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Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-1 Chapter 15.

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Presentation on theme: "Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-1 Chapter 15."— Presentation transcript:

1 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-1 Chapter 15

2 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-2 Chapter Summary  Objective: To provide an overview of financial statement analysis and to show how it relates to equity valuation analysis. Overview Type of financial ratios Comparability problems

3 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-3  Purpose  Tools Used Statements Ratio Analysis  Limitations Overview

4 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-4  Balance Sheet Common Sized Trend or Indexed  Income Statement Common Sized Trend or Indexed  Statement of Changes in Financial Position Financial Statements

5 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-5  Purpose of Ratio Analysis  Uses Trend analysis Comparative analysis Combination  Use by External Analysts Important information for investment community Important for credit markets Ratio Analysis

6 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-6 Summary Reminder  Objective: To provide an overview of financial statement analysis and to show how it relates to equity valuation analysis. Overview Type of financial ratios Comparability problems

7 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-7  Liquidity Ratios  Activity or Management Efficiency Ratios  Leverage Ratios  Profitability Ratios  Market Price Ratios Type of Financial Ratios

8 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-8 Current Ratio Liquidity Ratios Quick Ratio

9 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-9 Inventory Turnover Activity or Management Efficiency Ratios Total Asset Turnover

10 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-10 Average Collection Period Activity or Management Efficiency Ratios Days to Sell Inventory

11 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-11 Times Interest Earned Leverage Ratios Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends

12 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-12 Debt to Assets Leverage Ratios Debt to Equity

13 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-13 Net Profit Margin Profitability Ratios Return on Assets

14 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-14 Return on Equity Profitability Ratios Operating Margin After Depreciation Operating Profit Sales Operating Profit Sales

15 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-15 Price to Earnings Market Price Ratios Market-to-Book-Value

16 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-16 (1) x (2) x (3) x (4) x (5) xx Margin x Turnover x Leverage Tax Burden Interest Burden Decomposition of ROE

17 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-17 Summary Reminder  Objective: To provide an overview of financial statement analysis and to show how it relates to equity valuation analysis. Overview Type of financial ratios Comparability problems

18 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-18  Accounting Differences Inventory Valuation Depreciation  Inflation  International Accounting Conventions Comparability Problems

19 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-19 Quality of Earnings  Concept refers to the extent to which one may expect reported level of earnings to be sustained  Factors influencing quality of earnings: Allowance for bad debt Nonrecurring items Stock options

20 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-20 International Accounting Differences  Reserves – many other countries allow for more flexibility in use of reserves  Depreciation – US allows separate tax and reporting presentations  Intangibles – treatment varies widely

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