1. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. Chapter 2: Financial Statement and Cash Flow Analysis Corporate Finance, 3e Graham, Smart, and Megginson

2. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 2 Financial Statements  Company managers, investors, and outside analysts use financial statements to conduct…  Cash flow analysis  Performance (ratio) analysis  The SEC requires U.S. companies to produce financial statements conforming to Generally Accepted Accounting Principles (GAAP), developed by the Financial Accounting Standards Board (FASB).

3. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 3 Four Key Financial Statements 1. Balance sheet 2. Income statement 3. Statement of retained earnings 4. Statement of cash flows

4. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 4 Key Measures of Cash Flow Net operating profit after taxes (NOPAT) = EBIT (1 – T) Operating cash flow (OCF) = NOPAT + Depreciation = EBIT (1 – T) + Depreciation Free cash flow (FCF) = OCF –  FA – (  CA –  AP –  Accruals)

5. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 5 Table 2.4 The Inflows and Outflows of Corporate Cash  Decrease in any asset  Increase in any liability  Net profits after taxes  Depreciation and other non-cash charges  Sale of stock  Increase in any asset  Decrease in any liability  Net loss  Dividends paid  Repurchase or retirement of stock InflowsOutflows

6. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 6 Liquidity Ratios Current ratio = Current assets Current liabilities Quick ratio = Current assets  Inventory Current liabilities

7. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 7 Activity Ratios Inventory turnover = Cost of goods sold Inventory Average collection period = Accounts receivable Average daily sales Average payment period = Accounts payable Average daily purchases

8. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 8 Activity Ratios Fixed asset turnover = Sales Net fixed assets Total asset turnover = Sales Total assets

9. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 9 Debt Ratios Debt ratio = Total liabilities Total assets Equity multiplier = Total assets Common stock equity Debt-to-equity ratio = Long-term debt Stockholders’ equity

10. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 10 Debt Ratios Times interest earned = EBIT Interest expense

11. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 11 Profitability Ratios Gross profit margin = Gross profit Sales Operating profit margin = Operating profit Sales Net profit margin = Earnings available for common shareholders Sales

12. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 12 Profitability Ratios Earnings per share (EPS) = Earnings available for common stockholders Number of common shares outstanding Return on total assets (ROA) = Earnings available for common stockholders Total assets Return on common equity (ROE) = Earnings available for common stockholders Common stock equity

13. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 13 DuPont System of Analysis ROA = Net profit margin  Total asset turnover ROE = ROA  A/E ROE = Net profit margin  Total asset turnover  A/E

14. © 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part. 14 Market Ratios Price/earnings (P/E) ratio = Market price per share of common stock Earnings per share (EPS) Book value per share = Common stock equity Number of common shares outstanding Market/book (M/B) ratio = Market price per share of common stock Book value per share of common stock