Financial Analysis Financial Statements Measuring a Firm’s Financial Condition Class Activity Financial Planning

Financial Statements Mandatory for public companies Standard format and rules –Some discretion –Significant differences by country Balance sheet –Snapshot of current financial condition Income statement –Measures performance over time Sources and uses of funds –Where did funds come from? –Where did funds go?

Sample Balance Sheet

Sample Income Statement

Sample Sources and Uses of Funds

Key Financial Ratios Leverage –How much has the firm borrowed –How easily can it cover the cost of debt Liquidity –Does it have enough funds to cover its obligations –Can it get funds quickly Efficiency –How productively are assets being used Profitability –What are its profits compared to sales, assets and equity Market value –How do investors value the company

Sample Financial Ratios

Leverage Ratios Debt ratio = (Long term debt + leases)/(Long term debt + leases +equity) = 450/( ) = ≈.45 Debt-equity ratio = (Long term debt + leases)/equity = 450/540 = ≈.83 Times-interest earned = (EBIT + depreciation)/interest = ( )/42.5 = ≈ 5.18

Liquidity Ratios Net working capital to total assets = (Current assets – current liabilities)/total assets = ( )/1450 ≈.30 Current ratio = Current assets/current liabilities = 900/460 ≈ 1.96 Quick ratio = (Cash + short-term securities + receivables)/current liabilities = ( )/460 ≈ 1.20 Cash ratio = (Cash + short-term securities)/current liabilities = 110/460 ≈.24

Efficiency Ratios Sales-to-assets ratio = Sales/((beginning assets+ending assets)/2) = 2200/(( )/2) ≈ 1.55 Days in inventory = Average inventory/(cost of goods sold/365) = (( )/2)/(1980/365) ≈ 63.6 days Average collection period = Average receivables/ (sales/365) = (( )/2)/(2200/365) ≈ 72.4 days

Profitability Ratios Net profit margin = (EBIT – tax)/sales = (166.7 – 49.7)/2200 ≈ 5.3% Return on assets = (EBIT – tax)/average total assets = (166.7 – 49.7)/(( )/2) ≈ 8.3% Return on equity = Earnings available for common stockholders/average equity = 74.5/(( )/2) ≈ 14.2% Payout ratio = Dividends/earnings = 43.8/74.5 ≈.6

Market-Value Ratios Price-earnings ratio = Stock price/earnings per share = 50/5.26 ≈ 9.5 Dividend yield = Dividend per share/stock price = 3.09/50 ≈ 6.2% Market-to-book ratio = Stock price/book value per share = 50/(540/14.16) ≈ 1.3

Financial Planning Common approaches –Single 5 year plan –Consensus values –Deviations from the plan questioned Multiple plans –Best case –Normal growth –Retrenchment Sensitivity analysis –Let key assumptions vary –Shows critical factors

Financial Planning Models Trade-off –Simplicity –Realism Beware of information overload –Much easier to generate financial plans than to understand them Based on accounting values Need to incorporate financial decisions –Project selection –Financing strategies –Maximizing firm value

Next Class Present Values Student presentations –Perpetuities and annuities –Compound interest Read Chapters 2 and 3 in text