Dr Irena JindrichovskaFinancial Analysis1 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

Dr Irena JindrichovskaFinancial Analysis2 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.

Dr Irena JindrichovskaFinancial Analysis3 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

Dr Irena JindrichovskaFinancial Analysis4 Sources of information Auditors’ report Management discussion and analysis Annual report in the SEC format 10-K, quarterly report10-Q Other sources

Dr Irena JindrichovskaFinancial Analysis5 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

Dr Irena JindrichovskaFinancial Analysis6 Ratios Liquidity – firms ability to meet cash needs as they arise Activity (asset management) – efficiency of managing assets Leverage ratios (debt management) – D/E, coverage of interest and fixed charges Profitability ratios – overall performance Return to investors

Dr Irena JindrichovskaFinancial Analysis7 Liquidity - S/T solvency Current ratio (working capital ratio)= CA/CL Acid test ratio = (CA-I)/CL Cash flow liquidity ratio = = (cash+market. securities+operating CF )/CL

Dr Irena JindrichovskaFinancial Analysis8 Activity ratios – asset management efficiency Average collection period = receivables/(S/360) Accounts receivable turnover = S/Receivables Inventory turnover = Cost of goods sold/Inventory Fixed asset turnover = S/PPE Total assets turnover= S/A

Dr Irena JindrichovskaFinancial Analysis9 Leverage (debt financing and coverage) Debt ratio = D/A Long term debt to total capitalization = L/T debt / L/T debt + Equity Debt to equity = D/E TIE = operating profit/interest expense Fixed charge coverage = (operating profit+leasing)/(interest+leasing) *Cash flow adequacy = operating CF / (average annual L/T debt maturities)

Dr Irena JindrichovskaFinancial Analysis10 Profitability ratios – overall performance Gross profit margin = GP/S Operating profit margin = Operating profit/S Net profit margin = Net earnings/net sales Cash flow margin = Operating CF /S ROA = Net earnings / A ROE = Net earnings/Equity Cash return on assets= Operating CF / A

Dr Irena JindrichovskaFinancial Analysis11 Return to investors EPS = Net earnings / no of shares Price earnings = P/E Dividend yield = Div / share price Book ratio = Share price / book value per share

Dr Irena JindrichovskaFinancial Analysis12 Summary Relating the ratios : Du-Pont analysis – pyramid of ratios Assessment of propensity to bankruptcy – Altman Z-score Projections, forecasting Summary of analysis findings cannot be interpreted in isolation