMPROVE FINANCIAL PERFORMANCE. •ESTABLISH THE STARTING POINT FOR MAKING FINANCIAL PROJECTIONS. RW Melicher IBanking 2013 1
TOPIC: EVALUATING FINANCIAL PERFORMANCE. Objectives: Determine how THE firm has performed over time and relative to other firms. Explore methods to improve financial performance. Establish the starting point for making financial projections. i. Financial models and Ratios. - PowerPoint PPT Presentation
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TOPIC: EVALUATING FINANCIAL PERFORMANCE
OBJECTIVES:
•DETERMINE HOW THE FIRM HAS PERFORMED OVER TIME AND RELATIVE TO OTHER FIRMS.
•EXPLORE METHODS TO IMPROVE FINANCIAL PERFORMANCE.
•ESTABLISH THE STARTING POINT FOR MAKING FINANCIAL PROJECTIONS.
RW Melicher IBanking 2013 1
I. FINANCIAL MODELS AND RATIOS
• FINANCIAL MODELS CONSIST OF TWO OR MORE INTERACTING RATIOS
• FINANCIAL MODELS ALLOW THE SIMULTANEOUS EXAMINATION OF TWO OR MORE FINANCIAL DIMENSIONS (E.G., PROFITABILITY, ASSET UTILIZATION, FINANCIAL LEVERAGE, ETC.)
• FINANCIAL RATIOS PROVIDE THE BASIS FOR CONDUCTING COMPARABLE COMPANIES VALUATION ANALYSIS
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A. RETURN ON ASSETS MODEL
OPERATING PERFORMANCE IS COMPOSED OF:
1.PROFIT MARGIN (PM) = NET PROFIT/NET SALES
2.ASSET TURNOVER OR UTILIZATION (ATO) = NET SALES/TOTAL ASSETS
•RETURN ON ASSETS (ROA) FINANCIAL MODEL = PM X ATO
•ROA = NET PROFIT/NET SALES X NET SALES/TOTAL ASSETS = NET PROFIT/TOTAL ASSETS
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B. RETURN ON EQUITY MODEL
RETURN ON EQUITY (ROE) FINANCIAL MODEL = 1. PROFIT MARGIN (PM) X2. ASSET TURNOVER (ATO) X 3. EQUITY MULTIPLIER (EM) [WHERE EM = TOTAL ASSETS/COMMON EQUITY]
ROE = NET INCOME/NET SALES X NET SALES/TOTAL ASSETS X NET INCOME/COMMON EQUITY, OR NET INCOME/COMMON EQUITY
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C. CONDUCTING RATIO ANALYSIS
TYPES OF FINANCIAL RATIOS:
1. LIQUIDITY
2. PROFIT MARGIN
3. ASSET TURNOVER (UTILIZATION)
4. FINANCIAL LEVERAGE
5. PROFITABILITY (RETURNS)
6. MARKET VALUE-BASED
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MARKET VALUE-BASED RATIOS:
1. MARKET-TO-BOOK VALUE RATIO: (STOCK PRICE X NUMBER OF SHARES
OUTSTANDING)/(BOOK VALUE OF COMMON EQUITY) 2. PRICE-EARNINGS (P/E) MULTIPLE: STOCK PRICE/EARNINGS PER SHARE (EPS)3. PEG RATIO: (PRICE/EARNINGS MULTIPLE)/(EARNINGS GROWTH FORECAST) [NOTE: MARKET VALUE IS ALSO REFERRED TO AS THEMARKET CAPITALIZATION VALUE OR MARKET “CAP”]