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Chapter 19

Financial Statement Analysis. Chapter 19. Overview. Purpose Tools Used Statements Ratio Analysis Limitations. Financial Statements. Balance Sheet Common Sized Trend or Indexed Income Statement Common Sized Trend or Indexed Statement of Cash Flows. Ratio Analysis.

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Chapter 19

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  1. Financial Statement Analysis Chapter 19

  2. Overview • Purpose • Tools Used • Statements • Ratio Analysis • Limitations

  3. Financial Statements • Balance Sheet • Common Sized • Trend or Indexed • Income Statement • Common Sized • Trend or Indexed • Statement of Cash Flows

  4. Ratio Analysis • Purpose of Ratio Analysis • Uses • Trend analysis • Comparative analysis • Combination • Use by External Analysts • Important information for investment community • Important for credit markets

  5. Type of Financial Ratios • Liquidity Ratios • Activity or Mgmt Efficiency Ratios • Leverage Ratios • Profitability Ratios • Market Price Ratios

  6. Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets - Inventory Current Liabilities

  7. Activity or Management Efficiency Ratios Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Total Assets

  8. Activity or Management Efficiency Ratios Average Collection Period Accounts Receivable Sales Per Day Days to Sell Inventory Inventory Sales Per Day

  9. Leverage Ratios Times Interest Earned Earnings Before Int. & Taxes Interest Expense Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends

  10. Leverage Ratios Debt to Assets Long Term Debt Assets Debt to Equity Long Term Debt Shareholders Equity

  11. Profitability Ratios Net Profit Margin % Net Income Sales Return on Assets Net Income Total Assets

  12. Profitability Ratios Return on Equity Net Income Common Equity Operating Margin After Depr. Operating Profit Sales

  13. Market Price Ratios Price to Earnings Market Price of Stock Earnings Market-to-Book-Value Market Price of Stock Book Value Per Share

  14. Decomposition of ROE EBIT Sales Sales Assets Assets Equity Net Profit Pretax Profit Pretax Profit EBIT ROE = x x x (1) x (2) x (3) x (4) x (5) Tax Burden Interest Burden x x Margin x Turnover x Leverage x

  15. Economic Value Added • Difference between return on assets (ROA) and the opportunity cost of capital (k) • EVA = above difference time the invested capital • EVA can be positive or negative for firms that have positive earnings

  16. Comparability Problems • Accounting Differences • Inventory Valuation • Depreciation • Inflation • International Accounting Conventions

  17. International Accounting Differences • Reserves – many other countries allow more flexibility in use of reserves. • Depreciation – US allows separate tax and reporting presentations. • Intangibles – treatment varies widely.

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