Transcript Chapter 02 - Financial Statements and Analysis

Financial Statements
And Cash Flow Analysis
Professor Dr. Rainer Stachuletz
Corporate Finance
Four Key Financial Statements
Balance
sheet
Income
statement
Retained Cash flow
earnings Statemt.
Financial Managers and analysts
use financial statements to conduct:
- Cash Flow Analysis
- Performance (Ratio) Analysis
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Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Accounting Profit vs. Cash Flow
Accounting Profit based on accrual
accounting—focus on past periods
Finance emphasizes the importance of timing
“You can’t deposit net income, only cash”
Timing of cash flow matters.
Accrual accounting may obscure timing.
What are key measures of cash flow?
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Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Sources and Uses of Corporate Cash
Sources
•
•
•
•
Decrease in any asset
Increase in any liability
Net profits after taxes
Depreciation and other
non-cash charges
• Sale of stock
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Uses
•
•
•
•
•
Increase in any asset
Decrease in any liability
Net loss
Dividends paid
Stock repurchase or
retirement
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Key Measures of Cash Flow
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Cash Flow f.
Operations
• Total cash generated
Operating
Cash Flow
• Cash flow before repaying
lenders
Free Cash
Flow
• Cash flow that firm could
distribute to investors.
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Types Of Financial Ratios
Liquidity Ratios
• Current ratio
• Quick ratio
Activity Ratios
• Inventory turnover ratio
• Average collection period
Debt Ratios
Profitability Ratios
Market Ratios
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• Debt-to-equity ratio
• Times interest earned ratio
• Gross margin
• EPS
• P/E ratio
• Market-to-book ratio
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Financial Ratios: Trends and
Benchmarking
Benchmarking: comparison of a company’s ratio
values to industry competitors’ ratios
Firms’ financial ratios compared at the same point
in time
Trend analysis - performance evaluation over time
Developing trends can be seen using multi-year
comparisons.
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Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Liquidity Ratios
currentassets
Current ratio=
currentliabilities
currentassets-inventory
Quick ratio=
currentliabilities
Staples (2004)
Office Depot
(2004)
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Current ratio = 1.64
Quick ratio= 0.95
Current ratio = 1.57
Quick ratio= 0.98
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Activity Ratios
cost of goods sold
Inventoryturnover=
inventory
sales
Fixed asset turn over =
net fixed assets
Staples (2004)
Office Depot
(2004)
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Inventoryturnover= 6.52
Fixed asset turn over = 4.36
Inventoryturnover= 6.35
Fixed asset turn over = 4.81
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Activity Ratios (Continued)
Accounts receivable
Average collection period=
Average sales per day
Annual sales
Average sales per day =
365
sales
Total asset turn over =
total assets
Averagesales per day = $36,112,936.99
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Staples (2004)
Average collection period= 11.36 days
T otalasset turnover= 2.03
Office Depot
(2004)
Averagesales per day = $33,859,084
.93
Average collection period= 37.86 days
T otalasset turnover= 2.01
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Debt Ratios
total liabilities
Debt ratio =
total assets
Long term debt
Debt-equity ratio=
Stockholders' equity
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Staples (2004)
Debt ratio = 0.44
Debt-equity ratio= 0.16
Office Depot
(2004)
Debt ratio = 0.55
Debt-equity ratio= 0.30
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Debt Ratios (Continued)
earnings before interest and taxes
Times interest earned =
interest
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Staples (2004)
Times interest earned = 39.57
Office Depot
(2004)
Times interest earned = 9.12
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Profitability Ratios
Gross profits
Gross profit margin =
sales
Earnings before interest & taxes
Operating profit margin =
sales
Staples (2004)
Office Depot
(2004)
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Gross profitmargin = 27.5%
Operatingprofitmargin = 6.06%
Gross profitmargin = 31.35%
Operatingprofitmargin = 4.04%
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Profitability Ratios (Continued)
Net income
Net profit margin =
sales
Net income
Earningsper share =
number of sharesof commonstockoutstanding
Staples (2004)
Office Depot
(2004)
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Net profitmargin = 3.72%
Earningsper share = $ 0.98
Net profitmargin = 2.24%
Earningsper share = $ 0.89
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Profitability Ratios (Continued)
Net income
Return on total assets =
Total assets
Net income
Return on commonequity =
Stockholders' equity
Staples (2004)
Office Depot
(2004)
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Return on totalassets = 7.54%
Return on commonequity = 13.4%
Return on totalassets = 4.50%
Return on commonequity = 9.89%
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Market Ratios
Price/earnings (P/E)ratio=
marketprice per share of commonstock
earningsper share
commonstockequity
Book valueper share =
number of sharesof commonstockoutstanding
Staples (2004)
Price/earnings (P/E)ratio= 28.04
Book valueper share = $6.05
Office Depot
(2004)
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Price/earnings (P/E)ratio= 17.87
Book valueper share = $5.40
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Market Ratios
Market value per share of commonstock
Market/book (M/B) ratio
Book valuepershareof commonstock
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Staples (2004)
Market/book (M/B) ratio 4.55
Office Depot
(2004)
Market/book (M/B) ratio 2.94
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Financial Statements and
Cash Flow Analysis
Case:
Staples Ltd.
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Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Staples Balance Sheet
($ Thousands)
Current assets
Cash & Equivalents
Investments
Receivables
Inventories
Other current assets
Deferred taxes
Total current assets
Fixed assets
Property, plant and equipment
Goodwill
Intangible assets
Other assets
Total Non-Current Assets
Total assets
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Jan 31, 2004 Feb 1, 2003
$457,465
$495,889
934,275
100,175
410,330
364,419
1,465,989
1,555,205
114,598
105,559
96,247
96,229
$3,478,904
$2,717,476
$1,505,301
1,202,007
253,768
63,066
$3,024,142
$6,503,046
$1,447,752
1,207,824
267,841
80,495
$3,003,912
$5,721,388
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Staples Liabilities & Stockholders’
Equity ($ Thousands)
Current liabilities
Payables and Accrued Expenses
Short Term and Current Long Term
Total current liabilities
Long term Debt
Total long-term liabilities
Other
Total liabilities
Shareholders’ equity
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
Total liabilities & stockholders’ equity
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Jan 31, 2004
$1,933,084
190,150
$2,123,234
567,433
$567,433
149,479
$2,840,146
Feb 1, 2003
$1,874,655
327,671
$2,175,326
732,041
$732,041
155,129
$3,062,496
$316
2,209,302
(561,099)
1,933,379
81,002
$3,662,900
$6,503,046
$299
1,719,091
(556,812)
1,484,833
11,481
$2,658,892
$5,721,388
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Staples Income Statement
($ Thousands)
Jan 31, 2004 Feb 01, 2003
Total Revenue
Cost of Revenue
Gross Profit
Operating/Selling
General/Admin. Expenses
Non Recurring
Other
Operating income
Earnings Before Interest and Taxes
Interest Expense
Income Tax Expense
Net Income from Continuing
Operations
Net income
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$13,181,222
(9,559,123)
$3,622,099
2,282,092
524,094
9,639
7,986
$798,288
$798,288
20,176
287,901
$490,211
$11,596,075
(8,652,593)
$2,943,482
1,795,428
451,501
8,746
2,135
$682,672
$682,672
20,609
215,963
$446,100
$490,211
$446,100
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Staples Statement Of Retained
Earnings ($ Thousands)
Common
stock
Treasury
stock
Income
1,485,132
11,481
Equity offering
252,972
---
---
---
---
CS issues for option exercise
121,553
---
---
---
---
Tax benefit for option exercise
30,613
---
---
---
---
9,136
---
---
---
---
Sale of CS under ESOP
16,170
---
---
---
---
Issues of restricted stock
18,389
---
---
---
---
Translation adjustments
---
69,521
---
---
69,521
Reissuance of treasury stock
97
---
---
28
---
Net income for year
---
---
490,211
---
490,211
Purchase of treasury stock
---
---
---
(4,315)
---
(367)
---
---
---
---
1,933,379
81,002
2,209,302 (561,099)
559,732
Balances February 1, 2003
CS to employee saving plan
Other
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Cumul.
Translat Retained
adjustmt earnings
Balances January 31, 2004
1,719,091 (556,812)
484,710
Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Staples Statement Of Cash Flows
($ Thousands)
Jan 31,2004
Feb 1,2003
$490,211
$446,100
282,811
267,209
Adjustments to Net Income
22,709
35,993
Changes in Account Receivables
(4,218)
62,460
Changes in Liabilities
81,123
121,943
Changes in Inventories
80,721
80,721
(34)
(3,574)
$1,019,732
$914,350
($280,703)
($1,435,879)
(831,190)
(100,175)
($1,114,803)
($1,536,401)
Cash Flow From Operating Activities
Net income (net profit after tax)
Depreciation
Changes in Other Operating Activities
Cash Flows from Operating Activities
Cash Flow from Investment Activities
Capital Expenditures
Other Cash Flows from Investing Activities
Cash Flows From Investing Activities
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Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics
Staples Statement Of Cash Flows
($Thousands)
Jan 31, 2004
Feb 1, 2003
Sale (Purchase) of Stock
$385,506
$78,421
Net Borrowings
(350,235)
635,662
$35,271
$714,038
21,376
9,033
Net (decrease) increase in cash
($38,424)
$101,065
Cash and Cash Equivalents, End of Period
$457,465
$495,889
Cash Flow From Financing Activities
Net Cash Provided by Financing Activities
Effect of exchange rate changes on cash
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Prof. Dr. Rainer Stachuletz
Corporate Finance
Berlin School of Economics