financial analysis[1].pdf

7/29/2019 financial analysis[1].pdf

1/95

Financialanalysis


2/95

whyfinancialanalysis?

corporateaccountscontaininforma6onusefulforanoveralldiagnosisofacompanyusefulfirststeptovalua6onbutFAisnotenoughtogetvalue!


3/95

Howtodoit?

Goalofthislecture:learnhowtomakeafinancialanalysis

Youstartwithsources:FinancialstatementsMarketinfo(-Infooncomparablecompanies

Marketstudies,analystresearchDirectcontactwiththecompany)


4/95

Howtodoit?

Usingfinancialstatements,applyafourstepmethod:

1.Valuecrea5on:trendsinsales&margins2.InvestmentAnalysis:CAPX&inventories3.FinancingAnalysis:Cashflows4.ProfitabilityAnalysis:ROE,ROCE

Usingmarketinfo,obtaininvestors

expecta6ons


5/95

Outline

1 Financialstatements:theeconomicview2 The4stepmethod3 Extrac6nginfofromthestockmarket


6/95

Textbookreferences

Accoun6ngreview CorporatefinanceTheory&Prac6ce:chapters2-10

4stepsmethod

CorporatefinanceTheory&Prac6ce:chapters11-1

FinancialanalysisisNOTaccoun6ng Iamnoaccountant! Accoun6ngfromafinanceperspec6ve Idontwanttobeaspreciseandexhaus6veasanaccountant

Wanttofocusonbigitemsthatareeconomicallymeaningful


7/95

Financialstatements:economicview

Shouldconnectwithyouraccoun6ngclass Yet,weareusingfinancialstatementfor

financialanalysis

Focusonlargecontribu6onstocorporateincomeForgetaboutthesmallaccoun6ngitems

noconcernforexhaus6vity

Focusonwhatma\ersinfinance Cashflows(forvalua6on) Debt&leverage(forriskanalysis) Profitability(forreturns)

Astylizedviewofaccoun6ng


8/95

Financialstatements

ThreemainstatementsIncomestatement

meaningfulcashmovementsCashflowstatement

TruecashmovementsBalancesheet

Cumulatedinvestmentsandtheirfinancing(throughretainedearningsorsecurityissues)


9/95

IncomeStatement,byNature

+NetSales

+changeininventoriesoffinishedgoods

=Produc5on-purchaseofrawmaterials

+changeininventoriesofrawmaterials

-personnalexpenses

-taxesotherthancorporateincometax

-writedowns/offsoftradeassets&inventories=EBITDA

-amor6za6on,deprecia6onoffixedassets

=EBIT

-Financialexpenses

+Financialincome=Profitbeforetaxandnonrecurrentitems

+/-Nonrecurringitems

-CorporateIncomeTax(T)=Netincome(rE.E)

-Dividends

=Retainedearnings(RE)

~x(profitbeforetax)deprecia5onistaxfreeinterestistaxfree = 33%inFrance


10/95

theore5calcashflowstatement

+opera6ngreceipts

-opera6ngexpenses=Opera5ngCashflows

-capitalexpenditure+fixedassetsdisposals

=Freecashflowbeforetax-Financialexpenses

+Financialincome

-Dividends

+proceedsfromshareissues

-CorporateIncomeTax=netdecreaseindebt/netincr.incash

-ShareBuybacks

butinprac5cedifferentpresenta5on


11/95

FromEBITDAtoopera6ngcashflows

Opera6ngreceipts=Netsaleschangeintradereceivables Opera6ngexpenses=opera6ngcosts(excl.Deprecia6on)

changeintradepayables+changeininventories(material)

OCF=opera6ngreceiptsopera6ngexpenses = netsalesopera6ngcosts

+TradePay.-Traderec.-Inv(mat.)

=EBITDAInv(finishedGoods)

+TradePay.Traderec.-Inv(mat.) =EBITDA-(-Tradepay.+Traderec.+Inv)

WorkingCapital


12/95

EBITDA

-WC=Opera5ngCashflows


=Freecashflowbeforetax

-Financialexpenses

+Financialincome

-Dividends


-CorporateIncomeTax=Netdecreaseindebt

-ShareBuybacks


13/95

FromNetInctoCFfromop.

some6mes:weuseNetInc.tocomputecash

flows,&useadifferentCFconcept

CFfromop.=opera6ngreceiptsopera6ng

expensesinterestexpenses

=EBITDA-

WCinterestexpenses =NetInc+D&A-cap.gains-WC


14/95

+Amor5za5onandProvision

-WC=Cashflowsfromopera5ons


=Freecashflowbeforetax

-Financialexpenses

+Financialincome

-Dividends


-CorporateIncomeTax=Netdecreaseindebt

-ShareBuybacks

Netincome


15/95

Anexample

FindStarBucksannualreportonthewebHowdotheypresentthecashflowstatement?Isthereabigdifferencebtwcashflowsandearnings?

FindGeneralMotorsannualreportonthewebHowdotheypresentthecashflowstatement?Isthereabigdifferencebtwcashflowsandearnings?


16/95

Balancesheet:details

-Prepaidproducts-Tradepayables-Taxliabili6es-Commercialpaper-shorttermbankdebt-Longtermbankdebt-Bonds-Conver6blebonds-Preferredstock-Commonstock-Retainedearnings-NetIncome

-tradereceivables-inventoriesof:

-Finishedproduct-Semifinished-Materials

-Intangiblefixedassets-Patents-Brands

-Tangiblefixedassets-Land&buildings-Machines


17/95

Balancesheet:asimpleview

French

Bri>sh/American

Actif immobilis Capitaux propres

Dettes long terme

Actif circulant Dettes court terme

Current assets Current Liabilities

Long-Term Liabilities

Fixed assets Shareholders equity

Our view of the balance sheet is extremely stylized


18/95

Pijallsofsimplifica6on

Butobviouslygengtothislevelofaggrega6onrequireslotsofassump6ons

Someassets&liabili6esarefic66ouscomputeequityisharderthanyouthinkCompu6ngdebtisharderthanyouthinkCompu6ngassetsisharderthanyouthink

letsdiscusssomeoftheseassump6ons


19/95

Removingfic66ousassets&liabili6es

Assetsareabadindicatorofemployedcapitalassetsincreasewhensuppliersarepaidlater,andthefirmstoresaddi>onalinputs

assetsincreasewhenthefirmsproducesmoreandstorestheaddi>onalproductsinawarehouse

assetsincreasewhenthefirmretainsearningstoholdmorecash

yet,inallcases,thishasli\letodowiththe

firmsopera6ons!

needtoremovetheseOPTICALILLUSIONS


20/95

Removingfici6ousassets&liabili6es

Remove,FROMBOTHSIDESofthebalancesheet:

Cash&equivalents,becausetheycouldbeusedinstantaneouslytorepayliabili6esCreditfromsuppliersandclients,becausetheydo

notneedtobefinancedbyinvestors tradepayables(crditfournisseurs)prepaids


21/95

Equity

Bank debt

Fixed Assets

Trade recevables

Assets Liabilities

Convertible

debt

Trade payables,prepaids

inventories

Cash&equivalents

Fixed Assets:

(machines, land,

patents)

Operating capital Capital invested

NET

DEBT

Equity

Working Capital

WC = Inventories + trade receivables - trade payables - prepaids

NET DEBT = DEBT cash cash equivalents

Removingfici6ousassets&liabili6es


22/95

Opera6ngcapital

AssetsofthefirmnowcalledOpera6ngcapitaloreconomicassets

Fixedassets(=before)Workingcapital

Workingcapital:tofinanceinventories+thefactthatcredittoclients>creditfromsupplier

ingeneral>0.why?butsome6mes,WC


23/95

Capitalemployed

Liabili6esofthefirmnowcalledcapitalemployed,orcapitalinvested

Equity(=before)Netdebt=financial(nontrade)debtcash

Netdebt:Ingeneral>0.Why?Butcanbenega6ve.When?


24/95

examples

FindthelastannualreportofDeutscheTelekom

DoestheWCcorrec6onmakeabigdifference?Onsize?Ondebt/assets?

FindoutMicrososbalancesheetfor2009Howbigisnetdebt?


25/95

Itshardtocomputeequity

Fromafinancialviewpointconver6blebondsarepartlyequitypreferredstockisequity

OnlydotheadustmentwhenthisisworthitWhenthisisBIG


26/95

Itshardtocomputedebt

Someliabili6esareoffbalancesheet Infointhefootnotesofthefinancialstatements

Examples Leasedassets:commitmenttorentanasset

isbig:1%ofassets(~longtermdebt) ifopera6nglease:offbalancesheet Ifcapitallease:onbalancesheetbutcreditorscannotseizeit

Definedbenefitpensionobliga6ons Pensionfunds=30%oflargefirmsfinancialdebt Backedbyassets,butfirmhastoinectcapitalifunderfunded=addedleverage


27/95

example


28/95

10Kfiling,footnote18


29/95

Itshardtocomputefixedassets:

goodwill

Debt=0

Equity=100Fixedassets=120

W.cap.=30

Acquiror

Equity=80Fixedassets

=80

Target

Buysatprice200

Debt=???

Equity=???Fixedassets

=??

W.cap.=??

Mergeden5ty

Assume acquiror issues 200 of new stock, or 200 of new debtwhat is the important convention??? How does it affect measured leverage?


30/95

The4stepmethod

1.Valuecrea5on:trendsinsales&margins

2.InvestmentAnalysis:

trendsinCAPX&workingcapital3.FinancingAnalysis:

trendsincashflows&balancesheetfragility

4.ProfitabilityAnalysis:

computeprofitabilityra6os:ROE,ROCE


31/95

Step#1:valuecrea6on

Goal:isolatetrendsinEBITDA Startwithsomebroadeconomicanalysis

Ontheenvironment: Isitamatureorgrowingindustry?

Isitacyclicalorstableindustry? Anypressuretoconsolidate? Anyregulatoryrisk?

Onthefirm Howdoesitdealwithcompe66on? Whoownsthefirm?Afamily,thepublic,afund?


32/95

Valuecrea6on:

thescissorseffect

Insight:lookatthetrendsinsales&costsseparately

Nega5vecissorseffect Whencostsgrowfasterthansales EBITDAslowsdown,maydecrease EBITDA/sales(EBITDAmargin)decreases

Posi5vecissorseffect Theopposite


33/95

posi6veornega6vecissorseffect?


34/95

Valuecrea6on:

breakevenpoint

insight:findthelevelofsalesrequiredtomakezeroprofit &seehowfarthefirmisfromthatlevel

Assumeyoucanbreakdowncostsintoafixedandavariablepart:

Costs=Fixedcosts+Variablecosts

Fixedcostsarealwaysthere,whethersalesarebigorsmall

Variablecostsincreaseinpropor6ontosales=cxsales


35/95

sales

Totalcost

Fixedcost

=$100m

Anumericalexample

MegaCorpLtdhas-fixedcostof$100m

-variablecostof70cperdollarofsales

0

slope=0.7

Assumesales=$100m

whatistheprofit?

Assumesales=$1bn

whatistheprofit?


36/95

Valuecrea6on:breakevenpoint

Onceyouknowhowcostsreacttosales,computebreakevenpoint:

ProfitBE

=SalesBE

FixedCostcxSalesBE

=0

SalesBE=Fixedcost/(1-c)

SalesBEisminimumsalesrequiredsothatprofits>0 HigherifFixedcostisbig,orifcisbig

whathappensifc1?


37/95

sales

Totalcost

Backtonumericalexample

WhatisthebreakevenpointofMegaCorp?

45

Sales

Breakeven point,where sales = cost

Profit < 0 Profit > 0


38/95

Valuecrea6on

breakevenpoint

Inprac6ce,howdoIcomputethecostfunc6on?

Usetheincomestatementbyfunc6onCostofgoodssold:mostlyvariableR&D,SG&A:mostlyfixedMartke6ng&sales:both

Thehorizonma\ersInthelongrun,morecostsarevariable


39/95

Valuecrea6on:

opera6ngleverage

BacktoMegaCorp Impactofa1%changeinsalesonprofits

IfsalesareclosetoBEpoint?Ifsales>>BEpoint?


40/95

Valuecrea6on:

opera6ngleverage

Ifafirmistooclosetoitsbreakevenpoint,thenprofitsaremuchmorevola6le

Mathema6cally:

EBITDA = Sales c Sales Fixed cost

= (1 c) sales 1 c( )salesBE

EBITDA

EBITDA=

Sales

Sales

Sales

Sales SalesBE&

'(

)

*+

Big if sales ~ salesBE


41/95

Valuecrea6on:

opera6ngleverage

Conversely,amodestincreaseinsales&largeincreaseinEBIT=thefirmisclosetoitsBE

Company in 2003 Salesgrowth

Net incomegrowth

Tesco + 18 % + 22 %

Roche + 11 % + 24 %

Heidelberg Cement + 9 % + 215 %

Explain why this makes sense


42/95

Valuecrea6on:

opera6ngleverage

Amodestdecreaseinsales&largedecreaseinEBIT=thefirmisclosetoitsBE

Company in 2003 Salesgrowth

Net incomegrowth

Volkswagen - 2 % - 4 %

BMW - 2 % - 48 %

Which company has the biggest fixed costs?


43/95

Step #2:


44/95

Step#2:

investmentanalysis

Discussestrendsinoverallassets First,lookatfixedassets

lookforbumpsandtrendsin: balancesheet cashflowsfrominvestment

Second,lookatworkingcapital:WC=Inventories+ReceivablesPayables-prepaid


45/95

Fixedassets:anexample

Explain what is happening to Danone


46/95

Workingcapital

Workingcapitalprosandcons:Cons

NeedstobefinancedwithcostlydebtorequityPros avoidsbo\lenecksinproduc6on Infacttradepayablescanbeverycostly

ClassicalarrangementinUSmanufacturing:2/10net30 2%discountifpaidwithin10days,elsefullpricepaidin30

days

Equivalentinterestrateoftheloan70%annual!!!why? Thiscostisoenimplicitlyomi\edinWCanalysis


47/95

workingcapital

Ingeneral:lowWCisconsideredasgoodWCanalysisclassictooltodetectanomalies&

managementquality

Butkeepinmindthat:WCdependsontheindustryWCdependsonthebusinesscycleWCmayhavestrongseasonalpa\erns


48/95

MiniCase:CARREFOUR,aFrenchretailerTheIncomeStatement

Retail!

CARREFOUR,theBalanceSheet


49/95

WC~-3.Mdeuros!NetDebt~13Mdeuros

Overallcapitalemployed=F.A.+WC=22Mdeuros


50/95

Investmentanalysis:

workingcapital

Typicalra6osWC Turnover = 365

WC

Annual SalesReceivables = 365

Accounts Receivables

Annual Sales

Payables = 365 Accounts Payables

Annual Purchases

Inventories =365 Inventories

Annual Sales

#

$

%%%

&

%%%

St #3


51/95

Step#3:

financinganalysis

Twoques6onsrelatedtofirmsurvival:Arecashflowslargeenoughtopayinterestondebt?

Istherealiquidityrisk?

Nothere:Isthereenoughle7forshareholders?

Tools:analysisofcashflowstatementCompareopera6ngcashflows&financialexpensesanalysisofdura>onofassetsandliabili>esCompareWC&shorttermliabili6es

Financing analysis


52/95

Financinganalysis

thecashflowstatement

LookatallcomponentsofdecreaseinnetDebtandtheirevolu6on:

EBITDAWC (=Opera>ngCF)

-(CAPEXAssetsales)(=CFfrominv.)

-financialexpensesdividends+proceedsfromequityissues (=CFfromfin.)

=DecreaseinNetDebt

Financing analysis


53/95

Financinganalysis


Alterna5vepresenta5on:

NetInc.+Deprec.WC (=CFfromOp.)

-(CAPEXAssetsales)(=CFfrominv.)

dividends+proceedsfromequityissues (=CFfromfin.)

=DecreaseinNetDebt

(dontbeafraid:interestpaymentustmoves

fromCFfromfin.toCFfromOp.)

Fi i l i


54/95

Financinganalysis


cashflowsdontlieIncomestatementeasiertomanipulateCashisking

Basicidea:inthelongrun,op.CFmustpayforInterestpaymentsreinvestment


55/95

Financinganalysis:

ra6os

Leverageconsideredaslessinforma6veinfinancinganalysis:

Whatma\ersisOpera6ngCF TakingEBITDAasaproxyforOCF,prefer:

Interests

EBITDACoverageInterest

EBITDA

DebtNetCoverageServiceDebt

=

=

AssetsTotal

DebtFinancial

Leverage=


56/95

Whyleveragera5oisnotsoreliable:

TheTaleofTwoCompanies

Company in 2003 Net Debt /Assets

Net Debt /EBITDA

Unilever 71 % 2.2

Rmy Cointreau < 50 % 3.8 !

Unilevers operations are so profitable that it can affordmore debt !

Prefer Net Debt / EBITDA to leverage !!!

Fi i l i


57/95

Financinganalysis:

ra6os

WhatshouldNetDebt/EBITDAbeworth?

Standards:


58/95

Financinganalysis:

balancesheetliquidity

RiskofliquiditymismatchEvenifPVofassets>PVofliabili6esAssetsmatureinthelongrun(investment)Liabili6esmatureintheshortrun(shorttermdebt)

(give examples of industries where this is common)

Intheory,notaproblemifrolloverispossible Butinprac6ce:Rollover risk

Creditorshavedoubts,theywanttocashin&runCheapshortruncreditcandryupsuddenly(Crisis)


59/95

Rolloverriskinthebankingsystem


60/95

tradi6onalbankingsystem

large

depositors,

retail

investors

bankborro

wer

loans


61/95

USshadowbankingsystem

large

depositors,

retail

investors

money

market

mutualfunds

ABCP

conduit

CDO

ABS

vehicle,

fannymae,

freddy

mac

sharesCP

CDO

origin

ator

loans

broker-

dealers

hedgefundsproptrading

securi6es

lenders

borro

wer

re

po


62/95

Rolloverriskinshadowbanks

Financing analysis:


63/95

Threera>ostomeasurematuritymismatch:

year)1(sLiabilitieCurrent

CashRatioCash


sInventorieyear)1(AssetsCurrentRatioQuick


year)1(AssetsCurrent

RatioCurrent

Date post:	14-Apr-2018
Category:	Documents
Upload:	dovee
View:	219 times
Download:	0 times

financial analysis[1].pdf

Documents