Dr Eva CipovovaCorporate Finance I1 I. Role of Financial Analysis Financial Statements & Annual report –Financial statements BS, P&L, CF, Statement of earnings –Notes to financial statements –Auditor’s report –Five year summary of key financial data –Management’s discussion & analysis of operations

2 Time horizon standpoint Balance Sheet – financial position of the firm at a certain date. Income statement (Earnings, P&L)– result of operation for the accounting period Statement of stockholders equity- reconciling beginning and ending balances Cash Flow statement – information about cash inflows and outflows during the period.

3 II. Analysis of financial statements Objective depends on the user of the analysis –Creditor – firm capital structure, impact of the borrowing, source of debt repayments –Investor – past performance & future expectations, risk involved, expected returns, competitive position –Management –performance, different, operating areas, strengths and weaknesses, changes for the future

4 Sources of information Auditors’ report Management discussion and analysis Annual report in the SEC format 10-K, quarterly report10-Q Other sources

5 Tools and techniques Analysis of the structure (common size) –BS items as percentage of total assets –P&L items as percentage of net sales Financial ratios Trend analysis Comparison with competitors Forecasting – regression analysis

6 Ratios Liquidity ratios– firms ability to meet cash needs as they arise Asset utilization ratios– efficiency of managing assets Debt utilization assets– D/E, coverage of interest and fixed charges Profitability ratios – overall performance Return to investors

Profitability ratios Profit margin = Net income/Sales Return on assets = Net income/Total assets Return on equity = Net income/St’s Equity 7

Assets utilization ratios Receivables turnover = Sales/Acc. Receivables Invetory turnover = Sales/Inventories Fixed assets turnover = Sales/Fixed Assets Total asset turnover = Sales/Total Assets Average colletion period = Acc.Receivables/Avg.daily credit sales 8

Liquidity ratios Current ratio = Current assets/Current liabilities Quick ratio = (Current assets – Inventory)/ Current liabilities Cash flow liquidity ratio = (cash+market.securities+operating cash flow)/ Current liabilities 9

Debt utilization ratio Debt to total assets = Total debt/Total assets Times interest earned = EBIT/Interest Fixed charge coverage = Income before fixed charges and taxes/ Fixed charges Fixed Charges = Lease payments + Interest 10

Dr Irena JindrichovskaFinancial Analysis11 Liquidity - S/T solvency Current ratio (working capital ratio)= CA/CL Quick ratio= (CA-I)/CL Cash flow liquidity ratio = = (cash+market. securities+operating CF )/CL

12 Return to investors EPS = EAT/ outstanding common shares P/E ratio= Price per share/Earning per share Profit margin = Net income/Sales Return on assets (ROA) = Net income/Total Assets Return on equity (ROE) = Net income/St. Equity Return on equity = ROA/(1 – Debt/Assets)