McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Statement Analysis CHAPTER 13

13-2 Overview Purpose Tools Used –Statements –Ratio Analysis Limitations

13-3 Financial Statements Balance Sheet –Common Sized –Trend or Indexed Income Statement –Common Sized –Trend or Indexed Statement of Cash Flows

13-4 Ratio Analysis Purpose of Ratio Analysis Uses –Trend analysis –Comparative analysis –Combination Use by External Analysts –Important information for investment community –Important for credit markets

13-5 Type of Financial Ratios Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios

13-6 Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets - Inventory Current Liabilities

13-7 Activity or Management Efficiency Ratios Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Sales Total Assets

13-8 Activity or Management Efficiency Ratios Average Collection Period Accounts Receivable Sales Per Day Sales Per Day Days to Sell Inventory Inventory Sales Per Day Sales Per Day

13-9 Leverage Ratios Times Interest Earned Earnings Before Int. & Taxes Interest Expense Interest Expense Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends

13-10 Leverage Ratios Debt to Assets Long Term Debt Assets Debt to Equity Long Term Debt Long Term Debt Shareholders Equity

13-11 Profitability Ratios Net Profit Margin % Net Income Sales Sales Operating Return on Assets Earnings Before Int. & Taxes Earnings Before Int. & Taxes Total Assets

13-12 Profitability Ratios Return on Equity Net Income Net Income Common Equity Operating Margin After Depreciation Operating Profit Sales

13-13 Market Price Ratios Price to Earnings Market Price of Stock Earnings EarningsMarket-to-Book-Value Market Price of Stock Market Price of Stock Book Value Per Share Book Value Per Share

13-14 Decomposition of ROE ROE = Net Profit Net Profit Pretax Profit x EBIT EBIT x EBITSalesSalesAssets xx AssetsEquity (1) x (2) x (3) x (4) x (5) x Margin x Turnover x Leverage Tax TaxBurdenInterestBurden

13-15 Figure 13.1 Intel’s Financial Ratios Over Time

13-16 Economic Value Added Approach to compare accounting profitability with the cost of capital Definition –ROA-K (Capital Invested in the firm) –K = opportunity cost for capital Ties accounting to return by investors

13-17 Table Key Financial Ratios of Growth Industries Inc.

13-18 Table Growth Industries Statements of Cash Flow

13-19 Comparability Problems Accounting Differences –Inventory Valuation –Depreciation Inflation International Accounting Conventions

13-20 Quality of Earnings: Areas of Accounting Choices Allowance for bad debts Non-recurring items Reserves management Stock options Revenue recognition Off-balance sheet assets and liabilities

13-21 Figure 13.2 Comparative Accounting Rules

13-22 Figure 13.3 Adjusted Versus Reported Price-Earnings Ratios