1. Financial Statement Analysis
CHAPTER 19
Financial Statement Analysis

2. Overview Purpose Tools Used Statement analysis Ratio analysis
Limitations

3. Financial Statements Balance Sheet Common Sized Trend or Indexed
Income Statement
Statement of Cash Flows

4. Table 19.1 Consolidated Statement of Income for Hewlett-Packard, 2006

5. Table 19.2 Consolidated Balance Sheet for Hewlett-Packard, 2006

6. Table 19.3 Statement of Cash Flows for Hewlett-Packard, 2006

7. Accounting Versus Economic Earnings
Sustainable cash flow that can be paid to stockholders without impairing productive capacity of the firm
Accounting earnings
Affected by conventions regarding the valuation of assets

8. Profitability Measures
ROE: measures the profitability for contributors of equity capital
ROA: measures the profitability for all contributors of capital
Leverage has a significant effect on profitability measures

9. Table 19.4 Nodett’s Profitability over the Business Cycle

10. Table 19.5 Impact of Financial Leverage on ROE

11. ROE, ROA and Leverage

12. Decomposition of ROE (1) x (2) x (3) x (4) x (5) ROE = x Net Profit
Pretax Profit x
EBIT
Sales
Assets
Equity
(1) x (2) x (3) x (4) x (5)
x Margin x Turnover x Leverage
Tax
Burden
Interest x

13. Table 19.6 Ratio Decomposition Analysis for Nodett and Somdett

14. Table 19.7 Differences between Profit Margin and Asset Turnover across Industries

15. Table 19.8 Growth Industries Financial Statements, 2004 – 2007 ($ thousands)

16. Table 19.9 Summary of Key Financial Ratios: Leverage, Asset Utilization, Liquidity, Profitability and Market Price

17. Figure 19.1 DuPont Decomposition for Hewlett-Packard

18. Table 19.10 Financial Ratios for Major Industry Groups

19. Economic Value Added
Difference between return on assets (ROA) and the opportunity cost of capital (k)
EVA is also called residual income
EVA can be positive or negative for firms that have positive earnings

20. Table 19.11 Economic Value Added, 2007

21. Table 19.12 Key Financial Ratios of Growth Industries, Inc

22. Table 19.13 Growth Industries Statement of Cash Flows ($ thousands)

23. Comparability Problems
Accounting Differences
Inventory Valuation
Depreciation
Inflation and Interest Expense
Fair Value Accounting
Quality of Earnings
International Accounting Conventions

24. International Accounting Differences
Reserves – many other countries allow more flexibility in use of reserves
Depreciation – US allows separate tax and reporting presentations
Intangibles – treatment varies widely

25. Figure 19.2 Adjusted Versus Reported Price-Earnings Ratios

26. The Graham Technique
Careful analysis of a firm’s financial statements could turn up bargain stocks
Purchase common stocks at less then their working-capital value
Give no weight to plant or other fixed assets
Deduct all liabilities in full from assets