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. Efficiency or turnover 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 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 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 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.
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