Financial Statement

Analysis

3.1.Cash Flow and Financial Statements

3.2.Standardized Financial
Statements
3.3.Financial Ratio Analysis
3.4.Du Pont Analysis Method

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 Chapter objectives
 Show the use of financial ratios to get useful
information from financial statements.
 Evaluate current operations
 Compare performance with past performance
 Compare performance against other firms or
industry standards
 Understand the limitations of financial ratios.

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What is Financial Analysis?
 Assessment of the firm’s past, present and
future financial conditions
 Done to find firm’s financial strengths and
weaknesses
 Primary Tools:
 Financial Statements
 Comparison of financial ratios to past, industry,
sector and all firms

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 Analysis Process
 Collect information
 Analyze and process information
 Create financial data
 Conclusion or making decision
collecting
Collecting and
and Using technical Creating financial inf/ data
processing
processing Tools
data
information

Financial decision
4
Users of F. statement analysis
 Trade Creditors -- Focus on the liquidity of
the firm.
 Bondholders -- Focus on the long-term cash
flow of the firm.
 Shareholders -- Focus on the profitability and
long-term health of the firm
 Banks and financial institutions

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3.1.Cash Flow and F.Statements
 Sources of Cash :
- Decrease in assets
- Increase in liability & equity
 Uses of cash (Applications of cash): -
Increase in assets
- Decrease in liability and equity

Exercise 6 (43)- B.Block & hirr

Example page 34. table 2-7, 2-8, 2-9
6
3.2.Standardized
Financial statements (S.F.S)
 Common- size statement : presenting all items
in percentage terms.
+B.S items are shown as percentage of asset.
+I.S items are shown as percentage of sales.
+CF items are shown as percentage of total
sources/uses of cash. - table 3.1, 3.5
 Common - based year statement: presenting
all items relative to a certain base-year amount.
Table 3.1 ,3.7

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Example:

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3.3.Financial Ratio Analysis
A Financial Ratio:
is an index that relates two accounting
numbers and is obtained by dividing one
number by the other.

Used to compare and investigate

relationships between different pieces of
financial information, either over time or
between companies.
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3.3.1Types of Ratios
 Liquidity—measures the firm’s short-term
solvency.
 Capital structure—measures the firm’s
ability to meet long-run obligations
(financial leverage).
 Asset management (turnover)—measures the
efficiency of asset usage to generate sales.
 Profitability—measures the firm’s ability to
control expenses.
 Market value—per-share ratios.
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An Example: Dell
Abbreviated Balance Sheet
 Assets:
 Current Assets: $7,681.00
 Non-Current Assets: $3,790.00
 Total Assets: $11,471.00
 Liabilities:
 Current Liabilities: $5,192.00
 LT Debt & Other LT Liab.: $971.00
 Equity: $5,308.00
 Total Liab. and Equity: $11,471.00
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An Example: Dell
Abbreviated Income Statement

Sales $25,265.00
Costs of Goods Sold -$19,891.00
Gross Profit $5,374.00
Cash operating expense -$2,761.00
EBITDA 2,613.00
Depreciation & Amortization -$156.00
Other Income (Net) -$6.00
EBIT $2,451.00
Interest -$0.00
EBT $2,451.00
Income Taxes -$785.00
Special Income/Charges -$194.00
Net Income (EAT) $1,666.00
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 Liquidity Ratio Examples: Dell
 Current Ratio:

 Quick (Acid Test) Ratio:

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 Ratio Comparison: Current Ratio
2.5

2
Current Ratio

1.5

0.5

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Dell 2.08 1.66 1.45 1.72 1.48
Industry 1.80 1.80 1.90 1.60

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 Leverage Ratio Examples: Dell
 Debt Ratio:

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 Ratio Comparison: Debt Ratio
0.8
0.7
0.6
Debt Ratio

0.5
0.4
0.3
0.2
0.1
0

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Dell 54.70% 73.07% 69.70% 66.25% 53.73%
Industry 62.96% 60.00% 52.38% 62.96%

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 Profitability Ratio Examples:
Dell
 Return on Assets (ROA):

 Return on Equity (ROE):

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 Profitability Ratio Examples:
Dell
 Net Profit Margin:

 Retention Ratio

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 Ratio Comparison: ROE
80%
70%
60%
50%
ROE

40%
30%
20%
10%
0%

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Dell 28.13% 64.27% 73.01% 62.90% 31.39%
Industry 22.30% 30.60% 25.50% 18.00%

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 Ratio Comparison: ROA
25%

20%

15%
ROA

10%

5%

0%

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Dell 12.66% 17.31% 22.12% 21.23% 14.52%
Industry 6.80% 10.90% 7.20% 5.70%

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 Ratio Comparison: Profit Margin
9%
8%
7%
Profit Margin

6%
5%
4%
3%
2%
1%
0%

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Dell 5.14% 6.68% 7.66% 8.00% 6.59%
Industry 3.40% 4.74% 3.79% 2.85%

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 Activity (Turnover) Ratio
Examples: Dell
 Total Asset Turnover Ratio:

 Inventory Turnover Ratio:

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 Ratio Comparison: Asset Turnover
350%

300%
Asset Turnover

250%

200%

150%

100%

50%

0%

Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

Dell 2.47 2.59 2.89 2.65 2.20
Industry 2.00 2.30 1.90 2.00

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Excersice 10 (69) – B.Block and Hirr

Excersice 21 (73) – B.Block

Home work : 22 (73) B.Block

26 (87) . Ross
7 (314) – Nguyen hai san.

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 Market Value Ratios

Price Per Share

Price Earnings (P/E) Ratio =
Earnings Per Share
Market Value Per Share
Market to Book Value =
Book Value Per Share

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 3.4.DuPont Relationships

Return on Assets = (Asset Turnover)( Net Profit Margin)

(ROA)
 Sales  Net Income 
=  
 Total Assets  Sales 
Net Income
=
Total Assets
ROA
Return on Total Equity =
Total Liab
1-
Total Assets

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The Du Pont Identity
 Breaks ROE into three parts:
 operating efficiency
 asset use efficiency
 financial leverage

Net profit Sales Assets

ROE   
Sales Assets Equity

 Profit margin  Total asset turnover  Equity multiplier

 ROA  Equity multiplier

3-27
 Ratio Analysis and
Wealth Maximization

Expenses

Net
Profit Return
Margin on
Assets Return
Sales on Total
Equity
Total Return
Debt to
Asset on
Assets
Turnover Preferred Common
Ratio
Stock Equity
Assets 28

Financing
 Ratio Analysis and Wealth
Maximization (Continued)

Return
Book Value Earnings
on
X Per = Per
Common
Share Share
Equity

Earnings Price
Per X Earnings = Price Per Share
Share Ratio
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 Some Additional
Analytical Problems
 Inflation
 Sales and profits may increase simply because of
rising prices, even without an increase in physical
volume.
 Replacement costs of assets may be higher than
historical costs.
 Inventory Accounting
 If firms employ different techniques (e.g., LIFO,
FIFO), comparability of ratios is impaired.
 Industry Averages
 Some firms operate in more than one.

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Summary of Financial Ratios
 Ratios help to:
 Evaluate performance
 Structure analysis
 Show the connection between activities and
performance
 Benchmark with
 Past for the company
 Industry
 Ratios adjust for size differences

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Summary of Key Financial Ratios
Summary of Key Financial Ratios
Summary of Key Financial Ratios
Summary of Key Financial Ratios
Summary of Key Financial Ratios