Chapter 17 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Financial Statement Analysis
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Topics Covered Financial Ratios DuPont System Using Financial ratios Measuring Company Performance The Role of Financial Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Type of Financial Ratios Leverage ratios show how heavily the company is in debt. Liquidity ratios measure how easily the firm can lay its hands on cash. ( 對現金的掌控能力 ) Efficiency or turnover ratios (or Activity ratios) measure how productively the firm is using its assets. Profitability ratios are used to measure the firm’s return on its investments.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Four Areas of Ratios Four areas of ratios: liquidity, turnover, profitability, and debt. Liquidity ratios indicate a firm's ability to meet its maturing short-term obligations. Turnover indicates how effectively a firm manages resources at its disposal to generate sales. Profitability indicates the efficiency with which a firm manages resources. Debt indicates the extent to which a firm is financed by debt.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Financial Statements Income Statement - Financial statement that shows the revenues, expenses, and net income of a firm over a period of time. Common-Size Income - Statement Income statement that presents items as a percentage of revenues. Balance Sheet - Financial statement that shows the value of the firm’s assets and liabilities at a particular time. Common-Size Balance Sheet - Balance sheet that presents items as a percentage of total assets.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Example of a Balance Sheet
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Example of An Income Statement
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Leverage Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Leverage Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Liquidity Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Liquidity Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Efficiency Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Efficiency Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Profitability Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Profitability Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Market Value Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Market Value Ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin The DuPont System A breakdown of ROE and ROA into component ratios
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin The DuPont System asset turnover Operating profit margin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin The DuPont System leverage ratio asset turnover Operating profit margin debt burden
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Example of DuPont Analysis
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin The DuPont System of Analysis
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Using Financial Ratios Source: U.S. Department of Commerce, Quarterly Financial Report for Manufacturing, Mining and Trade Corporations, December 2004.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin MVA & Economic Profit Economic Profit = capital invested multiplied by the spread between return on investment and the cost of capital. Market Value Added = The difference between the market value of common stock and its book value
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Residual Income & EVA Residual Income or EVA = Net Dollar return after deducting the cost of capital © EVA is copyrighted by Stern-Stewart Consulting Firm and used with permission.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Measuring Performance
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Measuring Performance Note: Economic value added is the rate of return on capital less the cost of capital times the amount of capital invested; e.g., for Microsoft, EVA = (.329 –.177) × $204,168 million Source: Data provided by Stern Stewart & Co.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Financial Ratios and Default Risk Note: EBITDA is earnings before interest, taxes, depreciation, and amortization. Sources: Default rates from “Statement of Standard & Poor’s on Credit Rating Agencies to SEC,” Public Hearing, November 2002; all other data from Standard & Poor’s.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Videos for Financial Ratios Understand Financial Ratios DuPont Analysis - Pat Obi DuPont Analysis Pt. 1 (v) Ratio Analysis 1