1. Financial Analysis Finance defined Basic business forms Corporate governance Accounting representation Cash Flow Financial Analysis Growth

2. Finance “The science of the motion of money” –Finance and accounting –Finance and economics –Finance and management Body of knowledge Basic areas in finance –Investments and financial institutions –Corporate finance NWC LT financing Long term investment

3. Forms of organizations Sole proprietorship, partnership, corporation –Advantages –Disadvantages Focus of the course: CORPORATION Snapshot of a corporation –Right side –Left side

6. Corporate Governance 4 actors: –Shareholders –Creditors –Officers –Stakeholders 1 GOAL? Agency problems = Cost –Direct (compensations and perquisites) –Indirect (monitoring and non-optimal decision making)

7. Financial position Income Statement (over a period) NI=(Sales-COGS-Dpr-Int) X (1-T) Retained Earnings(over a period) End RE=Beg. RE +NI - Div Balance Sheet (At one point in time) –Assets=Liabilities + Equity = Liability + Stocks + RE

12. Cash flow Define sources and uses of cash Another (smarter) way to look at cash flow: –Cash flow from assets=CF to creditors +CF to owners Cash from asset = Operating cash flow = EBIT-T+Dpr - Use of NWC = End NWC-Beg.NWC - Long term asset spending = End NFA - Beg.NFA + Dpr Cash to creditor = Interest paid –net new borrowing Cash to owners = dividends paid- net new equity raised Calculate and interpret (from Hermetic Inc.)

13. Sources and Uses of Cash

14. Another way to look at Cash flows

15. Financial Statements Analysis IS  RE  BS  CF Common size analysis Ratio analysis –Cross sectional analysis –Time serie analysis 5 families –ST Liquidity –LT Liquidity –Activity –Profitability –Market

19. Ratio analysis ST Liquidity: –Current ratio=CA/CL –Acid test=(CA-Inv.)/CL LT Liquidity: –Debt-to-equity ratio=D/E –Cash coverage ratio= (EBIT+Dpr)/Int Activity: –Short-term asset turnover –Asset turnover=Sales/Asset Profitability –Profit margin=NI/Sales –ROA=NI/Asset –ROE=NI/Equity

20. Dupont Equation ROE=NI/Sales x Sales/Assets x Assets/Equity ROE=Profit x Asset x Equity Margin Turnover Multiplier –Operating efficiency –Asset use efficiency –Financial leverage ROE=ROA x Equity multiplier Differentiate ROE and ROA Remedy to “paralysis by analysis”

21. Growth Internal growth: Debt is constant –g= ROA x b/(1-ROA x b) Sustainable growth: Debt to equity is constant –g=ROE x b/(1-ROE x b) Differentiate between internal and sustainable growth. What are the factors that affect growth? Forecasting tool

22. Cases Study Sunset Board S&S Air