Transcript Lect#15.Chapter2.ed3.ppt

Working with Financial Statements
Why Use Financial Statements?
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External Users
Internal Users
Trend Analysis – Time Series
Comparing Firms
The only good number on a stand alone basis
is a phone number (old saying)
Different Objectives makes comparisons more
difficult
Why compare firms…limited investment
resources
Working with Financial Statements
The Pitfalls of Financial Statements
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it is not a cookbook – don’t read to much
into a single ratio or comparison
financial statements are backward looking
financial decisions are forward looking
comparing firms…
different industries
different timing on recording information
different goals
different constraints
Working with Financial Statements
Ratio Analysis
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Estimating the Health of the Firm
Exxon, McDonalds, Intel, Wal-Mart
Which firm is the healthiest?
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Using Ratios as proxies for health of firm
Most profitable
Fastest Growing
Most stable
Recession Proof
Long term Survival
Working with Financial Statements
Examining the Firm
Working with Financial Statements
Four Types of Ratios
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Liquidity
The ability to meet obligations on a timely basis
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Activity
Management of assets
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Debt
The borrowing structure of the firm
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Profitability
The most abused ratios – measure (potential)
return
Working with Financial Statements
Liquidity
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Net Working Capital
Current Ratio
Quick Ratio
Chapter 2 – Problem 8
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Analyze Current and Quick Ratio
Trend Analysis
Evaluation
Working with Financial Statements
Activity Ratios
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Inventory Turnover
Average Collection Period
Average Payment Period
Asset Turnover
Chapter 2 – Problem 11
Working with Financial Statements
Debt Ratios
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Debt Ratio
Total Liabilities / Total Assets
Debt Percent ( 1 – Debt Percent = Equity
Percent)
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Times Interest Earned
Must make interest payments…failure means
the firm is in technical bankruptcy
Note before taxes as government is paid after
interest
Chapter 2 – Problem 12
Working with Financial Statements
Profitability Ratios (Most Abused)
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ROA – Return on Assets
ROE – Return on Equity
P/E Ratio (not in text but very common)
Operating Profit Margin
% profit per sale dollar before interest and taxes
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Net Profit Margin
% profit per sale dollar
What is available to shareholders
Working with Financial Statements
DuPont System
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Target is ROE
Breaks down into components of ROE
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ROE = Profit Margin x Total Asset Turnover
x
Equity Multiplier
 Profit Margin is Net Income/Sales
 Asset Turnover is Sales/Assets
 Equity Multiplier is Assets/Total Equity
Chapter 2 – Problem 14