1. 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

2. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 2 Topics Covered  Financial Ratios  DuPont System  Using Financial ratios  Measuring Company Performance  The Role of Financial Ratios

3. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 3 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. ( 對現金的掌控能力 )  Efficiency or turnover ratios (or Activity ratios) measure how productively the firm is using its assets.  Profitability ratios are used to measure the firm’s return on its investments.

4. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 4 Four Areas of Ratios Four areas of ratios: liquidity, turnover, profitability, and debt.  Liquidity ratios indicate a firm's ability to meet its maturing short-term obligations.  Turnover indicates how effectively a firm manages resources at its disposal to generate sales.  Profitability indicates the efficiency with which a firm manages resources.  Debt indicates the extent to which a firm is financed by debt.

5. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 5 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.

6. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 6 Example of a Balance Sheet

7. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 7 Example of An Income Statement

8. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 8 Leverage Ratios

9. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 9 Leverage Ratios

10. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 10 Liquidity Ratios

11. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 11 Liquidity Ratios

12. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 12 Efficiency Ratios

13. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 13 Efficiency Ratios

14. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 14 Profitability Ratios

15. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 15 Profitability Ratios

16. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 16 Market Value Ratios

17. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 17 Market Value Ratios

18. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 18 The DuPont System  A breakdown of ROE and ROA into component ratios

19. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 19 The DuPont System asset turnover Operating profit margin

20. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 20 The DuPont System leverage ratio asset turnover Operating profit margin debt burden

21. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 21 Example of DuPont Analysis

22. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 22 The DuPont System of Analysis

23. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 23 Using Financial Ratios Source: U.S. Department of Commerce, Quarterly Financial Report for Manufacturing, Mining and Trade Corporations, December 2004.

24. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 24 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

25. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 25 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.

26. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 26 Measuring Performance

27. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 27 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.

28. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 28 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.

29. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 17- 29 Videos for Financial Ratios  Understand Financial Ratios https://www.youtube.com/watch?v=U5rRFh32gQU https://www.youtube.com/watch?v=U5rRFh32gQU  DuPont Analysis - Pat Obi https://www.youtube.com/watch?v=tX9kuCZcSK8  DuPont Analysis Pt. 1 (v) https://www.youtube.com/watch?v=GFS-KZsFQIA  Ratio Analysis https://www.youtube.com/watch?v=TzW5fWqUwZM  1