analyzing financial statements. 2 general rules 1) restate balance sheet to work with capital. 2)...
TRANSCRIPT
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
• Cash
• Receivables
• Inventory
Fixed Assets
• Net Property Plant and Equipment (NPPE) • Investments
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Total Assets
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Current Liabilities • Notes Payable
• Accounts Payable
• Other Payables
Long Term Liabilities • L.T. Debt
• Other Liabilities
Shareholder Equity
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Total Liabilities and Equity
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Traditional Method
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Current Assets • Cash
• Receivables
• Inventory
Less : Operating Current Liabilities • Accounts Payable
• Other Payables
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Operating Working Capital
Capital Method
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Operating Working Capital
Fixed Assets • Net Property Plant and Equipment (NPPE)
• Investments
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Total Capital
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Capital Method
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Short Term Debt • Notes Payable
Long Term Liabilities • L.T. Debt
• Other Liabilities
Shareholder Equity
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Total Debt and Equity
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Capital Method
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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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Net Profit Margin (NPM) = Net Pft after Tax / Sales
Gross Pft Margin (GPM) = Gross Pft / Sales
Expenses to Sales = SGA / Sales
Profitability Ratios
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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• 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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ROIC = Net Operating Profit after Tax / Capital
= EBIT (1-T) / Capital
= EBIT (1-T) / Sales x Sales / Capital
= NPM x TATO
Value Drivers
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Reebok Example
See the Reebok Excel File