Transcript Oil and Gas Business

Financial Statement
Analysis
Determinants of Intrinsic Value:
Using Ratio Analysis
Net operating
profit after taxes
Free cash flow
(FCF)
Value =
Required investments
in operating capital
−
=
FCF1
FCF2
FCF∞
... +
+
+
(1 + WACC)1
(1 + WACC)2
(1 + WACC)∞
Weighted average
cost of capital
(WACC)
Market interest rates
Cost of debt
Firm’s debt/equity mix
Market risk aversion
Cost of equity
Firm’s business risk
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Overview
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Ratios facilitate comparison of:
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One company over time
One company versus other companies
Ratios are used by:
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Managers to identify areas of weakness and strength
Lenders to determine creditworthiness
Stockholders to estimate future cash flows and risk
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RATIO ANALYSIS
Liquidity Ratios
 Asset Management Ratios
 Debt Management Ratios
 Profitability Ratios
 Market Value Ratios

Liquidity Ratios
Can the company meet its short-term
obligations using the resources it currently
has on hand?
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Current Ratio
Quick Ratio
CR =
CA
CL
QR =
CA - Inv.
CL
Asset Management Ratios
How efficiently does the firm use its assets?
How much does the firm have tied up in
assets for each dollar of sales?
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Inventory Turnover Ratio
Days Sales Outstanding (DSO), Average
Collection Period (ACP)
Fixed Asset Turnover Ratio
Total Asset Turnover Ratio
Asset Management Ratios
Sales
= Inventories
Inv. turnover
DSO =
Receivables
= Receivables
Average sales per day
Sales/365
Fixed assets
turnover
Total assets
turnover
=
Sales
Net fixed assets
Sales
=
Total assets
Debt Management Ratios
Does the company have too much debt?
Can the company’s earnings meet its debt
servicing requirements?
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Total Liabilities to Total Assets, Long Term Debt
to Total Assets, Debt to Equity Ratio
Times Interests Earned Ratio
EBITDA Coverage Ratio
Debt Management Ratios
Total liabilities
Debt ratio =
Total assets
EBIT
TIE =
Int. expense
EBITDA Coverage Ratio =
EBIT + Depr. & Amort. + Lease payments
Interest +
Lease + Loan pmt.
expense
pmt.
Profitability Ratios
What is the company’s rate of return on:
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Sales?
Assets?
Profit Margin on Sales
Basic Earning Power
Return on Total Assets
Return on Common Equity
Profit Margin
Net profit margin (PM):
NI
PM = Sales
Operating profit margin (OM):
EBIT
OM = Sales
Gross profit margin (GPM):
Sales − COGS
GPM =
Sales
Basic Earning Power
Return on Asset, Return on Equity
EBIT
BEP =
Total assets
NI
ROA =
Total assets
ROE =
NI
Common Equity
Market Values Ratios
Market value ratios incorporate the:
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High current levels of earnings and cash flow increase
market value ratios
High expected growth in earnings and cash flow increases
market value ratios
High risk of expected growth in earnings and cash flow
decreases market value ratios
Price/Earnings Ratio
Price/Cash Flow Ratio
Market/Book Value Ratio
Market Values Ratios
P/E = Price per share
EPS
Price per share
P/CF = Cash flow per share
Mkt. price per share
M/B = Book value per share
DU PONT EQUATION
ROE  ROA x Equity Multiplier
 Pr ofit Margin xT otalAssetsT urnover xEquity Multiplier
Net Income
Sales
T otalAssets

x
x
Sales
T otalAssets CommonEquity
ANALYTICAL APPROACHES
Trend Analysis
 Common Size Analysis
 Percent Change Analysis
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Limitations
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Different divisions in different industries
Average is not good enough
Inflation
Seasonal factors
Window dressing
Different accounting practices
What is a good ratio?
Financial statements accuracy
Qualitative Factors
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Dependence on key customer(s)
Dependence on key product(s)
Dependence on key supplier(s)
Competition
Future prospects
Legal & regulatory environment