Ch.3 - 13ed Analysis of Fin Stmts.ppt

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1

CHAPTER 3

Analysis of Financial

Statements



2

Topics in Chapter Ratio analysis

Du Pont system

Eects of improin! ratios

"imitations of ratio analysis

#ualitatie factors



3

Value = + + +FCF1 FCF2 FCF∞

(1 + WACC)1 (1 +WACC)∞

(1 + WACC)2

Free cash fow(FCF)

$ar%et interest rates

Firm’s business risk $ar%et ris% aersion

Firm’s deb!e"ui# mi$Cost of &e't

Cost of e(uity

Wei%hed a&era%e

cos o' caial(WACC)

e oerain%ro* a'er a$es

e"uired in&esmensin oerain% caial

,

=

-eerminans o' .nrinsic Value/0sin% aio Anal#sis



)

*erie+ Ratios facilitate comparison of,

*ne company oer time

*ne company ersus other companies Ratios are use& 'y,

"en&ers to &etermine cre&it+orthiness

Stoc%hol&ers to estimate future cash -o+san& ris%

$ana!ers to i&entify areas of +ea%ness an&stren!th



.

/ncome Statement2010 2011E

Sales .3))00 403.500

C*6S )70000 .00000

*ther e8penses 420000 512750

Deprec9 115750 120000

Tot9 op9 costs .15750 5.32750

E:/T 14))0 .025)0

/nt9 e8pense 145000 0000

E:T ;1..50< )225)0

Ta8es ;)0=< ;53)2)< 1570.5

>et income ; 7.135< 2.3.)



5

:alance Sheets, Assets2010 2011E

Cash 422 1)000

S?T inest9 20000 41532

AR 532150 4000

/nentories 124350 1415)0

Total CA 17)502 250112 >et FA 737470 35)0

Total assets 25.72 3.157.2



4

:alance Sheets, "ia'ilities

@ E(uity2010 2011E

Accts9 paya'le 32)000 3.700

>otes paya'le 420000 300000Accruals 2)750 30000

Total C" 132750 103700

"on!?term &e't 1000000 .00000

Common stoc% )50000 150735

Ret9 earnin!s 74532 275215

Total e(uity ..4532 17441.2

Total "@E 25.72 3.157.2



*ther Data2010 2011E

Stoc% price 5900 12914

of shares 100000 2.0000

EPS ?097. 1901

DPS 0911 0922

:oo% al9 persh9 .9. 4971

"ease payments )0000 )0000

Ta8 rate 09) 09)



Fie Cate!ories of Fin9

Ratios "i(ui&ity

Asset $!mt

De't $!mt

ProBta'ility

$ar%et alue

7



10

"i(ui&ity Ratios Can the company meet its short?

term o'li!ations usin! the

resources it currently has on han&



11

Forecaste& Current an&

#uic% Ratios for 20119

CR11 29.9

#R11

09739

CA

C"

250

10)0

250 ? 141510)0

CA ? /n9

C"



12

Comments on CR an& #R2011E 2010 2007 /n&9

CR 29. 19)5 293 294

#R 0973 09. 09 190

E8pecte& to improe 'ut still 'elo+ the

in&ustry aera!e9 "i(ui&ity position is +ea%9



13

Asset $ana!ement Ratios Ho+ eciently &oes the Brm use

its assets

Ho+ much &oes the Brm hae tie&up in assets for each &ollar ofsales



1)

/nentory Turnoer Ratio

s9 /n&ustry Aera!e

/n9 turnoer

)9109

Sales/nentories

40351415

2011E 2010 2007 /n&9

/n9 T9 )91 )9. )9 591



1.

Comments on /nentory

Turnoer /nentory turnoer is 'elo+

in&ustry aera!e9

Firm mi!ht hae ol& inentory orits control mi!ht 'e poor9

>o improement is currently

forecaste&9



15

DS*

).9. &ays9

Receia'les

Aera!e sales per &ay

44035G35.

Receia'lesSalesG35.

DS*, aera!e num'er of&ays from sale until cashreceie&9



14

Appraisal of DS*

Firm collects too slo+ly an&situation is !ettin! +orse9

Poor cre&it policy9

2011 2010 2007 /n&9DS* ).9. 379. 349) 3290



1

Total assetsturnoer

29009

Sales

Total assets

40353.14

Fi8e& assets

turnoer

Sales

>et B8e& assets

9)19403534

(More…)

Fi8e& Assets an& TotalAssets

Turnoer Ratios



17

Fi8e& Assets an& TotalAssets

Turnoer Ratios FA turnoer is e8pecte& to e8cee& in&ustry

aera!e9 6oo&9

TA turnoer not up to in&ustry aera!e9Cause& 'y e8cessie current assets ;AGR an&inentory<9

2011E 2010 2007 /n&9

FA T* 9) 592 1090 490

TA T* 290 290 293 29.



20

De't $ana!ement Ratios

Does the company hae too much&e't

Can the companyIs earnin!s meetits &e't sericin! re(uirements



21

Total lia'ilities Total assetsDe't ratio

)39=10)0 J .00

3.14

E:/T

/nt9e8pense

T/E

5939

.02950 (More…)

Calculate the &e't T/Ean& E:/TDA coera!eratios9



22

.9.9

E:/T J Depr9 @ Amort9 J "ease payment /nterest "ease e8pense pmt9J J "oan

pmt9

.0295 J 120 J )00 J )0 J 0

E:/TDA Coera!e ;EC<



23

Recapitalization improved situation, butlease payments drag down EC.

2011E 2010 2007

/n&9DGA )39=094= .)9= .090=

T/E 593 091 393 592

EC .9. 09 295 90

De't $ana!ement Ratioss9 /n&ustry Aera!es



2)

ProBta'ility Ratios

Khat is the companyIs rate ofreturn on, Sales Assets



2.

ProBt $ar!ins

P$ 395=9 >/Sales 2.3954035

*$ 491=9E:/TSales

.034035

>et proBt mar!in ;P$<,

*peratin! proBt mar!in

;*$<,

(More…)



25

Sales LC*6SSales

ProBt $ar!ins ;Continue&<

6P$

6P$ 1495=9 12354035

6ross proBt mar!in;6P$<,

4035 L.004035



24

ery 'a& in 2010 'ut proMecte& tomeet or e8cee& in&ustry aera!e in20119

2011E 2010 2007

/n&9P$ 395= ?195= 295= 395=

*P$ 491 093 591 491

6P$ 1495 1)95 1595 1.9.

ProBt $ar!ins s9 /n&ustryAera!es



2

:EP

1)93=9

E:/T

Total assets

.02953.14

(More…)

:asic Earnin! Po+er ;:EP<



27

:asic Earnin! Po+er s9/n&ustry Aera!e

:EP remoes eect of ta8es an&Bnancial leera!e9 Nseful for

comparison9 ProMecte& to 'e 'elo+ aera!e9

Room for improement9

2011E 2010 2007 /n&9

:EP 1)93= 095= 1)92=149=



30

R*A

492=9

>/

Total assets

2.3953.14

(More…)

Return on Assets ;R*A<an& Return on E(uity;R*E<



31

R*E

129=9

>/

Common E(uity

2.3951744

(ore3)

Return on Assets ;R*A<an& Return on E(uity;R*E<



32

2011E 2010 2007

/n&9

R*A 492= ?393= 590= 790=

R*E 129= ?1491=1393= 190=

:oth 'elo+ aera!e 'ut improin!9

R*A an& R*E s9 /n&ustryAera!es



33

Eects of De't on R*Aan& R*E

R*A is lo+ere& 'y &e't??intereste8pense lo+ers net income +hich

also lo+ers R*A9 Ho+eer the use of &e't lo+ers

e(uity an& if e(uity is lo+ere&

more than net income R*E +oul&increase9



Eects of De't on R*A @R*E>o De't ;unleere&< s9 De't;leere&<

3)



/mportant /mplications ofDe't Financin! ;Financial

"eera!e<

3.



The /nternal 6ro+th Rate

The internal !ro+th rate tells usho+ much the Brm can !ro+

assets usin! retaine& earnin!s asthe only source of Bnancin!9

/ntrnl 6rth rate ;R*A 8 Retention

=< 1? ;R*A 8 Retention

=<



The Sustaina'le 6ro+thRate

The sustaina'le !ro+th rate tells usho+ much the Brm can !ro+ 'y usin!

internally !enerate& fun&s an&issuin! &e't to maintain a constant&e't ratio9

Sustn'l 6rth rate ;R*E 8 Retention=<

1? ;R*E 8 Retention =<



3

$ar%et alue Ratios

$ar%et alue ratios, !ies m!mtin&ication of +hat inestors thin%

of co9Is past performance @ futureprospects



37

$ar%et alue Ratios

$ar%et alue ratios incorporate the, Hi!h current leels of earnin!s an&

cash -o+ increase mar%et alue ratios Hi!h e8pecte& !ro+th in earnin!s an&

cash -o+ increases mar%et alue ratios

Hi!h ris% of e8pecte& !ro+th inearnin!s an& cash -o+ decreases mar%et alue ratios



)0

$ar%et alue Ratios

PGE $r%t price per share G Earnin! pershare

PE6 ratio ;PriceGEarnin!s< G 6ro+th

PE6 O190 re-ects fairly alue& stoc%

$G: $r%t price p9s9 G :oo% alue p9s9

PGCFPrice p9s9 G CF p9s9



)1

Price 129149

EPS 19019

PGE 129

>/Shares out9

2.3952.0

Price per shareEPS

129141901

Calculate an& appraise thePGE PGCF an& $G: ratios9



)2

/n&ustry PGE Ratios,

/n&ustry Tic%er PGE

:an%in! ST/ 1932

Soft+are $SFT 591)Dru! PFE .94

Electric Ntilities DNQ 1091)

Semicon&uctor

s

/>TC )901

Steel >NE 0933

To'acco $* 1930

S@P .00 1)92245icker is 'or #ical *rm in indusr#6 bu 7!8 raio is 'or he

http://www.investor.reuters.com/



)3

>/ J Depr9

Shares out9

CF per share

19)72.395 J 12090

2.0

Price per shareCash -o+ per share PGCF

92912914

19)7

$ar%et :ase& Ratios



))

Com9 e(uity

Shares out9:PS

497191744

2.0

$%t9 price per share:oo% alue per share $G:

19.)9129144971

$ar%et :ase& Ratios;Continue&<



).

/nterpretin! $ar%et :ase&Ratios

PGE, Ho+ much inestors +ill payfor 1 of earnin!s9 Hi!her is

'etter9 $G:, Ho+ much pai& for 1 of 'oo%

alue9 Hi!her is 'etter9

PGE an& $G: are hi!h if R*E is hi!hris% is lo+9



$ar%et alue $easures

alue Stoc%s, Firms +G lo+ $r%t to :oo%ratios

6ro+th Stoc%s, Firms +G hi!h $r%t to:oo% ratios $ar%et Capitaliation $r%t alue of

Common E(uity

Enterprise alue $ e(uity J $ &e't Cash mr%t'l securities9 $easuresalue of BrmIs un&erlyin! 'usiness



)4

2011E 2010 2007/n&9

PGE 1290 ?593 794 1)92

PGCF 92 249. 90 495$G: 19. 191 193 297

Comparison +ith /n&ustryAera!es

i l i li



E(uity $ultiplier T9 AssetsGCmn E(ty

Firms +ith lar!e amts of &e'tBnancin! ;hi!h leera!e< hae hi!hE(ty $ultiplier

)

E i $ l i li



E(uity $ultiplier T9 AssetsGCmn E(ty

Firms +ith Small amts of &e'tBnancin! ;lo+ leera!e< hae smallerE(ty $ultiplier

)7



.0

E8plain the Du PontSystem

The Du Pont system focuses on, E8pense control ;P$<

Asset utiliation ;TAT*< De't utiliation ;E$<

/t sho+s ho+ these factors

com'ine to &etermine the R*E9



.1

; <; <; < R*E

ProBtmar!in

TAturnoer

E(uitymultiplier

>/

Sales

Sales

TA

TA

CE8 8 R*E

The Du Pont System



.2

>/

Sales

Sales

TA

TA

CE8 8 R*E

The Du Pont System



.3

200, 295= 8 293 8 292 1392=2007,?195= 8 290 8 .92 ?1595=2010, 395= 8 290 8 19 1390=/n&9, 395= 8 29. 8 290 190=

>/

Sales

Sales

TA

TA

CE8 8 R*E

The Du Pont System

C Si : l



.)

Common Sie :alanceSheets,

Dii&e all items 'y TotalAssets Assets 2007 2010 2011E /n&9

Cash 095= 093= 09)= 093=

ST /n9 393= 094= 290= 093=AR 2397= 2197= 2.90= 229)=

/nent9 )94= ))95= )9= )192=

TotalCA

459.= 549)= 4592= 5)91=

>et FA 239.= 3295= 239= 3.97=

TA 10090 10090= 10090= 10090=

Di i& ll i ' T l



..

Dii&e all items 'y Total"ia'ilities @ E(uity

Assets 2007 2010 2011E /n&9

AP 797= 1192= 1092= 1197=

>otespay9

1395= 2)97= 9.= 29)=

Accruals 793= 797= 109= 79.=

Total C" 329= )590= 2795= 2394="T De't 2290= 3)95= 1)92= 2593=

Total e(9 ).92= 1793= .592= .090=

Total "@E 10090 10090 10090 10090=

A l i f C Si



.5

Analysis of Common Sie:alance Sheets

Computron has hi!her proportion ofinentory an& current assets than

/n&ustry9 Computron no+ has more e(uity

;+hich means "ESS &e't< than/n&ustry9

Computron has more short?term&e't than in&ustry 'ut less lon!?term &e't than in&ustry9

C Si /



.4

Common Sie /ncomeStatement,

Dii&e all items 'y Sales2007 2010 2011E /n&9

Sales 10090= 10090= 10090= 10090=

C*6S 39)= .9)= 29)= )9.=*there8p9

797= 1293= 94= )9)=

Depr9 095= 290= 194= )90=

E:/T 591= 093= 491= 491=/nt9 E8p9 19= 390= 191= 191=

E:T )93= ?294= 590= .97=

Ta8es 194= ?191= 29)= 29)=

>/ 295= ?195= 395= 395=

A l i f C Si



.

Analysis of Common Sie/ncome Statements

Computron has lo+er C*6S ;594<than in&ustry ;)9.< 'ut hi!her

other e8penses9 Result is thatComputron has similar E:/T ;491<as in&ustry9

Percenta!e Chan!e Anal sis



.7

Percenta!e Chan!e Analysis,= Chan!e from First ear

;2007<Income St. 2007 2010 2011E

Sales 090= 4090= 10.90=

C*6S 090= 4397= 1029.=*ther e8p9 090= 1119= 093=

Depr9 090= .19= .3)97=

E:/T 090= ?7194= 1)09)=

/nt9 E8p9 090= 1195= 290=

E:T 090= ?2092= 193=

Ta8es 090= ?2092= 193=

>/ 090= ?2092= 193=

A l i f P t



50

Analysis of PercentChan!e /ncome Statement

Ke see that 2011 sales !re+ 10.=from 2007 an& that >/ !re+ 1=

from 20079 So Computron has 'ecome more

proBta'le9

P t Ch



51

Percenta!e Chan!e:alance Sheets, Assets

Assets 2007 2010 2011E

Cash 090= ?1791= ..95=

ST /nest9 090= ?.9= )49)=AR 090= 090= 1.090=

/nent9 090= 090= 1)090=

Total CA 090= 4392= 139)=>et FA 090= 14295= 1)294=

TA 090= 759.= 1379)=

Percenta!e Chan!e



52

Percenta!e Chan!e:alance Sheets, "ia'ilities@ E(uityLiab. &Eq.

2007 2010 2011E

AP 090= 1229.= 1)491=>otespay9

090= 25090= .090=

Accruals 090= 1079.= 1479)=

Total C" 090= 14.97= 11.97=

"T De't 090= 20792= .)95=

Total e(9 090= ?1590= 17497=

A l i f P t



53

Analysis of PercentChan!e :alance Sheets

Ke see that total assets !re+ at arate of 137= +hile sales !re+ at a

rate of only 10.=9 So assetutiliation remains a pro'lem9

Potential Pro'lems an&



5)

Potential Pro'lems an&"imitations of Ratio Analysis

Comparison +ith in&ustry aera!esis &icult if the Brm operates many&ierent &iisions9

Ae performance

/n-ation

Seasonal factors

Potential Pro'lems an&



5.

Potential Pro'lems an&"imitations of Ratio Analysis

Kin&o+ &ressin!

Dierent acct! @ op9 practices

Ratio !oo& or 'a&



55

#ualitatie Factors

There is !reater ris% if, reenues tie& to a sin!le customer reenues tie& to a sin!le pro&uct reliance on a sin!le supplier Hi!h percenta!e of 'usiness is !enerate&

oerseas

Khat is the competitie situation Khat pro&ucts are in the pipeline Khat are the le!al an& re!ulatory issues



:enchmar%in!

Ratios not ery helpful 'y themselesUnee& to 'e compare& to somethin!

Peer 6roup Analysis Compare to similar co9Is or +Gin in&ustries S/C an& >A/CS co&es

Time?Tren& Analysis Chan!e in performance oer time

/nternal @ E8ternal

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Ch.3 - 13ed Analysis of Fin Stmts.ppt

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