Professor Dr. Rainer Stachuletz Corporate Finance

Financial Statements And Cash Flow Analysis

Professor Dr. Rainer Stachuletz

Corporate Finance

Prof. Dr. Rainer StachuletzCorporate FinanceBerlin School of Economics

2

Four Key Financial Statements

Balancesheet

Income statement

Retainedearnings

Cash flowStatemt.

Financial Managers and analystsuse financial statements to conduct:

- Cash Flow Analysis- Performance (Ratio) Analysis


3

Accounting Profit vs. Cash Flow

What are key measures of cash flow?

Accounting Profit based on accrual

accounting—focus on past periods

Finance emphasizes the importance of timing

“You can’t deposit net income, only cash”

Timing of cash flow matters.

Accrual accounting may obscure timing.


4

Sources and Uses of Corporate Cash

Sources

• Decrease in any asset

• Increase in any liability

• Net profits after taxes

• Depreciation and other non-cash charges

• Sale of stock

Uses

• Increase in any asset• Decrease in any

liability• Net loss• Dividends paid• Stock repurchase or

retirement


5

Key Measures of Cash Flow

5

Cash Flow f. Operations

• Total cash generated

Operating Cash Flow

• Cash flow before repaying lenders

Free Cash Flow

• Cash flow that firm could distribute to investors.


6

• Current ratio • Quick ratio• Inventory turnover ratio• Average collection period• Debt-to-equity ratio• Times interest earned ratio• Gross margin• EPS• P/E ratio• Market-to-book ratio

Types Of Financial Ratios

Activity Ratios

Debt Ratios

Profitability Ratios

Market Ratios

Liquidity Ratios


7

Financial Ratios: Trends and Benchmarking

Benchmarking: comparison of a company’s ratio values to industry competitors’ ratios

Firms’ financial ratios compared at the same point in time

Trend analysis - performance evaluation over time

Developing trends can be seen using multi-year comparisons.


8

Liquidity Ratios

seitilibailcurrent

assetscurrent = ratioCurrent

seitilibailcurrent

inventoryassets-current = ratioQuick

Staples (2004)

64.1 = ratioCurrent 95.0 = ratioQuick

Office Depot (2004)

57.1 = ratioCurrent 98.0 = ratioQuick


9

Activity Ratios

inventory

sold goods ofcost = turnoverInventory

assets fixednet

sales = overasset turn Fixed

52.6 = turnoverInventory

36.4 = overasset turn Fixed Staples (2004)

Office Depot (2004)

35.6 = turnoverInventory

81.4 = overasset turn Fixed


10

Activity Ratios (Continued)

daypersalesAverage

receivableAccounts = periodcollectionAverage

365

salesAnnual = daypersalesAverage

assets total

sales = overasset turn Total

99.936,112,36$ = daypersalesAverage

days 36.11 = periodcollectionAverage

03.2 = overasset turn Total Staples (2004)

Office Depot (2004)

.9333,859,084$ = daypersalesAverage

days 86.37 = periodcollectionAverage01.2 = overasset turn Total


11

Debt Ratios

equityrs'Stockholde

debttermLong = ratioequity Debt-

assets total

seitilibail total = ratioDebt

44.0 = ratioDebt

16.0 = ratioequity Debt- Staples (2004)

Office Depot (2004)

55.0 = ratioDebt

30.0 = ratioequity Debt-


12

Debt Ratios (Continued)

interest

taxesandinterest before earnings = earnedinterest Times

57.39 = earnedinterest Times Staples (2004)

Office Depot (2004)

12.9 = earnedinterest Times


13

Profitability Ratios

sales

taxes&interestbeforeEarnings = marginprofit Operating

sales

profitsGross = marginprofit Gross

%5.27 = marginprofit Gross

%06.6 = marginprofit Operating Staples (2004)

Office Depot (2004)

%35.31 = marginprofit Gross

%04.4 = marginprofit Operating


14

Profitability Ratios (Continued)

sales

incomeNet = marginprofit Net

goutstandinstock common of shares ofnumber

incomeNet = shareper Earnings

%72.3 = marginprofit Net

98.0$ = shareper Earnings Staples (2004)

Office Depot (2004)

%24.2 = marginprofit Net

89.0$ = shareper Earnings


15

Profitability Ratios (Continued)

assets Total

incomeNet = assets on totalReturn

equity rs'Stockholde

incomeNet = equitycommon on Return

%54.7 = assets on totalReturn

%4.13 = equitycommon on Return Staples (2004)

Office Depot (2004)

%50.4 = assets on totalReturn

%89.9 = equitycommon on Return


16

Market Ratios

shareper earnings

stockcommon of shareper pricemarket = ratio (P/E) ingsPrice/earn

goutstandinstock common of shares ofnumber

equitystock common = shareper Book value

04.28 = ratio (P/E) ingsPrice/earn

05.6$ = shareper Book value Staples (2004)

Office Depot (2004)

87.17 = ratio (P/E) ingsPrice/earn

40.5$ = shareper Book value


17

Market Ratios

stockcommonofsharepervalueBook

stockcommonofsharepervalueMarketratio (M/B)k Market/boo

55.4 ratio (M/B)k Market/boo Staples (2004)

Office Depot (2004)

94.2 ratio (M/B)k Market/boo


18

Case:Staples

Ltd.

Financial Statements andCash Flow Analysis


19

Staples Balance Sheet($ Thousands)

Current assets Jan 31, 2004 Feb 1, 2003

Cash & Equivalents $457,465 $495,889 Investments 934,275 100,175 Receivables 410,330 364,419 Inventories 1,465,989 1,555,205 Other current assets 114,598 105,559 Deferred taxes 96,247 96,229 Total current assets $3,478,904 $2,717,476 Fixed assets Property, plant and equipment $1,505,301 $1,447,752 Goodwill 1,202,007 1,207,824 Intangible assets 253,768 267,841 Other assets 63,066 80,495 Total Non-Current Assets $3,024,142 $3,003,912 Total assets $6,503,046 $5,721,388


20

Staples Liabilities & Stockholders’ Equity ($

Thousands)

Current liabilities Jan 31, 2004 Feb 1, 2003 Payables and Accrued Expenses $1,933,084 $1,874,655 Short Term and Current Long Term 190,150 327,671 Total current liabilities $2,123,234 $2,175,326 Long term Debt 567,433 732,041 Total long-term liabilities $567,433 $732,041 Other 149,479 155,129

Total liabilities $2,840,146 $3,062,496 Shareholders’ equity Common Stock $316 $299 Retained Earnings 2,209,302 1,719,091 Treasury Stock (561,099) (556,812) Capital Surplus 1,933,379 1,484,833 Other Stockholder Equity 81,002 11,481 Total Stockholder Equity $3,662,900 $2,658,892 Total liabilities & stockholders’ equity $6,503,046 $5,721,388


21

Staples Income Statement ($ Thousands)

Jan 31, 2004

Feb 01, 2003

Total Revenue $13,181,222 $11,596,075 Cost of Revenue (9,559,123) (8,652,593) Gross Profit $3,622,099 $2,943,482 Operating/Selling 2,282,092 1,795,428 General/Admin. Expenses 524,094 451,501 Non Recurring 9,639 8,746 Other 7,986 2,135 Operating income $798,288 $682,672 Earnings Before Interest and Taxes $798,288 $682,672 Interest Expense 20,176 20,609 Income Tax Expense 287,901 215,963 Net Income from Continuing Operations

$490,211 $446,100

Net income $490,211 $446,100


22 559,732(561,099)2,209,30281,0021,933,379Balances January 31, 2004

------------(367)Other

---(4,315)---------Purchase of treasury stock

490,211---490,211------Net income for year

---28------97Reissuance of treasury stock

69,521------69,521---Translation adjustments

------------18,389Issues of restricted stock

------------16,170Sale of CS under ESOP

------------9,136CS to employee saving plan

------------30,613Tax benefit for option exercise

------------121,553CS issues for option exercise

------------252,972Equity offering

484,710(556,812)1,719,09111,4811,485,132Balances February 1, 2003

Income

Treasury stock

Retained earnings

Cumul. Translat

adjustmtCommon

stock

Staples Statement Of Retained Earnings ($ Thousands)


23

Staples Statement Of Cash Flows

($ Thousands)

Cash Flow From Operating Activities

Jan 31,2004

Feb 1,2003

Net income (net profit after tax) $490,211 $446,100

Depreciation 282,811 267,209

Adjustments to Net Income 22,709 35,993

Changes in Account Receivables (4,218) 62,460

Changes in Liabilities 81,123 121,943

Changes in Inventories 80,721 80,721

Changes in Other Operating Activities (34) (3,574)

Cash Flows from Operating Activities $1,019,732 $914,350

Cash Flow from Investment Activities

Capital Expenditures ($280,703) ($1,435,879)

Other Cash Flows from Investing Activities (831,190) (100,175)

Cash Flows From Investing Activities ($1,114,803) ($1,536,401)


24

Staples Statement Of Cash Flows ($Thousands)

Cash Flow From Financing Activities

Jan 31, 2004 Feb 1, 2003

Sale (Purchase) of Stock $385,506 $78,421

Net Borrowings (350,235) 635,662

Net Cash Provided by Financing Activities $35,271 $714,038

Effect of exchange rate changes on cash 21,376 9,033

Net (decrease) increase in cash ($38,424) $101,065

Cash and Cash Equivalents, End of Period $457,465 $495,889

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Professor Dr. Rainer Stachuletz Corporate Finance

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