Post on 05-Apr-2018
transcript
7/31/2019 Fin Forecasting & Analysis
1/35
Financial Analysis & Forecasting
Fin 601
Corporate Financial Management
LeBow College of Business
US_Composite_Corp.xls
7/31/2019 Fin Forecasting & Analysis
2/35
Common Size Financial Statements
Standardized Financial Statements
Balance Sheet % of total assets
Income Statement
% of sales
Statement of Cash Flows?
7/31/2019 Fin Forecasting & Analysis
3/35
Ratio Analysis
Who performs ratio analysis?
Outsiders: creditors/investors Insiders: management
How do you use ratio analysis?
Cross sectional comparison
Time series analysis
7/31/2019 Fin Forecasting & Analysis
4/35
Group 1: Liquidity Ratios
Current Ratio
Quick Ratio
CLCACR
CL
INVCAQR
7/31/2019 Fin Forecasting & Analysis
5/35
Group 2: Leverage Ratios/
Debt Management Ratios
Debt Ratio
Debt/Equity Ratio
LTD/Equity Ratio
TA
TDDR
TE
TDED /
TE
LTDEdebttermLong /
7/31/2019 Fin Forecasting & Analysis
6/35
Group 2: Leverage Ratios/
Debt Management Ratios
Times Interest Earned Coverage Ratio
Interest
EBITTIE
7/31/2019 Fin Forecasting & Analysis
7/35
Group 3: Activity/Turnover Ratios
Receivables Turnover
Average Collection Period/Days Sales Outstanding
RA
SalesARTO
/
ARTODSO
365
7/31/2019 Fin Forecasting & Analysis
8/35
Group 3: Activity/Turnover Ratios
Inventory T-O
Days Sales in Inventory
INV
CGS
TOINV
TOINVDSI
365
7/31/2019 Fin Forecasting & Analysis
9/35
Group 3: Activity/Turnover Ratios
Total Asset Turnover
TA
SalesTATO
7/31/2019 Fin Forecasting & Analysis
10/35
Group 4: Profitability Ratios
Gross Profit Margin
Operating Profit Margin
Net Profit Margin
Sales
CGSSalesGPM
)(
Sales
EBITOPM
SalesEBITDA
Sales
NINPM
7/31/2019 Fin Forecasting & Analysis
11/35
Group 4: Profitability Ratios
Return on Assets
Return on Equity
TANIROA
TE
NIROE
7/31/2019 Fin Forecasting & Analysis
12/35
Group 5: Valuation Ratios
Price-Earnings
Market to Book
Enterprise Value to EBITDA
where EV = Market Cap of the stock + market value of interest bearing debt - cash
EPS
sharepericePE
Pr
sharepervalueBook
sharepervalueMarketBM /
EBITDA
EV
7/31/2019 Fin Forecasting & Analysis
13/35
Exercise
Excel Spreadsheet: US_Composite_Corp.xls
Compute ratios listed in ratio analysis tab
Additional data needed:
Current price = $90/share
# of shares outstanding = 29M
PAUSE NOW
7/31/2019 Fin Forecasting & Analysis
14/35
The ROE / ROA disparity?
The Dupont Identity
ROE= (profit margin) x TATO x Equity Multiplier
TE
TAx
TA
Salesx
Sales
NIROE
7/31/2019 Fin Forecasting & Analysis
15/35
DuPont Calculation
ROE PM TATO
Equity
Multiplier
USComposite
.11 .04 1.2 2.32
IndustryAverage
.15 .02 1.25 6
Note: Industry average DR = .833 so TE/TA = 1-.833=.167 and TA/TE = 1/.167= 6
7/31/2019 Fin Forecasting & Analysis
16/35
Return on Invested Capital
If a firm is an all equity firm, how will the ROICand ROE compare?
ROE = ROIC
TETDtEBITROIC
)1(
7/31/2019 Fin Forecasting & Analysis
17/35
Pro forma financial statements
pro forma
Historical relationships Sales forecast
Goal: estimate the amount of financingneeded for the upcoming period
7/31/2019 Fin Forecasting & Analysis
18/35
A simple start
Income Statement
Sales 2262Costs 2176
Net Income 86
Balance Sheet
Fixed Assets 1879 Long term debt 1074
Equity 805
Total 1879 1879
7/31/2019 Fin Forecasting & Analysis
19/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
SalesCosts
Net Income
Balance Sheet
Fixed Assets Long term debt
Equity
Total
7/31/2019 Fin Forecasting & Analysis
20/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs
Net Income
Balance Sheet
Fixed Assets Long term debt
Equity
Total
7/31/2019 Fin Forecasting & Analysis
21/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs 2611
Net Income
Balance Sheet
Fixed Assets Long term debt
Equity
Total
7/31/2019 Fin Forecasting & Analysis
22/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs 2611
Net Income 103
Balance Sheet
Fixed Assets Long term debt
Equity
Total
7/31/2019 Fin Forecasting & Analysis
23/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs 2611
Net Income 103
Balance Sheet
Fixed Assets 2255 Long term debt
Equity
Total 2255
7/31/2019 Fin Forecasting & Analysis
24/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs 2611
Net Income 103
Balance Sheet
Fixed Assets 2255 Long term debt 1289
Equity
Total 2255
7/31/2019 Fin Forecasting & Analysis
25/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs 2611
Net Income 103
Balance Sheet
Fixed Assets 2255 Long term debt 1289
Equity 966
Total 2255
7/31/2019 Fin Forecasting & Analysis
26/35
Construct a pro-forma income statement and balance sheetassuming sales grow by 20% and all other accounts are a fixed
percentage of sales.
Income Statement
Sales 2714Costs 2611
Net Income 103
Balance Sheet
Fixed Assets 2255 Long term debt 1289
Equity 966
Total 2255 2255
7/31/2019 Fin Forecasting & Analysis
27/35
Whats the problem?
Think of the link between the IS and the BS!=> RE = NI - dividends
Balance Sheet
Fixed Assets 2255 Long term debt
Equity
Total 2255
PAUSE NOW
7/31/2019 Fin Forecasting & Analysis
28/35
Whats the problem?
Think of the link between the IS and the BS!=> RE = NI - dividends
Balance Sheet
Fixed Assets 2255 Long term debt
Equity
Total 2255 2255
7/31/2019 Fin Forecasting & Analysis
29/35
Whats the problem?
Think of the link between the IS and the BS!=> RE = NI - dividends
Balance Sheet
Fixed Assets 2255 Long term debt
Equity 908
Total 2255 2255
=805+103
7/31/2019 Fin Forecasting & Analysis
30/35
Whats the problem?
Think of the link between the IS and the BS!=> RE = NI - dividends
Balance Sheet
Fixed Assets 2255 Long term debt 1347
Equity 908
Total 2255 2255
=805+108
=2255 - 908
(PLUG)
7/31/2019 Fin Forecasting & Analysis
31/35
A more complex example
Refer to the Excel file:US_Composite_Corp.xls
7/31/2019 Fin Forecasting & Analysis
32/35
Excess Capacity
Suppose US Composite is operating at 70%capacity.
The need for additional Fixed Assets may bereduced or eliminated
How much can sales grow before additional
Fixed Assets are needed?30%/70% = 43%
7/31/2019 Fin Forecasting & Analysis
33/35
Feedback effects
Additional financing (debt or equity) results inincreased payments (interest or dividends)which effects the level of RE available forplowback into the firm, further increasing theneed for financing.
7/31/2019 Fin Forecasting & Analysis
34/35
Uses of pro forma statements
Sensitivity Analysis
Scenario Analysis
7/31/2019 Fin Forecasting & Analysis
35/35
How can we apply this to our own
work lives?
Understanding of financial statements andthe analysis process helps to gain anoverview look of the firm.
The ROIC Ratio