Tài chính doanh nghiệp - Chapter 3: Working with financial statements

Working With Financial StatementsChapter 30Key Concepts and SkillsKnow how to standardise financial statements for comparison purposesKnow how to compute and interpret important financial ratiosKnow the determinants of a firm’s profitability and growthUnderstand the problems and pitfalls in financial statement analysis1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChapter OutlineStandardised Financial StatementsRatio AnalysisThe Du Pont IdentityInternal and Sustainable GrowthUsing Financial Statement Information2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerStandardised Financial StatementsCommon-Size Balance SheetsCompute all accounts as a percent of total assetsCommon-Size Income StatementsCompute all line items as a percent of salesStandardised statements make it easier to compare financial information, particularly as the company growsThey are also useful for comparing companies of different sizes, particularly within the same industry3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerRatio AnalysisRatios also allow for better comparison through time or between companiesAs we look at each ratio, ask yourself what the ratio is trying to measure and why is that information importantRatios are used both internally and externally4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerCategories of Financial RatiosShort-term solvency or liquidity ratiosLong-term solvency or financial leverage ratiosAsset management or turnover ratiosProfitability ratiosMarket value ratios5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerSample Balance SheetCash6,489A/P340,220A/R1,052,606N/P86,631Inventory295,255Other CL1,098,602Other CA199,375Total CL1,525,453Total CA1,553,725LT Debt871,851Net FA2,535,072C/S1,691,493Total Assets4,088,797Total Liab. & Equity4,088,797Numbers in thousands6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerSample Income StatementRevenues3,991,997Cost of Goods Sold1,738,125Expenses1,205,530Depreciation308,355EBIT739,987Interest Expense42,013Taxable Income697,974Taxes272,210Net Income425,764EPS2.17Dividends per share0.86Numbers in thousands, except EPS & DPS7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Liquidity RatiosCurrent Ratio = CA/CL1,553,725 / 1,525,453 = 1.02 timesQuick Ratio = (CA – Inventory)/CL(1,553,725 – 295,255) / 1,525,453 = 0.825 timesCash Ratio = Cash/CL6,489 / 1,525,453 = 0.004 times8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Leverage RatiosTotal Debt Ratio = (TA – TE)/TA(4,088,797 – 1,691,493) / 4,088,797 = 0.5863 times or 58.63%The firm finances almost 59% of their assets with debt.Debt/Equity = TD/TE(4,088,797 – 1,691,493) / 1,691,493 = 1.417 timesEquity Multiplier = TA/TE = 1 + D/E1 + 1.417 = 2.4179Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Coverage RatiosTimes Interest Earned = EBIT/Interest739,987 / 42,013 = 17.6 timesCash Coverage = (EBIT + Depreciation)/Interest(739,987 + 308,355) / 42,013 = 24.95 times10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Inventory RatiosInventory Turnover = Cost of Goods Sold/Inventory1,738,125 / 295,255 = 5.89 timesDays’ Sales in Inventory = 365/Inventory Turnover365 / 5.89 = 62 days11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Receivables RatiosReceivables Turnover = Sales/Accounts Receivable3,991,997 / 1,052,606 = 3.79 timesDays’ Sales in Receivables = 365/Receivables Turnover365 / 3.79 = 96 days12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Total Asset TurnoverTotal Asset Turnover = Sales/Total Assets3,991,997 / 4,088,797 = 0.98 timesMeasure of asset use efficiencyNot unusual for TAT <1, especially if a firm has a large amount of fixed assets13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Profitability MeasuresProfit Margin = Net Income/Sales425,764 / 3,991,997 = 0.1067 times or 10.67%Return on Assets (ROA) = Net Income/Total Assets425,764 / 4,088,797 = 0.1041 times or 10.41%Return on Equity (ROE) = Net Income/Total Equity425,764 / 1,691,493 = 0.2517 times or 25.17%14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerComputing Market Value MeasuresMarket Price = $61.625 per shareShares outstanding = 205,838,594PE Ratio = Price per share/Earnings per share61.625 / 2.17 = 28.4 timesMarket-to-book ratio = market value per share/book value per share61.625 / (1,691,493,000 / 205,838,594) = 7.5 times15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 3.516Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerDeriving the Du Pont IdentityROE = NI/TEMultiply by 1 and then rearrangeROE = (NI/TE)(TA/TA)ROE = (NI/TA)(TA/TE) = ROA*EMMultiply by 1 again and then rearrangeROE = (NI/TA)(TA/TE)(Sales/Sales)ROE = (NI/Sales)(Sales/TA)(TA/TE)ROE = PM*TAT*EM17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerUsing the Du Pont IdentityROE = PM*TAT*EMProfit margin is a measure of the firm’s operating efficiency – how well does it control costsTotal asset turnover is a measure of the firm’s asset use efficiency – how well does it manage its assetsEquity multiplier is a measure of the firm’s financial leverage18Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerPayout and Retention RatiosDividend payout ratio = Cash dividends/Net income0.86 / 2.17 = 0.3963 or 39.63%Retention ratio = Additions to retained earnings/Net income = 1 – payout ratio1.31 / 2.17 = 0.6037 = 60.37%Or 1 - 0.3963 = 0.6037 = 60.37%19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Internal Growth RateThe internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerThe Sustainable Growth RateThe sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio.21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerDeterminants of GrowthProfit margin – operating efficiencyTotal asset turnover – asset use efficiencyFinancial leverage – choice of optimal debt ratioDividend policy – choice of how much to pay to shareholders versus reinvesting in the firm22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 3.623Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerWhy Evaluate Financial Statements?Internal usesPerformance evaluation – compensation and comparison between divisionsPlanning for the future – guide in estimating future cash flowsExternal usesCreditorsSuppliersCustomersShareholders24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerBenchmarkingRatios are not very helpful by themselves; they need to be compared to somethingTime-Trend AnalysisUsed to see how the firm’s performance is changing through timeInternal and external usesPeer Group AnalysisCompare to similar companies or within industriesGICS codes25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerReal World Example – I Ratios are figured using financial data from the 2005 Annual Report for MetcashCompare the ratios to the industry ratios in Table 3.8 in the bookMetcash’s fiscal year end is 30 JuneBe sure to note how the ratios are computed in the table so that you can compute comparable numbers26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerReal World Example – IILiquidity ratiosCurrent ratio = 1.12x; Industry = 1.11xQuick ratio = 0.71x; Industry = 0.58xLong-term solvency ratioDebt/Equity ratio (Debt / Worth) = 0.68x;Industry = 0.59x.Coverage ratioTimes Interest Earned = 20.7x; Industry = 9.0x27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerReal World Example – IIIAsset management ratios:Inventory turnover = 17.5x; Industry = 10.5xReceivables turnover = 10.9x (33 days); Industry = 21.6x Total asset turnover = 4.8x; Industry = 3.3xProfitability ratiosProfit margin before taxes = 1.42%; Industry = 2.14%ROA (profit before taxes/total assets) = 6.83%; Industry = 7.05%ROE = (profit before taxes/tangible net worth) = 21.64%; Industry = 17.22%28Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerQuick QuizHow do you standardise balance sheets and income statements and why is standardisation useful?What are the major categories of ratios and how do you compute specific ratios within each category?What are the major determinants of a firm’s growth potential?What are some of the problems associated with financial statement analysis?29Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan Trayler