1. Analyzing Financial Statements

2. General Rules 1) Restate balance sheet to work with capital.
2) Use averages (current and previous year) for balance sheet items.
3) Be consistent.

3. Traditional Method Current assets Fixed Assets Cash Receivables
Inventory
Fixed Assets
Net Property Plant and Equipment (NPPE)
Investments
Total Assets

4. Traditional Method Current Liabilities Long Term Liabilities
Notes Payable
Accounts Payable
Other Payables
Long Term Liabilities
L.T. Debt
Other Liabilities
Shareholder Equity
Total Liabilities and Equity

5. Capital Method Current Assets Less : Operating Current Liabilities
Cash
Receivables
Inventory
Less : Operating Current Liabilities
Accounts Payable
Other Payables
Operating Working Capital

6. Capital Method Operating Working Capital Fixed Assets
Net Property Plant and Equipment (NPPE)
Investments
Total Capital

7. Capital Method Short Term Debt Long Term Liabilities
Notes Payable
Long Term Liabilities
L.T. Debt
Other Liabilities
Shareholder Equity
Total Debt and Equity

8. Leverage Ratios
Debt Ratio = (Int. Bearing + Leases) / (Capital + Leases)
Debt-Equity Ratio = (Int. Bearing + Leases) / Equity
Times Interest Earned = (EBIT + Depreciation) / Interest
Leverage Ratio = Capital / Equity

9. Liquidity Ratios Current Ratio = Current Assets / Current Liabilities
Acid Test Ratio = (Curr Assets – Inv) / Curr Liabs
Working Capital to Assets = Working Capital / Capital

10. Efficiency Ratios Total Asset Turnover = Sales / Capital (TATO)
Sales to W. Capital = Sales / Working Capital
Fixed Asset T/O = Sales / Fixed Assets
Inventory T/O = Cost of Goods Sold / Inventory

11. Efficiency Ratios Avg Collection Period = Acc Rec / (Sales / 365)
Avg Payment Period = Acc Payable / (COS / 365)
Inventory Days = 365/(Inv T/O)
Cash Cycle = Inv Days + ACP - APP

12. Profitability Ratios
Return on Assets (ROA) = Net Pft after Tax / Capital
Return on Equity (ROE) = Net Pft after Tax / Equity
Operating Return on Assets = EBIT / Capital

13. Profitability Ratios
Net Profit Margin (NPM) = Net Pft after Tax / Sales
Gross Pft Margin (GPM) = Gross Pft / Sales
Expenses to Sales = SGA / Sales

14. Investment Ratios Payout Ratio = Divs per Share / Earnings per Share
Retention Ratio = 1 – Payout Ratio
Price–Earnings Ratio (P/E) = Stock Price / EPS
Market to Book Ratio = Stock Price
Book Value per Share

15. Approaches Time Series
Cross-section (Comparables -- i.e., Industry or Specific Competitors)
Goals / Targets

16. Other Methods Common Size Index Analysis
Balance sheet (as % of capital)
Income statement (as % of sales)
Index Analysis
as % of base year

17. DuPont Analysis
ROE = Leverage x ROA
ROA = NPM x TATO

18. Value Drivers Sales growth Operating profit margin Tax rate
Investment rate = [(NPPE + WCAP) / Sales ]
WACC
Competitive advantage period

19. Value Drivers ROIC = Net Operating Profit after Tax / Capital
= EBIT (1-T) / Capital
= EBIT (1-T) / Sales x Sales / Capital
= NPM x TATO

20. Reebok Example
See the Reebok Excel File