Week 4 Financial Statements Analysis PDF

1203106 CORPORATE FINANCE WEEK 4 FINANCIAL STATEMENTS ANALYSIS TABLE OF CONTENTS COMMON-SIZE 1 ANALYSIS 2 RATIO ANALYSIS STANDARDIZING FINANCIAL STATEMENTS One thing we want to do with a company’s financ...

1203106 CORPORATE FINANCE WEEK 4 FINANCIAL STATEMENTS ANALYSIS TABLE OF CONTENTS COMMON-SIZE 1 ANALYSIS 2 RATIO ANALYSIS STANDARDIZING FINANCIAL STATEMENTS One thing we want to do with a company’s financial statements is to compare them to those of other, similar companies. - < To start making comparisons, we try to standardize the financial statements. One common and useful way is to work = with percentages instead of total dollars. - - competitors ! - past performance -Industr Benchmark COMMON-SIZE BALANCE SHEET Using the following balance sheet, we &construct common-size balance sheets by expressing each item as a percentage of - total assets. -I -h Item < co  - - + # * 10 337 & & alway ① 3 12 & เ -> +10 = ② & & ↓ Total l liabilities = &+ & = 540 +4 equity  Company A Company B Inventory 10. Inventory 20 ↓ cost of goods sold Revenue I million Revenue I million COMMON-SIZE INCOME STATEMENT A useful way of standardizing the income statement is to express each item as a ~ percentage of total sales (revenue). - This home prevenue, "- Common- size = Vertical Analysis -> th 5 + 10 EBIT - - -> I 110 Competitors Cost of goods sold 50% Net income 20. RATIO ANALYSIS Another way of avoiding the problems involved in comparing companies of different sizes is to calculate and compare financial ratios. Financial ratios are ways of comparing and investigating the relationships between different pieces of financial information. RATIO ANALYSIS (CON.) Financial ratios are traditionally grouped into the following categories: solve Short-term Solvency (Liquidity) - Long-term Solvency (Financial Leverage) Asset Management (Turnover) Profitability Market Value  SHORT-TERM SOLVENCY Short-term solvency ratios are intended to provide information about a firm’s liquidity, and these ratios are sometimes called liquidity ratios. The primary concern is the firm’s ability to pay its bills over the short run without undue stress. Consequently, these ratios focus on current assets and current liabilities. ↓ ↓ Convert to cash within 1 Debt that you have to pay year within 1 year SHORT-TERM SOLVENCY (CON.) * useMl anual · 1. Current ratio = Current assets Current liabilities 2. Quick ratio = Current assets - Inventory Current liabilities 3. Cash Ratio = Cash (and equivalents) Current liabilities & It current assets -a cash, AR inventory = Cash t AR ( account receivable CORPORATION IN 202 Quick ration = Current assets - Inventory Current ration = Current assets Current liabilitie Current liabilitie = 708- 422 54 = # == 0.52 == 1.37 positive what if cash ration = cash & equivalents -a 0.7, negative · Current liabilitie Net working capital 30, Current ratio > Net working capital = ·Po 0 a Current ratic : & Net working capital < 0 , Current ration < 1 =- 0.18 LONG-TERM SOLVENCY Long-term solvency ratios are intended to address the firm’s long-run ability to meet its obligations. These ratios are sometimes called financial leverage ratios. LONG-TERM SOLVENCY (CON.) 1. Debt ratio = Total liabilities Total assets - 2. Debt-equity ratio = Total liabilities - Total equity 3. Times interest earned = · EBIT Interest expense = Earnings, Profit & Earning before interest and takes  #CORPORATION IN 2022. Debt- Total liabilities equity ration = Total equity Debt ration = Total liabilitie = Total assets =Current liabilities - Long term debt = 0.38 Total assets times interest earned =540 + 457 3588 997 :En expens = 0.88 - #8 equity 100 - 20 =4.26 ASSET amagra MANAGEMENT pum http The measures in this section are sometimes called asset utilization or turnover ratios. - - What they are intended to describe is how efficiently a firm uses the asset we are - measuring. Asset -> Revenue -> Cash & expense # ASSET MANAGEMENT (CON.) clast year + this year ↑ 2 1. Asset turnover = Sales (revenue) & Average total assets - - 2. Inventory turnover = Cost of goods sold Average inventory · 3. Days’ sales in inventory (Inventory period) = 365 Inventory turnover  INCOME STATEMENT IN 2022 Beginni Ending ↳ ↳ ↑ Balance sheet Balance sheet at the end 202 at the beginnin cend of Last yearl CORPORATION IN 2082. Inventory turnover = Cost of goods sold Asset turnover = Sales revenue Ang. inventory total Arg. ~ 4227/ assets 47 2 =2,311 = 3.5 ม 3480.5 ( 3373 + 3588) 2 Day's sale in inventory =0.66 (Period Inventory turnove raw materia er # er # : == 103.69 days process / # ↓ Productio #for Period material -a lear 104 days Work -in - Finished goods Finished goods ASSET MANAGEMENT (CON.) Revenue Cash 4. Receivables turnover = Sales (revenue) ↓ Average accounts receivable 5. Days’ sales in receivables (Receivables period) = 365 Receivables turnover  Receivable turnover = Sales revenue Arg, AR =2311 176.5 (165 + 188) / 2 = 17.09 salesin receivables =- Day's thatby able turnover : - =27.88 day fo 28 day ASSET MANAGEMENT (CON.) 6. Payables turnover = Cost of goods sold ↓ Average accounts payable 7. Days’ sales in payables (Payables period) = 365 Payables turnover  Payables turnover = #for # " title Paul/2 328 =4.38 Day's sales in payables : Po s t e d o n e s # turnover ( payables period) · =- 83.33 day ↓ 84 days PROFITABILITY Profitability ratios are used to assess business's ability to generate earnings. 1. Profit margin = Net income Total sales (revenue) 2. Return on assets = Net income Average total assets 3. Return on equity = Net income Average total equity  Return equity = Net income Profit income on margin: Net ROES sales revenue Arg. Total equity # = =363 2445 (2299 + 2591) /2 == 8.157 Or 15.7 % - =- 0.148 or 14.8 1/ Return on assets = Net income (ROA) Arg. Total assets : 35807 / 2 3480. == 0.104 Or 10.4.1. MARKET VALUE Our final group of measures is based on information not necessarily contained in financial statements - the market price per share of the stock. These measures can be calculated directly only for publicly traded companies. Public company MARKET VALUE (CON.) Profit -> 8 EPS) Co 1. Earnings per share = Net income Shares outstanding ( 2. Price-earnings ratio = Price per share (PE Earnings per share 3. Market capitalization Market Cap = Price per share x Shares outstanding shares available in the market  Drufrick's shares outstanding : 100 million shares share = Market cap. = Price per share + shares outstanding Earning per Net income shares outstanding = 50x10 =I =$5000 million # =$3.64 per shar Prufrock's stock share price = $50 per han Price - earrings Peter pers ratic = PE Permare : = 13.77 Q&A