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Analyzing Financial Statements
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General Rules 1) Restate balance sheet to work with capital.
2) Use averages (current and previous year) for balance sheet items. 3) Be consistent.
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Traditional Method Current assets Fixed Assets Cash Receivables
Inventory Fixed Assets Net Property Plant and Equipment (NPPE) Investments Total Assets
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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
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Capital Method Current Assets Less : Operating Current Liabilities
Cash Receivables Inventory Less : Operating Current Liabilities Accounts Payable Other Payables Operating Working Capital
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Capital Method Operating Working Capital Fixed Assets
Net Property Plant and Equipment (NPPE) Investments Total Capital
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Capital Method Short Term Debt Long Term Liabilities
Notes Payable Long Term Liabilities L.T. Debt Other Liabilities Shareholder Equity Total Debt and Equity
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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
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Liquidity Ratios Current Ratio = Current Assets / Current Liabilities
Acid Test Ratio = (Curr Assets – Inv) / Curr Liabs Working Capital to Assets = Working Capital / Capital
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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
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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
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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
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Profitability Ratios Net Profit Margin (NPM) = Net Pft after Tax / Sales Gross Pft Margin (GPM) = Gross Pft / Sales Expenses to Sales = SGA / Sales
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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
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Approaches Time Series
Cross-section (Comparables -- i.e., Industry or Specific Competitors) Goals / Targets
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Other Methods Common Size Index Analysis
Balance sheet (as % of capital) Income statement (as % of sales) Index Analysis as % of base year
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DuPont Analysis ROE = Leverage x ROA ROA = NPM x TATO
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Value Drivers Sales growth Operating profit margin Tax rate
Investment rate = [(NPPE + WCAP) / Sales ] WACC Competitive advantage period
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Value Drivers ROIC = Net Operating Profit after Tax / Capital
= EBIT (1-T) / Capital = EBIT (1-T) / Sales x Sales / Capital = NPM x TATO
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Reebok Example See the Reebok Excel File
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