1. CHAPTER 19 Investments Financial Statement Analysis Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin Cover image

2. 19- 2 Cover image  Purpose  Tools Used –Statement analysis –Ratio analysis  Limitations Overview

3. 19- 3 Cover image  Balance Sheet –Common Sized –Trend or Indexed  Income Statement –Common Sized –Trend or Indexed  Statement of Cash Flows Financial Statements

4. 19- 4 Cover image Table 19.1 Consolidated Statement of Income for Hewlett-Packard, 2005

5. 19- 5 Cover image Table 19.2 Consolidated Balance Sheet for Hewlett-Packard, 2005

6. 19- 6 Cover image Table 19.3 Statement of Cash Flows for Hewlett-Packard, 2005

7. 19- 7 Cover image Profitability Measures  ROE: measures the profitability for contributors of equity capital  ROA: measures the profitability for all contributors of capital  Leverage has a significant effect on profitability measures

8. 19- 8 Cover image Table 19.4 Nodett’s Profitability over the Business Cycle

9. 19- 9 Cover image Table 19.5 Impact of Financial Leverage on ROE

10. 19- 10 Cover image ROE = Net Profit Pretax Profit x EBIT x Sales Assets xx Equity (1) x (2) x (3) x (4) x (5) x Margin x Turnover x Leverage Tax Burden Interest Burden Decomposition of ROE x

11. 19- 11 Cover image Table 19.6 Ratio Decomposition Analysis for Nodett and Somdett

12. 19- 12 Cover image Table 19.7 Differences between Profit Margin and Asset Turnover across Industries

13. 19- 13 Cover image Table 19.8 Growth Industries Financial Statements, 2004 – 2007 ($ thousands)

14. 19- 14 Cover image Table 19.9 Effect of ROE and Plowback Ratio on P/B

15. 19- 15 Cover image Table 19.10 Summary of Key Financial Ratios

16. 19- 16 Cover image Table 19.10 Summary of Key Financial Ratios

17. 19- 17 Cover image Table 19.10 Summary of Key Financial Ratios

18. 19- 18 Cover image Table 19.10 Summary of Key Financial Ratios

19. 19- 19 Cover image Table 19.10 Summary of Key Financial Ratios

20. 19- 20 Cover image Figure 19.1 Financial Ratios for Hewlett- Packard

21. 19- 21 Cover image Table 19.11 Financial Ratios for Major Industry Groups

22. 19- 22 Cover image Economic Value Added  Difference between return on assets (ROA) and the opportunity cost of capital (k)  EVA = above difference time the invested capital  EVA can be positive or negative for firms that have positive earnings

23. 19- 23 Cover image Table 19.12 Economic Value Added, Year Ending January 2006

24. 19- 24 Cover image Table 19.13 Key Financial Ratios of Growth Industries, Inc

25. 19- 25 Cover image Table 19.14 Grow Industries Statement of Cash Flows ($ thousands)

26. 19- 26 Cover image  Accounting Differences –Inventory Valuation –Depreciation  Inflation  International Accounting Conventions Comparability Problems

27. 19- 27 Cover image International Accounting Differences  Reserves – many other countries allow more flexibility in use of reserves.  Depreciation – US allows separate tax and reporting presentations.  Intangibles – treatment varies widely.

28. 19- 28 Cover image Figure 19.2 Comparative Accounting Rules

29. 19- 29 Cover image Figure 19.3 Adjusted versus Reported Price- Earnings Ratios