1. EC7095 Financial Statement Analysis
Lecture 6

2. Recap – lecture 5 Gearing Theories of Gearing Interest Cover
Predicting corporate failure
Z scores

3. Shareholder/Investor ratios
An investment is only a good investment if you buy it at the right price
Shareholders will be interested in profitability, liquidity and gearing, but……

4. Shareholder/Investor ratios
An investment is only a good investment if you buy it at the right price
Shareholders will be interested in profitability, liquidity and gearing but we must always relate this back to the price of the share.

5. Dividend Yield = Dividend per share/ Share price (%)
An indicator of expected future income
Income or growth?
A low yield “should” suggest a fast growing company

6. Dividend Yield for Next plc
2011 dividend per share = 78p (a yield of 2.8% based on current share price)
2010 dividend per share = 66p
2009 dividend per share = 55p
2008 dividend per share = 55p
2007 dividend per share = 49p
2006 dividend per share = 44p
2005 dividend per share = 41p
2004 dividend per share = 35p
Share price over last year: £ £28.18
Current price (14 November) £27.89

7. Earnings per Share Trends in eps are very important
= PAT/number of shares
Problems in calculation
Next has a primary financial objective to

8. Earnings per Share Trends in eps are very important
= PAT/number of shares
Problems in calculation
Next has a primary financial objective to
“ maximise sustainable growth in earnings per share”

9. Earnings per Share Trends in eps are very important
= PAT/number of shares
Problems in calculation
Next has a primary financial objective to
“ maximise sustainable growth in earnings per share”
They believe that this will create value for shareholders.

10. EPS for Next plc EPS 2011 = 221.9p EPS 2010 = 188.5p EPS 2009 = 156.0p

11. EPS for Next plc EPS 2011 = 221.9p (181m shares in issue at year end)
They have repurchased over 100m shares since start of the 2003/4 financial year (37%)

12. Dividend cover
How many times could the dividend have been paid out of earnings (PAT)
Shows how safe the dividend is and the extent of profit retention
= PAT/Dividends or eps/dps
Income or growth?

13. Dividend cover for Next plc
2011: PAT/Dividends = 400.9/129.6 = 3.09 times
2010: 364.0/108.5 = 3.35 times
2009: 302.3/106.5 = 2.84 times
2009: 156.0/55.0 = 2.84 times
2008: 168.7/55 = 3.07 times
2007: 146.1/49 = 2.98 times
2006: 127.4/44 = 2.90 times
2005: 120.2/41 = 2.93 times
2004: 93.9/35 = 2.68 times

14. PE Ratio
Shows how highly investors value the earnings a company produces
= Market Price/EPS
Share price can be seen as a “multiple” of earnings
The size of the “multiple” can reflect expectations of future growth

15. PE Ratio As at 14 November 2011 (11 November 2010) PE Ratio
Marks and Spencer
8.76 (11.2)
Next
12.21 (11.2)
Tesco
11.18 (13.3)
Sainsbury
9.78 (10.3)
Morrisons
12.72 (12.90)

16. Earnings Yield = eps/market price (%)
Can be compared to dividend yield to give information on retentions
Low yield = high PE ratio?

17. Net assets per share = Net Assets/No of Shares
A crude measure of the value of most companies
Next = £1.28 per share (current market price is £27.89)

18. Other factors Current market price Past and expected future returns
Security

19. Financial v. Management Accounts
FINANCIAL ACCOUNTS
MANAGEMENT ACCOUNTS
Legal requirement
No legal requirement
Standard format
No standard format
Annual
Monthly (or less)
Audited
No audit required
Published
Not published
Minimum disclosure
“Maximum” disclosure
Late! (deal with the past)
Prompt! (also consider the future)
Financial data
Financial and non financial data
Compares previous year
Compares previous year, month and budget
Company as a whole
Detail on all departments/products

20. The Balanced Scorecard
Aim is to provide management with information that covers all relevant areas of performance in an objective and unbiased fashion
Uses indicators to measure performance on 4 different perspectives
Customer
Internal
Innovation and learning
Financial

21. Customer Perspective What do existing and new customers value from us?
Need to consider targets that matter to customers – cost, quality, delivery etc.

22. Customer Perspective GOALS MEASURES New Products
% of sales from new products
Responsive Supply
On time delivery
Preferred supplier
Share of key accounts’ purchases
Customer partnership
Number of cooperative engineering efforts

23. Internal Perspective
What processes must we excel at to achieve our financial and customer objectives?
Aim is to improve internal processes and decision making

24. Internal Perspective GOALS MEASURES Technology capability
Manufacturing configuration v. competition
Manufacturing excellence
Time/cost/yield
Design productivity
Engineering efficiency
New product introduction
Actual v. plan

25. Innovation and Learning Perspective
Can we continue to improve and create future value
Considers the business’s capacity to maintain its competitive position through the acquisition of new skills and the development of new products

26. Innovation and Learning Perspective
GOALS
MEASURES
Technology leadership
Time to develop next generation of products
Manufacturing learning
Process time to maturity
Product focus
Percentage of products that are 80% of sales
Time to market
New product introduction v. competition

27. Financial Perspective
How do we maximise the wealth of our shareholders?
Covers the traditional measures of growth, profitability and shareholder value. Set through talking directly with shareholders

28. Financial Perspective
GOALS
MEASURES
Survive
Cash flow
Succeed
Growth
Prosper
Increase market share and ROCE

29. Balanced scorecard advantages
Looks at internal and external factors – can improve understanding of key issues
Is related to the key elements of a company’s strategy
Financial and non financial measures are linked together

30. Balanced scorecard problems
Conflicting measures – research funding v. cost reduction
Selecting appropriate measures – and not too many
Expertise and understanding of the indicators
Interpretation – putting the data into an overall perspective

31. Problems with financial performance indicators
Concentration on too few variables
Lack of information on quality (see later)
Measuring success, not ensuring success

32. Growing emphasis on non financial indicators
Changes in cost structures
Changes in the competitive environment
Changes in the manufacturing environment
Non financial performance indicators are measures of performance based on non financial information and are used to monitor and control without any accounting input

33. NFI’s examples AREA ASSESSED PERFORMANCE MEASURE Service quality
Number of complaints
Proportion of repeat bookings
Customer waiting time
On time deliveries
Production performance
Set-up times
Number of suppliers
Days inventory in hand
Output per employee
Material yield
Schedule adherence/lead times
Proportion of output to be reworked

34. NFI’s examples AREA ASSESSED PERFORMANCE MEASURE
Marketing effectiveness
Market share (trend)
Sales volume growth
Customer visits per salesperson
Client contact hours per sales person
Sales volume – forecast v. actual
Number of customers
Personnel
Number of complaints received
Staff turnover
Absenteeism – days lost
Accidents/sickness – days lost
Training time per employee

35. Quality
Drury example
Route to TQM
Qualitative issues

36. Value for money
Used for evaluating public sector organisations E

37. Value for money Used for evaluating public sector organisations
Economy E

38. Value for money Used for evaluating public sector organisations
Economy
Efficiency E

39. Value for money Used for evaluating public sector organisations
Economy
Efficiency
Effectiveness

40. Value for money Used for evaluating public sector organisations
Economy
Efficiency
Effectiveness
Inputs, outputs and impacts

41. Value for money Used for evaluating public sector organisations
Economy
Efficiency
Effectiveness
Inputs, outputs and impacts
VFM audits