SlideShare uma empresa Scribd logo
1 de 74
Baixar para ler offline
Similarity is important as one should compare “apples to apples.”
What to expect?
What should you know before getting started (the purpose of financial ratios)
What common size ratio
Prepared by: Neven Erfan
E.mail: keven01000@yahoo.com
neven.erfan@nub.edu.eg
Advance your
career
Financial analysis techniques
Financial analysis techniques
Video -1
Intro Video
The purpose
Plan -- Focus on assessing the current financial position and evaluating potential firm
opportunities.
Control -- Focus on return on investment for various assets and asset efficiency.
Understand -- Focus on understanding how suppliers of funds analyze the firm.
– Financial Analysis Techniques
Introduction: This topic review presents a “tool box” for an analyst . It would be nice if you
could calculate all these ratios, but it is imperative that you understand what firm
characteristic each one is measuring, and even more important, that you know whether a
higher of lower ratio is better in each instance.
Different analysts calculate some ratios differently.
Don’t get too tied up in the details of each ratio, but understand what each one represents
and what factors would likely lead to significant changes in a particular ratio.
Session objectives
1. Describe tools and techniques used in financial analysis, including their
uses and limitations;
2. Classify, calculate, and interpret activity, liquidity, solvency, profitability,
and valuation ratios;
3. Describe relationships among ratios and evaluate a company using
ratio analysis;
5. Calculate and interpret ratios used in equity analysis and credit
analysis;
6. Explain the requirements for segment reporting and calculate and interpret segment ratios.
7. Describe how ratio analysis and other techniques can be used to model and forecast earnings.
Session objectives
6. Explain the requirements for segment reporting and calculate and interpret segment ratios.
7. Describe how ratio analysis and other techniques can be used to model and forecast earnings.
Financial Analysis
Module 1
Evaluate and compare companies using ratio analysis,
common size financial statements, and charts in financial
analysis
Common size ratios make comparisons more meaningful; they provide a context for your data
What is common-size
statements?
Vertical & horizontal common-
size balance sheet and Income
statement , for what?
Stacked column graphs
illustrate what?
Module objectives
Common size statements & ratios
It normalize balance sheets and income statements and allow the analyst to more easily
compare performance across firms and for a single firm over time.
• A vertical common-size balance sheet expresses all balance sheet accounts as a
percentage of total assets.
• A vertical common-size income statement express all income statement items as a
percentage of sales
• In addition to the comparison of financial data across firms and time, common-size
analysis is appropriate for quickly viewing certain financial ratios. For example, the
gross profit margin, operating profit margin, and net profit margin are all clearly
indicated within a common-size income statement.
• Vertical common-size income statement ratios are especially useful in studying trends
We will be looking to understand:
Balance sheet accounts can also be converted to common-size
ratios by dividing each balance sheet item by total assets
“
income statement account
Vertical common-size income statement ratios =
_______________________
Sales
Balance sheet account
Vertical common-size balance sheet ratios =
________________________
Total assets
“
Example: constructing common-size ratios
Vertical common-size balance sheet and income statement Total assets of $57,100; 55,798; 52,071
Balance Sheet fiscal year-end 2016 2015 2014
Cash and cash equivalents 0.38% 0.29% 0.37%
Accounts receivable 5.46% 5.61% 6.20%
Inventories 5.92% 5.42% 5.84%
Deferred income taxes 0.89% 0.84% 0.97%
Other current assets 0.41% 0.40% 0.36%
Total current assets
13.06% 12.56% 13.74%
Gross fixed assets 25.31% 23.79% 25.05%
Accumulated depreciation 8.57% 7.46% 6.98%
Net gross fixed assets 16.74% 16.32% 18.06%
Other long-term assets 70.20% 71.12% 68.20%
Total assets 100.00% 100.00% 100.00%
Liabilities
Accounts payable 3.40% 3.40% 3.79%
Short-term debt 1.00% 2.19% 1.65%
Other current liabilities 8.16% 10.32% 9.14%
TCL 12.56% 15.91% 14.58%
Long-term debt 18.24% 14.58% 5.18%
Other long-term liabilities 23.96% 27.44% 53.27%
Total liabilities 54.76% 57.92% 73.02%
Common equity 45.24% 42.08% 26.98%
Total liabilities & equity 100.00% 100.00% 100.00%
Example: constructing common-size ratios
Vertical common-size income statement
Total sales: $29,723; 29,234; 22,922 respect.
Income statement fiscal year-end 2016 2015 2014
Revenues 100.00% 100.00% 100.00%
Cost of goods sold 59.62% 60.09% 60.90%
Gross profit 40.38% 39.91% 39.10%
Selling, general & administrative 16.82% 17.34% 17.84%
Depreciation 2.39% 2.33% 2.18%
Amortization 0.02% 3.29% 2.33%
Other operating expenses 0.58% 0.25% -0.75%
Operating Income 20.57% 16.71% 17.50%
Interest and other debt expense 2.85% 4.92% 2.60%
Income before taxes 17.72% 11.79% 14.90%
Provision for income taxes 6.30% 5.35% 6.17%
Net Income (NI) 11.42% 6.44% 8.73%
– Interpretation
* Beginning at the bottom, we can see that the profitability of the company has increased nicely in 2016 after falling
slightly in 2015. we can examine the 2016 income statement values to find the source of this greatly improved
profitability.
• Cost of goods sold seems to be stable, with an improvement (decrease) in 2016 of only 0.48%. SG&A was down
approximately one-half percent as well
• These improvements from (relative cost reduction), however, only begin to explain the 5% increase in the net
profit margin for 2016. improvements in two items, “amortization” and “interest and other debt expense” appear
to be the most significant factors in the firm’s improved profitability in 2016
• Clearly the analyst must investigate further in both areas to learn whether these improvements represent
permanent improvements or whether these items can be expected to return to previous percentage of sales in the
future
– Interpretation
• We can also note that interest expense as a percentage of sales was approximately the same in 2014 and 2016. we
must investigate the reasons for the higher interest costs in 2015 to determine whether the current level of 2.85%
can be expected to continue into the next period. In addition, more than 3% of the 5% increase in net profit margin
in 2016 is due to a decrease in amortization expense. Since this is a noncash expense, the decrease may have no
implications for cash flows looking forward.
– Interpretation
• This discussion should make clear that common-size analysis doesn’t tell an analyst the whole story about this
company, but can certainly point the analyst in the right direction to find out the circumstances that led to the
increase in the net profit margin and to determine the effects, if any, on firm cash how going forward.
As this example illustrates, the point of doing financial ratio analysis is not to collect statistics about
your company, but to use those numbers to spot the trends affecting your company. Ask yourself why key
ratios are up or down compared to prior periods or to your competitors. The answers to those questions can
make an important contribution to your decision-making about the future of your company.
• Another way to present financial statement data that is quite useful when analyzing trends over time is a
horizontal common-size balance sheet or income statement. The divisor here is the first-year values, so they are
all standardized to 1.0 by construction.
Trends in the values of these items, as well as the relative growth in these items, are readily apparent from a horizontal common-
size balance sheet
Example: constructing common-size ratios
Horizontal common-size Balance Sheet Data
2014 2015 2016
Inventory 1.0 1.1 1.4
Cash and marketable securities 1.0 1.3 1.2
Long-term debt 1.0 1.6 1.8
PP&E (net of depreciation) 1.0 0.9 0.8
Module One work sheet-1 :
The table below presents the income
statements for company A, company B, and
company C. all three companies are involved
in the same industry.
- Evaluate the financial performance of the
three firms. (Small groups)
- What is the effective tax rate
How can we evaluate the performance
Vertical common-size income statement (Numbers in dollars)
Company A Company B Company C
Revenues $1,000 100% $5,000 100% $5,000 100%
Cost of goods sold 400 40% 2,500 50% 2,000 40%
Gross profit 600 60% 2,500 50% 3,000 60%
Selling, general & administrative 150 15% 750 15% 750 15%
Production R&D 100 10% 250 5% 500 10%
Operating Income 350 35% 1,500 30% 1,750 35%
Interest expense 50 5% 250 5% 250 5%
Income before taxes 300 30% 1250 25% 1,500 30%
Income taxes 120 12% 500 10% 600 12%
Net Income (NI) $180 18% $750 15% $900 18%
- As compared to company B, company A is smaller in terms of sales and net income when stated in dollars, however, in common
size terms, company A’s net income is higher than company B’s net income (18% versus 15%). By presenting the income
statements in common size format, the analyst is able to compare the firms without regard to size.
Common size analysis also provides information about a firm’s business strategies.
Revenues are the same at company B and company C, however, company C reports higher gross profit, higher operating profit,
and higher net income.
The higher profit can be traced to lower cost of goods sold. Notice that company C spends more on production research and
development (R&D) than company B. as a result, company C has been able to lower its production costs.
- Presenting income tax expenses as an effective rate is usually more meaningful than the common-size percentage. The effective
rate is equal to income tax expense divided by pre-tax income. In the above example, the effective tax rate for all three companies
is 40%
The answer
We can view the values in the common-size financial statements as ratios. Net income is shown on the common-size income
statement as net income/revenues, which is the net profit margin, and tells the analyst the percentage of each dollar of sales
that remains for shareholders after all expenses related to the generation of those sales are deducted. One measure of financial
leverage, long-term debt to total assets, can be read directly from the vertical common-size financial statements.
A stacked column graph (also called a stacked bar graph) shows the changes in items from year to year in graphical form.
Dashboards
Graphical Analysis
- Stacked column (stacked Bar) graph
- line graph
The increase in trade payables
and the decrease in cash are
evident in either format and
would alert the analyst to
potential liquidity problems that
require further investigation
and analysis
Show changes in items from
year to year
1- Trade payables 3- Cash
2- Lease obligations 4- Long-term notes
If you see accounts receivables increasing
dramatically over several periods, and it is not
a planned increase, you need to take action.
Video -
Dashboard
Module One work sheet : Discussion
1. Do the firms being compared have similar
accounting practices?
2. When comparing divisions within a firm.
Are the ratios comparable?
3. Do the ratios being used give consistent
readings?
4. Do the ratios yield a reasonable figure for
the industry?
Video -2
Financial ratios
They are often most useful in identifying questions that
need to be answered rather than for answering questions
directly their limitations are:
not useful in isolation only valid
when compared to those of
other firms or to the company’s
historical performance
difficult to find comparable
industry ratios for companies that
operate across different indices
comparison between firms
is difficult given different
accounting practices
determining a target or
comparison range is
difficult
The limitations of ratio analysis (Be aware of the limitations)
Module 2
Various techniques of common size analysis and interpret
the results of such analysis
Remember, your goal is to use the
information provided by the common
size ratios to start asking why changes
have occurred, and what you should do
in response. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Why use financial ratio analysis
!!!!!! More close?
can help you identify
problems that need
fixing
Module 2 objectives
Even better, it can direct
your attention to potential
problems that can be
avoided.
What is the right
interpretations
Common Size Ratios from the Balance Sheet
Liquidity ratios are employed by analysts to determine the firm’s ability to pay its
short-term obligations when due.
Quick Ratio = (Total Current Assets - Total Inventory) / Total
Current Liabilities The more conservative measure of liquidity
[More stringent]
Defensive interval = Cash + marketable securities + receivables /
average daily expenditures
Illustrate the number of days of average cash expenditures
Liquidity ratios
Current ratio = current assets / current liabilities
Best measure of liquidity
Cash Ratio = (Cash + marketable securities ) / Total Current
Liabilities The most conservative measure of liquidity
Highlighted
Ratio
Description
Guidance
Current ratio A current ratio of less than 1 means that
the firm has negative working capital and
may be facing a liquidity crisis
-If the ratio is very high it can also indicate
investment in current assets. Funds could
for a better return on other investments.
Acid test ratio In general, quick ratios between 0.5 and
1 considered satisfactory
- If current ratio is favorable and acid-test
unfavorable, it shows possibility of too
investment in stock.
Defensive
It ‘s a defensive interval ratio
This ratio indicates the number of days
of average cash expenditures the firm
could pay with its current liquid assets
- Expenditures here include cash expenses
of goods, SG&A, and R&D. If these items
from the income statement, non-cash
as depreciation should be added back..
Matter of Fact
Large enterprises generally have well established relationships with
banks that can provide lines of credit and other short-term loan
products in the event that the firm has a need for liquidity.
Smaller firms may not have the same access to credit, and
therefore they tend to operate with more liquidity.
Liquidity ratios
• A current ratio can be improved by increasing current assets
or by decreasing current liabilities.
• to accomplish an improvement include:
• Paying down debt
• Acquiring a long-term loan (payable in more than 1 year’s
time)
• Selling a fixed asset
• Putting profits back into the business
• A high current ratio may mean cash is not being utilized in an
optimal way. For example, the excess cash might be better
invested in equipment.
The improvement
Work sheet No-1
Common Size Ratios from the Balance Sheet
Solvency ratios measure financial risk and leverage. – the higher the ratio, the
greater the leverage and the greater the risk
Debt to equity = Total debt/ Total Equity
Measures total debt to the equity base (measure capital structure)
Financial Leverage ratio= Total assets / Total Equity
Provides information on the degree of a company’s fixed financing
obligations and its ability to satisfy these financing obligations
Solvency ratios
1:1 means there is
possible risk of
insolvency in the future
Long term debt-to-equity = Total long term debt / Total Equity
Measures total debt relative to the equity base
Total debt ratio to assets = Total debt/ Total Assets
Measures the extent to which assets are financed by creditors
– how much debt is used to finance the assets of the co.
Common Size Ratios from the Balance Sheet
Interest coverage ratio = EBIT / interest payments
measures the firm’s ability to make contractual interest payments
Z-score = Deward Altman developed this score, He assigned weight to
each of five key balance sheet ratios, multiplying each ratio by a number
he derived from his research to indicate its relative importance, the sum
of ratios is the z-score
Solvency ratios
Fixed charge coverage = EBIT + Lease payments / Interest payments
+ lease payments + {Principal payments + Preferred stock
dividends} x [1/(1-T)]
measures the firm’s ability to meet all fixed-payment obligations.
Here, lease payments are added back to operating earnings and
also added to interest payments.
Significant lease obligations will reduce this ratio compared to the
interest coverage ratio ====== for companies that lease large
portion of their assets such as, airlines
Common Size Ratios from the Balance Sheet
Highlighted
Ratio
Description
Guidance
Debt to worth
Total debt is calculated differently by
different analysts and different providers of
financial information. Here, we will define it
as long-term debt plus interest-bearing
short-term debt.
Some analysts include the present value
of lease obligations and / or non –interest-
bearing current liabilities, such as trade
payables.
If the Debt-to-Worth Ratio is greater than 1,
provided by lenders exceeds the capital
owners. Bank loan officers will generally
company with a high Debt-to-Worth Ratio to
greater risk. Debt-to-Worth Ratios will vary
type of business and the risk attitude of
Debt-to asset (Total
Capital)
Capital equals all short-term and long-term
plus preferred stock and equity.
- Increases and decreases in this ratio
greater or lesser reliance on debt as a
finance.
- Compare to other outside investments
Such as return on a fixed deposit
Financial leverage
Greater use of debt financing increases
financial leverage and, typically, risk to
equity holders and bondholders alike.
-
Solvency ratios
Highlighted
Ratio
Description
Guidance
Interest coverage The lower this ratio, the more likely it is
that the firm will have difficulty meeting its
debt payments
Fixed charge
Ability to meet obligations (including non
obligations i.e. taxes, leases -
Z-Score
a Z-Score of 1.81 or below
means you are headed for bankruptcy.
a Z-Score of 2.99 means your company is
- Expenditures here include cash expenses
goods, SG&A, and R&D. If these items are
the income statement, non-cash charges
depreciation should be added back.
Solvency ratios
• to accomplish an improvement include:
1. Debtors average collection period
Compare to term allowed If longer, then unfavorable.
• How to improve:
• Send statements more regularly
• Charge interest on overdue accounts
• Control credit
The improvement of solvency ratios
Video of activity ratios
Work sheet No-2
Break
Module 3
Profitability ratios
Work sheet No-3
Profitability ratios
Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity and capital.
Net profit margin = net income / revenue
Operating profit margin = EBIT / revenue
Return on assets (ROA) = net income / total assets
Profitability ratios
Gross profit margin = gross profit / revenue
Pretax margin = EBT / revenue
Profitability ratios
Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity and capital.
Return on equity = net income / average total equity Profitability ratios
Return on total capital (ROTC) = EBIT / average total capital
Return on common equity = net income available to common
shareholders/ average common equity
Operating return on assets = EBIT / average total assets
1- Net profit margin:
Analysts should be concerned if this ratio is too low. The net profit margin should be based on net income from continuous
operations. Because analysts should be primarily concerned about future expectations, and below-the line items such as
discontinued operations will not affect the company in the future.
2- The gross profit:
The Analysts should be concerned if this ratio is too low. Gross profit (sales – COGS) can be increased by raising prices or
reducing costs. However, the ability to raise prices may be limited by competition.
3- The operating profit margin :
Strictly speaking, EBIT (operating income) includes some non-operating items, such as gains on investment. The analyst, as with
other ratios with various formulations, must be consistent in his calculation method and know how published ratios are
calculated. Some analysts prefer to calculate the operating profit margin by adding back depreciation and any amortization
expense to arrive at earnings before interest, taxes, depreciation, and amortization (EBITDA)
4- The operating profit margin :
Sometimes profitability is measured using earnings before tax (EBT), which can be calculated by subtracting interest from EBIT or
from operating earnings
5- Return of assets (ROA):
ROA is one of a set of profitability ratios that measure profitability relative to funds invested in the company by common
stockholders, preferred stockholders, and suppliers of debt financing. This measure is a bit misleading because interest is
excluded from net income but total assets include debt as well as equity. Adding interest adjusted for tax back to net income puts
the returns to both equity and debt holders in the numerator. This result is an alternative calculation for ROA :
ROA = net income + interest expense (1 – tax rate) / average total assets
6- Operating Return of assets:
This measure includes both taxes and interest in the numerator.
7- Return on total capital (ROTC)
Total capital includes short-term and long-term debt, preferred equity, and common equity. Analysts should be concerned if this
ratio is too low. Total capital is the same as total assets. The interest expense that should be added back is gross interest expense,
not net interest expense (which is gross interest expense less interest income).
An alternative method for computing ROTC is to include the present value of operating leases on the balance sheet as a fixed
asset and as a long-term liability. This adjustment is especially important for firms that are dependent on operating leases as a
major form of financing.
5- Return on common equity:
This ratio differs from the return on total equity in that it only measures the accounting profits available to, and the capital
invested by, common stockholders, instead of common and preferred stockholders. That is why preferred dividends are deducted
from net income in the numerator.
Module Three work sheet : work sheet 4
Case study
(groups)
Module 4
Demonstrate how ratios are related and
how to evaluate a company using a
combination of different ratios
A balance sheet and income statement for a hypothetical company are shown below for this year and the previous year.
Using the company information provided, calculate the current year ratios.
Discuss how these ratios compare with the company’s performance last year and with the industry’s performance.
Example: using ratios to evaluate a company
Example: using ratios to evaluate a company
Sample balance sheet
Year Current year Previous year
Cash and cash equivalents $105 95
Accounts receivable 205 195
Inventories 310 290
Total current assets
620 580
Gross fixed assets 1800 1700
Accumulated depreciation 360 340
Net gross fixed assets 1440 1360
Total assets 2060 1940
Accounts payable 110 90
Short-term debt
160 140
Current portion of long-term debt 55 45
TCL 325 275
Long-term debt 610 690
Deferred taxes 105 95
Common stock 300 300
Additional paid in capital 400 400
Retained earnings 320 180
Common shareholders equity 1020 880
Total liabilities and equity 2060 1940
Example: using ratios to evaluate a company
Sample income statement
Current year
Revenues $4,000
Cost of goods sold 3,000
Gross profit 1,000
Operating expenses 650
Operating Income 350
Interest expense 50
Earnings before taxes
300
Taxes 100
Net income 200
Common dividends 60
Financial ratio template
Financial ratio Template
Current year Last year Industry
Current ratio 2.1 1.5
Quick ratio 1.1 0.9
Days of sales outstanding 18.9 18.0
Inventory turnover 10.7 12.0
Total asset turnover 2.3 2.4
Working capital turnover 14.5 11.8
Gross profit margin
27.4% 29.3%
Net profit margin 5.8% 6.5%
Return on total capital 21.1% 22.4%
Return on common equity 24.1% 19.8%
Debt-to-equity 99.4% 35.7%
Interest coverage 5.9 9.2%
The answer printed
Module 5
Calculate and interpret the ratios used in
equity analysis, credit analysis and
segment analysis
What is the equity analysis?
What is the credit
analysis?
Module 5 objectives
What we mean by
segment analysis?
What is the Business risk?
Equity analysis
Valuation ratios are used in analysis for investment in common equity. The most
widely used valuation ratio is the price-to-earnings (P/E) ratio, the ratio of the
current market price of a share of stock divided by the company’s earnings per share.
Related measures based on price per share are the price-to-cash flow, the price-to-
sales, and the price-to-book value ratios.
Per-share valuation measures include earnings per share (EPS)
- Basic EPS is net income available to common dividend by the weighted
average number of common shares outstanding
- Diluted EPS is a “what if” value. It is calculated to be the lowest possible EPS
that could have been reported if all firm securities that can be converted
into common stock, and that would decrease basic EPS if they had been,
were converted . Profitability dilutive securities include “convertible debt
and convertible preferred stock, as well as options and warrants issued by
the company”.
The numerator of diluted EPS is increased by the after-tax interest savings on
any dilutive debt securities and by the dividends on any dilutive convertible
preferred stock. The denominator is increased by the common shares that
would result from conversion or exchange of dilutive securities into common
shares
Valuation ratios
Equity analysis
Other Per-share valuation measures include earnings Cash flow per share
- Cash flow per share
- EBIT per share
- - EBITDA per share
Per share measures for different companies cannot be compared.
A firm with $100 share price can be expected to generate much greater
earnings, cash flow, EBITDA and EBIT per share than a firm with a $10 share
price Valuation ratios
Dividends
Dividends are declared on a per-common-share basis. Total dividends on a firm-
wide basis are referred to as dividends declared. Neither EPS nor net income is
reduced by the payment of common stock dividends. Net income minus
dividends declared is retained earnings, the earnings that are used to grow the
corporation rather than being distributed to equity holders. The proportion of a
firm’s net income that is retained to fund growth is an important determinant
of the firm’s sustainable growth rate.
To calculate the sustainable growth rate for a firm, the rate of return on
resources is measured as the return on equity capital, or the ROE. The
proportion of earnings reinvested is known as the retention rate (RR)
The formula for the sustainable growth rate, which is how fast e constant, the
firm can grow without additional external equity issues while holding leverage
constant is as follow:
Equity analysis
G = RR x ROE
Valuation ratios
Retention rate = net income available to common-dividends declared / net
income available to common
= 1- dividend payout ratio
Where : dividend payout ratio = dividends declared / net income available
to common
Module Five work sheet :
Individuals
Some ratios have specific applications in
certain industries
- Net income
per employee
- Sales per
employee
- Growth in
same-store
Sales per
square foot
Used in the analysis and
valuation of service and
consulting companies
Used in the restaurant and
retail industries to indicate
growth without the effect of
new locations that have been
opened
Commonly used in
the retail industry
– Business Risk
The standard deviation of revenue, standard deviation of operating income, and the
standard deviation of net income are all indicators of the variation in and the
uncertainty about a firm’s performance. Since they all depend on the size of the firm
to a great extent, analysts employ a size-adjusted measure of variation. The
coefficient of variation for a variable is its standard deviation divided by its expected
value.
Certainly, different industries have different levels of uncertainty about revenues,
expenses, taxes, and non operating items. Comparing coefficients of variation for a
firm across time, or among a firm and its peers, can aid the analyst is assessing both
the relative and absolute degree of risk a firm faces in generating income for its
investors.
CV sales = SD of sales / mean
sales
CV operating income = SD of OI /
mean operating income
CV net income = SD of NI / mean
net income
– Business Risk
Capital adequacy
Typically refers to the ratio of some dollar measure of the risk, both operational and
financial, of the firm to its equity capital. Other measures of capital are also used.
A common measure of capital risk is value-at-risk, which is an estimate of the dollar
size of the loss that a firm will exceed only some specific percent of the time, cover a
specific period of time
The performance of financial companies that lend funds is often summarized as the
net interest margin, which is simply interest divided by the firm’s interest-earning
assets.
Banks are subject to minimum
reserve requirement. Their
ratios of various liabilities to
their central bank reserves
must be above the minimum.
The ratio of a bank’s liquid
assets to certain liabilities is
called the liquid asset
requirement
Credit analysis
Credit analysis is based
on many of the ratios
that we have already
covered in this review.
In assessing a company’s
ability to sevice and
repay its debt, analysts
use
Ratios have been
used to analyze and
predict firm
bankruptcies.
Z-
score
- Interest coverage ratios
- Return of capital
- Debt to assets ratios
Useful in predicting firm bankruptcies (a low score
indicates high probability of failure)
– Segment Analysis
A business segment
is a portion of a larger company that accounts for more than 10% of the company’s revenues or assets, and is
distinguishable from the company’s other lines of business in terms of the risk and return characteristics of the
segment. Geographic segments are also identified when they meet the size criterion above and the
geographic unit has a business environment that is different from that of other segments or the remainder of
the company’s business.
Both U.S. GAAP and IFRS require companies to report segment data, but the required disclosure items are
only a subset of the required disclosures for the company as a whole. Nonetheless, an analyst can prepare a
more detailed analysis and forecast by examining the performance of business or geographic segments
separately.
Segment profit margins, asset utilization (turnover), and return on assets can be very useful in gaining a clear
picture of a firm’s overall operations. For forecasting, growth rates of segment revenues and profits can be
used to estimate future sales and profits and to determine the changes in company characteristics over time.
Example: illustrate how Boeing broke down its results into business segments in its 2006 annual report
Boeing, Inc. Segment Reporting
(Dollars in millions)
Year ended December 31 2006 2005 2004
Revenues:
Commercial airplanes
Integrated defense systems:
Precision engagement and mobility systems
Network and space systems
Support systems
____________________________________
Total integrated defense systems
Boeing capital corporation
Other
Accounting differences/eliminations
____________________________________
Total revenues
____________________________________
Module 6
How ratio analysis and other techniques can
be used to model and forecast earnings
corporatefinanceinstitute.com
Three methods of examining the variability of financial outcomes around point estimates are :
sensitivity analysis, scenario analysis, and simulation.
Sensitivity analysis is based on “what if” questions such as : What will be the effect on net income if sales
increase by 3% rather than the estimated 5%?
Scenario analysis is based on specific scenarios and will also yield a range of values for financial statement
items.
Simulation is a technique in which profitability distributions for key variables are selected and a computer
is used to generate a distribution of values for outcomes based on repeated random selection of values for
the key variables.
Words from the Wise
THOMAS JEFFERSON: Never spend your money before
you have earned it.
Napoleon Bonaparte: Take time to deliberate, but
when the time for action arrives, stop thinking and
go.
Peter R. Drucker: Management is doing thins right;
leadership is doing the right thins.
John F. Kennedy: Change is the law of life. And those
who look only to the past or present are certain to
miss the future
Conclusion
Thank you for your time

Mais conteúdo relacionado

Mais procurados

Horizontal and Vertical Analysis | Accounting
Horizontal and Vertical Analysis | AccountingHorizontal and Vertical Analysis | Accounting
Horizontal and Vertical Analysis | AccountingTransweb Global Inc
 
Ratio Analysis
Ratio AnalysisRatio Analysis
Ratio Analysisyashpal01
 
Financial statement analysis[1]
Financial statement analysis[1]Financial statement analysis[1]
Financial statement analysis[1]Karishma Agarwal
 
Project on ratio analysis
Project on ratio analysisProject on ratio analysis
Project on ratio analysisRanobir Dey
 
Chapter 7 on Valuation and Reporting in Organization
Chapter 7 on Valuation and Reporting in OrganizationChapter 7 on Valuation and Reporting in Organization
Chapter 7 on Valuation and Reporting in OrganizationFirdaus Fitri Zainal Abidin
 
Financial ratios and their use in understanding Financial Statements
Financial ratios and their use in understanding Financial StatementsFinancial ratios and their use in understanding Financial Statements
Financial ratios and their use in understanding Financial StatementsPranav Dedhia
 
Chapter 9-ratio-analysis121
Chapter 9-ratio-analysis121Chapter 9-ratio-analysis121
Chapter 9-ratio-analysis121Anjaneyulu Bandi
 
Ratio analysis advantages and limitations
Ratio analysis advantages and limitationsRatio analysis advantages and limitations
Ratio analysis advantages and limitationsSyed Mahmood Ali
 
Chapter 9 on Valuation and Reporting in Organization
Chapter 9 on Valuation and Reporting in OrganizationChapter 9 on Valuation and Reporting in Organization
Chapter 9 on Valuation and Reporting in OrganizationFirdaus Fitri Zainal Abidin
 
Ratio Analysis in Accounting
Ratio Analysis in AccountingRatio Analysis in Accounting
Ratio Analysis in AccountingCHIRANJIBI BISOI
 
Ratio analysis advantages and limitations (Complete Chapter)
Ratio analysis advantages and limitations (Complete Chapter)Ratio analysis advantages and limitations (Complete Chapter)
Ratio analysis advantages and limitations (Complete Chapter)Syed Mahmood Ali
 
Ratio analysis of Unilever
Ratio analysis of UnileverRatio analysis of Unilever
Ratio analysis of UnileverNasir Ali
 
Analysis of financial statements
Analysis of financial statementsAnalysis of financial statements
Analysis of financial statementsAfnan Amjad
 
Finacial Statement Analysis
Finacial Statement AnalysisFinacial Statement Analysis
Finacial Statement AnalysisAklas Chowdhury
 
Ratio Analysis of Samsung Electronics Co. Ltd.
Ratio Analysis of Samsung Electronics Co. Ltd.Ratio Analysis of Samsung Electronics Co. Ltd.
Ratio Analysis of Samsung Electronics Co. Ltd.Nikita Jangid
 

Mais procurados (19)

Horizontal and Vertical Analysis | Accounting
Horizontal and Vertical Analysis | AccountingHorizontal and Vertical Analysis | Accounting
Horizontal and Vertical Analysis | Accounting
 
Yamaha ratio analysis
Yamaha ratio analysisYamaha ratio analysis
Yamaha ratio analysis
 
Ratio Analysis
Ratio AnalysisRatio Analysis
Ratio Analysis
 
Financial statement analysis[1]
Financial statement analysis[1]Financial statement analysis[1]
Financial statement analysis[1]
 
Project on ratio analysis
Project on ratio analysisProject on ratio analysis
Project on ratio analysis
 
Ratio Analysis
Ratio AnalysisRatio Analysis
Ratio Analysis
 
Chapter 7 on Valuation and Reporting in Organization
Chapter 7 on Valuation and Reporting in OrganizationChapter 7 on Valuation and Reporting in Organization
Chapter 7 on Valuation and Reporting in Organization
 
Financial ratios and their use in understanding Financial Statements
Financial ratios and their use in understanding Financial StatementsFinancial ratios and their use in understanding Financial Statements
Financial ratios and their use in understanding Financial Statements
 
Chapter 9-ratio-analysis121
Chapter 9-ratio-analysis121Chapter 9-ratio-analysis121
Chapter 9-ratio-analysis121
 
Lec10 11 financial ratio analysis
Lec10 11 financial ratio analysisLec10 11 financial ratio analysis
Lec10 11 financial ratio analysis
 
Ratio analysis advantages and limitations
Ratio analysis advantages and limitationsRatio analysis advantages and limitations
Ratio analysis advantages and limitations
 
Chapter 9 on Valuation and Reporting in Organization
Chapter 9 on Valuation and Reporting in OrganizationChapter 9 on Valuation and Reporting in Organization
Chapter 9 on Valuation and Reporting in Organization
 
Ratio Analysis in Accounting
Ratio Analysis in AccountingRatio Analysis in Accounting
Ratio Analysis in Accounting
 
Ratio analysis advantages and limitations (Complete Chapter)
Ratio analysis advantages and limitations (Complete Chapter)Ratio analysis advantages and limitations (Complete Chapter)
Ratio analysis advantages and limitations (Complete Chapter)
 
Starb
StarbStarb
Starb
 
Ratio analysis of Unilever
Ratio analysis of UnileverRatio analysis of Unilever
Ratio analysis of Unilever
 
Analysis of financial statements
Analysis of financial statementsAnalysis of financial statements
Analysis of financial statements
 
Finacial Statement Analysis
Finacial Statement AnalysisFinacial Statement Analysis
Finacial Statement Analysis
 
Ratio Analysis of Samsung Electronics Co. Ltd.
Ratio Analysis of Samsung Electronics Co. Ltd.Ratio Analysis of Samsung Electronics Co. Ltd.
Ratio Analysis of Samsung Electronics Co. Ltd.
 

Semelhante a Financial analysis techniques

Solvency And Asset Recommendations 2011
Solvency And Asset Recommendations 2011Solvency And Asset Recommendations 2011
Solvency And Asset Recommendations 2011mrittmayer
 
How to analyze profitability
How to analyze profitabilityHow to analyze profitability
How to analyze profitabilityLam Chuc
 
Income StatementBalance SheetCash Flow Statement
Income StatementBalance SheetCash Flow StatementIncome StatementBalance SheetCash Flow Statement
Income StatementBalance SheetCash Flow Statementmanijutt
 
F6003Ch 05.php(1)
F6003Ch 05.php(1)F6003Ch 05.php(1)
F6003Ch 05.php(1)Aimey324
 
Ratio Analysis F F M
Ratio  Analysis   F F MRatio  Analysis   F F M
Ratio Analysis F F MZoha Qureshi
 
Financial Statement Analysis.docx
Financial Statement Analysis.docxFinancial Statement Analysis.docx
Financial Statement Analysis.docxCarloCartagenas
 
Accounts project
Accounts project Accounts project
Accounts project AdwaitDe
 
Management Accounting-UNIT-2.pptx
Management Accounting-UNIT-2.pptxManagement Accounting-UNIT-2.pptx
Management Accounting-UNIT-2.pptxKshitizBhargava
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysisAhmad Awan
 
Professor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docx
Professor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docxProfessor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docx
Professor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docxbriancrawford30935
 
Burke workshop doing financial projections
Burke workshop doing financial projectionsBurke workshop doing financial projections
Burke workshop doing financial projectionsAakash savani
 
Balance Sheet and Ratio Analysis of a Listed Company
Balance Sheet and Ratio Analysis of a Listed CompanyBalance Sheet and Ratio Analysis of a Listed Company
Balance Sheet and Ratio Analysis of a Listed CompanyShreyansh Kejriwal
 
Mien Phi Tai 10 Bai Assignment Mau Tu Moi Chu De
Mien Phi Tai 10 Bai Assignment Mau Tu Moi Chu DeMien Phi Tai 10 Bai Assignment Mau Tu Moi Chu De
Mien Phi Tai 10 Bai Assignment Mau Tu Moi Chu DeEssay24h Viết thuê Essay
 
Chapter 05(a) financial analysis-ratio and other analysis
Chapter 05(a) financial analysis-ratio and other analysisChapter 05(a) financial analysis-ratio and other analysis
Chapter 05(a) financial analysis-ratio and other analysisAl Sabbir
 
The Financial Analysis House©: from data to dashboards
The Financial Analysis House©: from data to dashboardsThe Financial Analysis House©: from data to dashboards
The Financial Analysis House©: from data to dashboardsDr. Basel Omar Abu-Ali
 
Running head FINANCIAL ANALYSIS OF LOWE’S COMPANY .docx
Running head FINANCIAL ANALYSIS OF LOWE’S COMPANY                .docxRunning head FINANCIAL ANALYSIS OF LOWE’S COMPANY                .docx
Running head FINANCIAL ANALYSIS OF LOWE’S COMPANY .docxwlynn1
 
Part 1-Financial Analysis.pptx.pdf
Part 1-Financial Analysis.pptx.pdfPart 1-Financial Analysis.pptx.pdf
Part 1-Financial Analysis.pptx.pdfDMBonoan1
 
WELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docxWELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docxalanfhall8953
 
WELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docxWELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docxphilipnelson29183
 

Semelhante a Financial analysis techniques (20)

Solvency And Asset Recommendations 2011
Solvency And Asset Recommendations 2011Solvency And Asset Recommendations 2011
Solvency And Asset Recommendations 2011
 
How to analyze profitability
How to analyze profitabilityHow to analyze profitability
How to analyze profitability
 
Income StatementBalance SheetCash Flow Statement
Income StatementBalance SheetCash Flow StatementIncome StatementBalance SheetCash Flow Statement
Income StatementBalance SheetCash Flow Statement
 
F6003Ch 05.php(1)
F6003Ch 05.php(1)F6003Ch 05.php(1)
F6003Ch 05.php(1)
 
Ratio Analysis F F M
Ratio  Analysis   F F MRatio  Analysis   F F M
Ratio Analysis F F M
 
Financial Statement Analysis.docx
Financial Statement Analysis.docxFinancial Statement Analysis.docx
Financial Statement Analysis.docx
 
Accounts project
Accounts project Accounts project
Accounts project
 
Management Accounting-UNIT-2.pptx
Management Accounting-UNIT-2.pptxManagement Accounting-UNIT-2.pptx
Management Accounting-UNIT-2.pptx
 
Ratio analysis
Ratio analysisRatio analysis
Ratio analysis
 
Professor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docx
Professor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docxProfessor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docx
Professor’s Critique of DENNISWRIGHT’s submissionExcel worksh.docx
 
Burke workshop doing financial projections
Burke workshop doing financial projectionsBurke workshop doing financial projections
Burke workshop doing financial projections
 
Financial management
Financial managementFinancial management
Financial management
 
Balance Sheet and Ratio Analysis of a Listed Company
Balance Sheet and Ratio Analysis of a Listed CompanyBalance Sheet and Ratio Analysis of a Listed Company
Balance Sheet and Ratio Analysis of a Listed Company
 
Mien Phi Tai 10 Bai Assignment Mau Tu Moi Chu De
Mien Phi Tai 10 Bai Assignment Mau Tu Moi Chu DeMien Phi Tai 10 Bai Assignment Mau Tu Moi Chu De
Mien Phi Tai 10 Bai Assignment Mau Tu Moi Chu De
 
Chapter 05(a) financial analysis-ratio and other analysis
Chapter 05(a) financial analysis-ratio and other analysisChapter 05(a) financial analysis-ratio and other analysis
Chapter 05(a) financial analysis-ratio and other analysis
 
The Financial Analysis House©: from data to dashboards
The Financial Analysis House©: from data to dashboardsThe Financial Analysis House©: from data to dashboards
The Financial Analysis House©: from data to dashboards
 
Running head FINANCIAL ANALYSIS OF LOWE’S COMPANY .docx
Running head FINANCIAL ANALYSIS OF LOWE’S COMPANY                .docxRunning head FINANCIAL ANALYSIS OF LOWE’S COMPANY                .docx
Running head FINANCIAL ANALYSIS OF LOWE’S COMPANY .docx
 
Part 1-Financial Analysis.pptx.pdf
Part 1-Financial Analysis.pptx.pdfPart 1-Financial Analysis.pptx.pdf
Part 1-Financial Analysis.pptx.pdf
 
WELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docxWELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docx
 
WELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docxWELCOMEFinancial Projections ModelFor Business PlansFran.docx
WELCOMEFinancial Projections ModelFor Business PlansFran.docx
 

Último

Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsP&CO
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024Stephan Koning
 
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...Khaled Al Awadi
 
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John MeulemansBCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John MeulemansBBPMedia1
 
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003believeminhh
 
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfTalent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfCharles Cotter, PhD
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access
 
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxCracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxWorkforce Group
 
MoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor PresentationMoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor Presentationbaron83
 
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfPDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfHajeJanKamps
 
NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023Steve Rader
 
A flour, rice and Suji company in Jhang.
A flour, rice and Suji company in Jhang.A flour, rice and Suji company in Jhang.
A flour, rice and Suji company in Jhang.mcshagufta46
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGlokeshwarmaha
 
To Create Your Own Wig Online To Create Your Own Wig Online
To Create Your Own Wig Online  To Create Your Own Wig OnlineTo Create Your Own Wig Online  To Create Your Own Wig Online
To Create Your Own Wig Online To Create Your Own Wig Onlinelng ths
 
Michael Vidyakin: Introduction to PMO (UA)
Michael Vidyakin: Introduction to PMO (UA)Michael Vidyakin: Introduction to PMO (UA)
Michael Vidyakin: Introduction to PMO (UA)Lviv Startup Club
 
Plano de marketing- inglês em formato ppt
Plano de marketing- inglês  em formato pptPlano de marketing- inglês  em formato ppt
Plano de marketing- inglês em formato pptElizangelaSoaresdaCo
 
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...AustraliaChapterIIBA
 
Developing Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, OursDeveloping Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, OursKaiNexus
 
ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...
ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...
ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...ISONIKELtd
 
Ethical stalking by Mark Williams. UpliftLive 2024
Ethical stalking by Mark Williams. UpliftLive 2024Ethical stalking by Mark Williams. UpliftLive 2024
Ethical stalking by Mark Williams. UpliftLive 2024Winbusinessin
 

Último (20)

Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizations
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
 
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John MeulemansBCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
BCE24 | Virtual Brand Ambassadors: Making Brands Personal - John Meulemans
 
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
The Vietnam Believer Newsletter_MARCH 25, 2024_EN_Vol. 003
 
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfTalent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024
 
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxCracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
 
MoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor PresentationMoneyBridge Pitch Deck - Investor Presentation
MoneyBridge Pitch Deck - Investor Presentation
 
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdfPDT 89 - $1.4M - Seed - Plantee Innovations.pdf
PDT 89 - $1.4M - Seed - Plantee Innovations.pdf
 
NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023NASA CoCEI Scaling Strategy - November 2023
NASA CoCEI Scaling Strategy - November 2023
 
A flour, rice and Suji company in Jhang.
A flour, rice and Suji company in Jhang.A flour, rice and Suji company in Jhang.
A flour, rice and Suji company in Jhang.
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
 
To Create Your Own Wig Online To Create Your Own Wig Online
To Create Your Own Wig Online  To Create Your Own Wig OnlineTo Create Your Own Wig Online  To Create Your Own Wig Online
To Create Your Own Wig Online To Create Your Own Wig Online
 
Michael Vidyakin: Introduction to PMO (UA)
Michael Vidyakin: Introduction to PMO (UA)Michael Vidyakin: Introduction to PMO (UA)
Michael Vidyakin: Introduction to PMO (UA)
 
Plano de marketing- inglês em formato ppt
Plano de marketing- inglês  em formato pptPlano de marketing- inglês  em formato ppt
Plano de marketing- inglês em formato ppt
 
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
IIBA® Melbourne - Navigating Business Analysis - Excellence for Career Growth...
 
Developing Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, OursDeveloping Coaching Skills: Mine, Yours, Ours
Developing Coaching Skills: Mine, Yours, Ours
 
ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...
ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...
ISONIKE Ltd Accreditation for the Conformity Assessment and Certification of ...
 
Ethical stalking by Mark Williams. UpliftLive 2024
Ethical stalking by Mark Williams. UpliftLive 2024Ethical stalking by Mark Williams. UpliftLive 2024
Ethical stalking by Mark Williams. UpliftLive 2024
 

Financial analysis techniques

  • 1. Similarity is important as one should compare “apples to apples.” What to expect? What should you know before getting started (the purpose of financial ratios) What common size ratio Prepared by: Neven Erfan E.mail: keven01000@yahoo.com neven.erfan@nub.edu.eg Advance your career
  • 5. The purpose Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities. Control -- Focus on return on investment for various assets and asset efficiency. Understand -- Focus on understanding how suppliers of funds analyze the firm.
  • 6. – Financial Analysis Techniques Introduction: This topic review presents a “tool box” for an analyst . It would be nice if you could calculate all these ratios, but it is imperative that you understand what firm characteristic each one is measuring, and even more important, that you know whether a higher of lower ratio is better in each instance. Different analysts calculate some ratios differently. Don’t get too tied up in the details of each ratio, but understand what each one represents and what factors would likely lead to significant changes in a particular ratio.
  • 7. Session objectives 1. Describe tools and techniques used in financial analysis, including their uses and limitations; 2. Classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios; 3. Describe relationships among ratios and evaluate a company using ratio analysis; 5. Calculate and interpret ratios used in equity analysis and credit analysis;
  • 8. 6. Explain the requirements for segment reporting and calculate and interpret segment ratios. 7. Describe how ratio analysis and other techniques can be used to model and forecast earnings. Session objectives
  • 9. 6. Explain the requirements for segment reporting and calculate and interpret segment ratios. 7. Describe how ratio analysis and other techniques can be used to model and forecast earnings. Financial Analysis
  • 10. Module 1 Evaluate and compare companies using ratio analysis, common size financial statements, and charts in financial analysis
  • 11. Common size ratios make comparisons more meaningful; they provide a context for your data What is common-size statements? Vertical & horizontal common- size balance sheet and Income statement , for what? Stacked column graphs illustrate what? Module objectives
  • 12. Common size statements & ratios It normalize balance sheets and income statements and allow the analyst to more easily compare performance across firms and for a single firm over time. • A vertical common-size balance sheet expresses all balance sheet accounts as a percentage of total assets. • A vertical common-size income statement express all income statement items as a percentage of sales • In addition to the comparison of financial data across firms and time, common-size analysis is appropriate for quickly viewing certain financial ratios. For example, the gross profit margin, operating profit margin, and net profit margin are all clearly indicated within a common-size income statement. • Vertical common-size income statement ratios are especially useful in studying trends We will be looking to understand:
  • 13. Balance sheet accounts can also be converted to common-size ratios by dividing each balance sheet item by total assets “ income statement account Vertical common-size income statement ratios = _______________________ Sales Balance sheet account Vertical common-size balance sheet ratios = ________________________ Total assets “
  • 14. Example: constructing common-size ratios Vertical common-size balance sheet and income statement Total assets of $57,100; 55,798; 52,071 Balance Sheet fiscal year-end 2016 2015 2014 Cash and cash equivalents 0.38% 0.29% 0.37% Accounts receivable 5.46% 5.61% 6.20% Inventories 5.92% 5.42% 5.84% Deferred income taxes 0.89% 0.84% 0.97% Other current assets 0.41% 0.40% 0.36% Total current assets 13.06% 12.56% 13.74% Gross fixed assets 25.31% 23.79% 25.05% Accumulated depreciation 8.57% 7.46% 6.98% Net gross fixed assets 16.74% 16.32% 18.06% Other long-term assets 70.20% 71.12% 68.20% Total assets 100.00% 100.00% 100.00% Liabilities Accounts payable 3.40% 3.40% 3.79% Short-term debt 1.00% 2.19% 1.65% Other current liabilities 8.16% 10.32% 9.14% TCL 12.56% 15.91% 14.58% Long-term debt 18.24% 14.58% 5.18% Other long-term liabilities 23.96% 27.44% 53.27% Total liabilities 54.76% 57.92% 73.02% Common equity 45.24% 42.08% 26.98% Total liabilities & equity 100.00% 100.00% 100.00%
  • 15. Example: constructing common-size ratios Vertical common-size income statement Total sales: $29,723; 29,234; 22,922 respect. Income statement fiscal year-end 2016 2015 2014 Revenues 100.00% 100.00% 100.00% Cost of goods sold 59.62% 60.09% 60.90% Gross profit 40.38% 39.91% 39.10% Selling, general & administrative 16.82% 17.34% 17.84% Depreciation 2.39% 2.33% 2.18% Amortization 0.02% 3.29% 2.33% Other operating expenses 0.58% 0.25% -0.75% Operating Income 20.57% 16.71% 17.50% Interest and other debt expense 2.85% 4.92% 2.60% Income before taxes 17.72% 11.79% 14.90% Provision for income taxes 6.30% 5.35% 6.17% Net Income (NI) 11.42% 6.44% 8.73%
  • 16. – Interpretation * Beginning at the bottom, we can see that the profitability of the company has increased nicely in 2016 after falling slightly in 2015. we can examine the 2016 income statement values to find the source of this greatly improved profitability. • Cost of goods sold seems to be stable, with an improvement (decrease) in 2016 of only 0.48%. SG&A was down approximately one-half percent as well • These improvements from (relative cost reduction), however, only begin to explain the 5% increase in the net profit margin for 2016. improvements in two items, “amortization” and “interest and other debt expense” appear to be the most significant factors in the firm’s improved profitability in 2016 • Clearly the analyst must investigate further in both areas to learn whether these improvements represent permanent improvements or whether these items can be expected to return to previous percentage of sales in the future
  • 17. – Interpretation • We can also note that interest expense as a percentage of sales was approximately the same in 2014 and 2016. we must investigate the reasons for the higher interest costs in 2015 to determine whether the current level of 2.85% can be expected to continue into the next period. In addition, more than 3% of the 5% increase in net profit margin in 2016 is due to a decrease in amortization expense. Since this is a noncash expense, the decrease may have no implications for cash flows looking forward.
  • 18. – Interpretation • This discussion should make clear that common-size analysis doesn’t tell an analyst the whole story about this company, but can certainly point the analyst in the right direction to find out the circumstances that led to the increase in the net profit margin and to determine the effects, if any, on firm cash how going forward. As this example illustrates, the point of doing financial ratio analysis is not to collect statistics about your company, but to use those numbers to spot the trends affecting your company. Ask yourself why key ratios are up or down compared to prior periods or to your competitors. The answers to those questions can make an important contribution to your decision-making about the future of your company. • Another way to present financial statement data that is quite useful when analyzing trends over time is a horizontal common-size balance sheet or income statement. The divisor here is the first-year values, so they are all standardized to 1.0 by construction.
  • 19. Trends in the values of these items, as well as the relative growth in these items, are readily apparent from a horizontal common- size balance sheet Example: constructing common-size ratios Horizontal common-size Balance Sheet Data 2014 2015 2016 Inventory 1.0 1.1 1.4 Cash and marketable securities 1.0 1.3 1.2 Long-term debt 1.0 1.6 1.8 PP&E (net of depreciation) 1.0 0.9 0.8
  • 20. Module One work sheet-1 : The table below presents the income statements for company A, company B, and company C. all three companies are involved in the same industry. - Evaluate the financial performance of the three firms. (Small groups) - What is the effective tax rate
  • 21. How can we evaluate the performance Vertical common-size income statement (Numbers in dollars) Company A Company B Company C Revenues $1,000 100% $5,000 100% $5,000 100% Cost of goods sold 400 40% 2,500 50% 2,000 40% Gross profit 600 60% 2,500 50% 3,000 60% Selling, general & administrative 150 15% 750 15% 750 15% Production R&D 100 10% 250 5% 500 10% Operating Income 350 35% 1,500 30% 1,750 35% Interest expense 50 5% 250 5% 250 5% Income before taxes 300 30% 1250 25% 1,500 30% Income taxes 120 12% 500 10% 600 12% Net Income (NI) $180 18% $750 15% $900 18%
  • 22. - As compared to company B, company A is smaller in terms of sales and net income when stated in dollars, however, in common size terms, company A’s net income is higher than company B’s net income (18% versus 15%). By presenting the income statements in common size format, the analyst is able to compare the firms without regard to size. Common size analysis also provides information about a firm’s business strategies. Revenues are the same at company B and company C, however, company C reports higher gross profit, higher operating profit, and higher net income. The higher profit can be traced to lower cost of goods sold. Notice that company C spends more on production research and development (R&D) than company B. as a result, company C has been able to lower its production costs. - Presenting income tax expenses as an effective rate is usually more meaningful than the common-size percentage. The effective rate is equal to income tax expense divided by pre-tax income. In the above example, the effective tax rate for all three companies is 40% The answer
  • 23. We can view the values in the common-size financial statements as ratios. Net income is shown on the common-size income statement as net income/revenues, which is the net profit margin, and tells the analyst the percentage of each dollar of sales that remains for shareholders after all expenses related to the generation of those sales are deducted. One measure of financial leverage, long-term debt to total assets, can be read directly from the vertical common-size financial statements. A stacked column graph (also called a stacked bar graph) shows the changes in items from year to year in graphical form. Dashboards
  • 24. Graphical Analysis - Stacked column (stacked Bar) graph - line graph The increase in trade payables and the decrease in cash are evident in either format and would alert the analyst to potential liquidity problems that require further investigation and analysis Show changes in items from year to year 1- Trade payables 3- Cash 2- Lease obligations 4- Long-term notes If you see accounts receivables increasing dramatically over several periods, and it is not a planned increase, you need to take action.
  • 26. Module One work sheet : Discussion 1. Do the firms being compared have similar accounting practices? 2. When comparing divisions within a firm. Are the ratios comparable? 3. Do the ratios being used give consistent readings? 4. Do the ratios yield a reasonable figure for the industry?
  • 28. They are often most useful in identifying questions that need to be answered rather than for answering questions directly their limitations are: not useful in isolation only valid when compared to those of other firms or to the company’s historical performance difficult to find comparable industry ratios for companies that operate across different indices comparison between firms is difficult given different accounting practices determining a target or comparison range is difficult The limitations of ratio analysis (Be aware of the limitations)
  • 29. Module 2 Various techniques of common size analysis and interpret the results of such analysis
  • 30. Remember, your goal is to use the information provided by the common size ratios to start asking why changes have occurred, and what you should do in response. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!! Why use financial ratio analysis !!!!!! More close? can help you identify problems that need fixing Module 2 objectives Even better, it can direct your attention to potential problems that can be avoided. What is the right interpretations
  • 31. Common Size Ratios from the Balance Sheet Liquidity ratios are employed by analysts to determine the firm’s ability to pay its short-term obligations when due. Quick Ratio = (Total Current Assets - Total Inventory) / Total Current Liabilities The more conservative measure of liquidity [More stringent] Defensive interval = Cash + marketable securities + receivables / average daily expenditures Illustrate the number of days of average cash expenditures Liquidity ratios Current ratio = current assets / current liabilities Best measure of liquidity Cash Ratio = (Cash + marketable securities ) / Total Current Liabilities The most conservative measure of liquidity
  • 32. Highlighted Ratio Description Guidance Current ratio A current ratio of less than 1 means that the firm has negative working capital and may be facing a liquidity crisis -If the ratio is very high it can also indicate investment in current assets. Funds could for a better return on other investments. Acid test ratio In general, quick ratios between 0.5 and 1 considered satisfactory - If current ratio is favorable and acid-test unfavorable, it shows possibility of too investment in stock. Defensive It ‘s a defensive interval ratio This ratio indicates the number of days of average cash expenditures the firm could pay with its current liquid assets - Expenditures here include cash expenses of goods, SG&A, and R&D. If these items from the income statement, non-cash as depreciation should be added back.. Matter of Fact Large enterprises generally have well established relationships with banks that can provide lines of credit and other short-term loan products in the event that the firm has a need for liquidity. Smaller firms may not have the same access to credit, and therefore they tend to operate with more liquidity. Liquidity ratios
  • 33. • A current ratio can be improved by increasing current assets or by decreasing current liabilities. • to accomplish an improvement include: • Paying down debt • Acquiring a long-term loan (payable in more than 1 year’s time) • Selling a fixed asset • Putting profits back into the business • A high current ratio may mean cash is not being utilized in an optimal way. For example, the excess cash might be better invested in equipment. The improvement
  • 35. Common Size Ratios from the Balance Sheet Solvency ratios measure financial risk and leverage. – the higher the ratio, the greater the leverage and the greater the risk Debt to equity = Total debt/ Total Equity Measures total debt to the equity base (measure capital structure) Financial Leverage ratio= Total assets / Total Equity Provides information on the degree of a company’s fixed financing obligations and its ability to satisfy these financing obligations Solvency ratios 1:1 means there is possible risk of insolvency in the future Long term debt-to-equity = Total long term debt / Total Equity Measures total debt relative to the equity base Total debt ratio to assets = Total debt/ Total Assets Measures the extent to which assets are financed by creditors – how much debt is used to finance the assets of the co.
  • 36. Common Size Ratios from the Balance Sheet Interest coverage ratio = EBIT / interest payments measures the firm’s ability to make contractual interest payments Z-score = Deward Altman developed this score, He assigned weight to each of five key balance sheet ratios, multiplying each ratio by a number he derived from his research to indicate its relative importance, the sum of ratios is the z-score Solvency ratios Fixed charge coverage = EBIT + Lease payments / Interest payments + lease payments + {Principal payments + Preferred stock dividends} x [1/(1-T)] measures the firm’s ability to meet all fixed-payment obligations. Here, lease payments are added back to operating earnings and also added to interest payments. Significant lease obligations will reduce this ratio compared to the interest coverage ratio ====== for companies that lease large portion of their assets such as, airlines
  • 37. Common Size Ratios from the Balance Sheet
  • 38. Highlighted Ratio Description Guidance Debt to worth Total debt is calculated differently by different analysts and different providers of financial information. Here, we will define it as long-term debt plus interest-bearing short-term debt. Some analysts include the present value of lease obligations and / or non –interest- bearing current liabilities, such as trade payables. If the Debt-to-Worth Ratio is greater than 1, provided by lenders exceeds the capital owners. Bank loan officers will generally company with a high Debt-to-Worth Ratio to greater risk. Debt-to-Worth Ratios will vary type of business and the risk attitude of Debt-to asset (Total Capital) Capital equals all short-term and long-term plus preferred stock and equity. - Increases and decreases in this ratio greater or lesser reliance on debt as a finance. - Compare to other outside investments Such as return on a fixed deposit Financial leverage Greater use of debt financing increases financial leverage and, typically, risk to equity holders and bondholders alike. - Solvency ratios
  • 39. Highlighted Ratio Description Guidance Interest coverage The lower this ratio, the more likely it is that the firm will have difficulty meeting its debt payments Fixed charge Ability to meet obligations (including non obligations i.e. taxes, leases - Z-Score a Z-Score of 1.81 or below means you are headed for bankruptcy. a Z-Score of 2.99 means your company is - Expenditures here include cash expenses goods, SG&A, and R&D. If these items are the income statement, non-cash charges depreciation should be added back. Solvency ratios
  • 40. • to accomplish an improvement include: 1. Debtors average collection period Compare to term allowed If longer, then unfavorable. • How to improve: • Send statements more regularly • Charge interest on overdue accounts • Control credit The improvement of solvency ratios
  • 43. Break
  • 46. Profitability ratios Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity and capital. Net profit margin = net income / revenue Operating profit margin = EBIT / revenue Return on assets (ROA) = net income / total assets Profitability ratios Gross profit margin = gross profit / revenue Pretax margin = EBT / revenue
  • 47. Profitability ratios Profitability ratios measure the overall performance of the firm relative to revenues, assets, equity and capital. Return on equity = net income / average total equity Profitability ratios Return on total capital (ROTC) = EBIT / average total capital Return on common equity = net income available to common shareholders/ average common equity Operating return on assets = EBIT / average total assets
  • 48. 1- Net profit margin: Analysts should be concerned if this ratio is too low. The net profit margin should be based on net income from continuous operations. Because analysts should be primarily concerned about future expectations, and below-the line items such as discontinued operations will not affect the company in the future. 2- The gross profit: The Analysts should be concerned if this ratio is too low. Gross profit (sales – COGS) can be increased by raising prices or reducing costs. However, the ability to raise prices may be limited by competition. 3- The operating profit margin : Strictly speaking, EBIT (operating income) includes some non-operating items, such as gains on investment. The analyst, as with other ratios with various formulations, must be consistent in his calculation method and know how published ratios are calculated. Some analysts prefer to calculate the operating profit margin by adding back depreciation and any amortization expense to arrive at earnings before interest, taxes, depreciation, and amortization (EBITDA) 4- The operating profit margin : Sometimes profitability is measured using earnings before tax (EBT), which can be calculated by subtracting interest from EBIT or from operating earnings
  • 49. 5- Return of assets (ROA): ROA is one of a set of profitability ratios that measure profitability relative to funds invested in the company by common stockholders, preferred stockholders, and suppliers of debt financing. This measure is a bit misleading because interest is excluded from net income but total assets include debt as well as equity. Adding interest adjusted for tax back to net income puts the returns to both equity and debt holders in the numerator. This result is an alternative calculation for ROA : ROA = net income + interest expense (1 – tax rate) / average total assets 6- Operating Return of assets: This measure includes both taxes and interest in the numerator. 7- Return on total capital (ROTC) Total capital includes short-term and long-term debt, preferred equity, and common equity. Analysts should be concerned if this ratio is too low. Total capital is the same as total assets. The interest expense that should be added back is gross interest expense, not net interest expense (which is gross interest expense less interest income). An alternative method for computing ROTC is to include the present value of operating leases on the balance sheet as a fixed asset and as a long-term liability. This adjustment is especially important for firms that are dependent on operating leases as a major form of financing.
  • 50. 5- Return on common equity: This ratio differs from the return on total equity in that it only measures the accounting profits available to, and the capital invested by, common stockholders, instead of common and preferred stockholders. That is why preferred dividends are deducted from net income in the numerator.
  • 51. Module Three work sheet : work sheet 4 Case study (groups)
  • 52. Module 4 Demonstrate how ratios are related and how to evaluate a company using a combination of different ratios
  • 53. A balance sheet and income statement for a hypothetical company are shown below for this year and the previous year. Using the company information provided, calculate the current year ratios. Discuss how these ratios compare with the company’s performance last year and with the industry’s performance. Example: using ratios to evaluate a company
  • 54. Example: using ratios to evaluate a company Sample balance sheet Year Current year Previous year Cash and cash equivalents $105 95 Accounts receivable 205 195 Inventories 310 290 Total current assets 620 580 Gross fixed assets 1800 1700 Accumulated depreciation 360 340 Net gross fixed assets 1440 1360 Total assets 2060 1940 Accounts payable 110 90 Short-term debt 160 140 Current portion of long-term debt 55 45 TCL 325 275 Long-term debt 610 690 Deferred taxes 105 95 Common stock 300 300 Additional paid in capital 400 400 Retained earnings 320 180 Common shareholders equity 1020 880 Total liabilities and equity 2060 1940
  • 55. Example: using ratios to evaluate a company Sample income statement Current year Revenues $4,000 Cost of goods sold 3,000 Gross profit 1,000 Operating expenses 650 Operating Income 350 Interest expense 50 Earnings before taxes 300 Taxes 100 Net income 200 Common dividends 60
  • 56. Financial ratio template Financial ratio Template Current year Last year Industry Current ratio 2.1 1.5 Quick ratio 1.1 0.9 Days of sales outstanding 18.9 18.0 Inventory turnover 10.7 12.0 Total asset turnover 2.3 2.4 Working capital turnover 14.5 11.8 Gross profit margin 27.4% 29.3% Net profit margin 5.8% 6.5% Return on total capital 21.1% 22.4% Return on common equity 24.1% 19.8% Debt-to-equity 99.4% 35.7% Interest coverage 5.9 9.2%
  • 58. Module 5 Calculate and interpret the ratios used in equity analysis, credit analysis and segment analysis
  • 59. What is the equity analysis? What is the credit analysis? Module 5 objectives What we mean by segment analysis? What is the Business risk?
  • 60. Equity analysis Valuation ratios are used in analysis for investment in common equity. The most widely used valuation ratio is the price-to-earnings (P/E) ratio, the ratio of the current market price of a share of stock divided by the company’s earnings per share. Related measures based on price per share are the price-to-cash flow, the price-to- sales, and the price-to-book value ratios. Per-share valuation measures include earnings per share (EPS) - Basic EPS is net income available to common dividend by the weighted average number of common shares outstanding - Diluted EPS is a “what if” value. It is calculated to be the lowest possible EPS that could have been reported if all firm securities that can be converted into common stock, and that would decrease basic EPS if they had been, were converted . Profitability dilutive securities include “convertible debt and convertible preferred stock, as well as options and warrants issued by the company”. The numerator of diluted EPS is increased by the after-tax interest savings on any dilutive debt securities and by the dividends on any dilutive convertible preferred stock. The denominator is increased by the common shares that would result from conversion or exchange of dilutive securities into common shares Valuation ratios
  • 61. Equity analysis Other Per-share valuation measures include earnings Cash flow per share - Cash flow per share - EBIT per share - - EBITDA per share Per share measures for different companies cannot be compared. A firm with $100 share price can be expected to generate much greater earnings, cash flow, EBITDA and EBIT per share than a firm with a $10 share price Valuation ratios Dividends Dividends are declared on a per-common-share basis. Total dividends on a firm- wide basis are referred to as dividends declared. Neither EPS nor net income is reduced by the payment of common stock dividends. Net income minus dividends declared is retained earnings, the earnings that are used to grow the corporation rather than being distributed to equity holders. The proportion of a firm’s net income that is retained to fund growth is an important determinant of the firm’s sustainable growth rate.
  • 62. To calculate the sustainable growth rate for a firm, the rate of return on resources is measured as the return on equity capital, or the ROE. The proportion of earnings reinvested is known as the retention rate (RR) The formula for the sustainable growth rate, which is how fast e constant, the firm can grow without additional external equity issues while holding leverage constant is as follow:
  • 63. Equity analysis G = RR x ROE Valuation ratios Retention rate = net income available to common-dividends declared / net income available to common = 1- dividend payout ratio Where : dividend payout ratio = dividends declared / net income available to common
  • 64. Module Five work sheet : Individuals
  • 65. Some ratios have specific applications in certain industries - Net income per employee - Sales per employee - Growth in same-store Sales per square foot Used in the analysis and valuation of service and consulting companies Used in the restaurant and retail industries to indicate growth without the effect of new locations that have been opened Commonly used in the retail industry
  • 66. – Business Risk The standard deviation of revenue, standard deviation of operating income, and the standard deviation of net income are all indicators of the variation in and the uncertainty about a firm’s performance. Since they all depend on the size of the firm to a great extent, analysts employ a size-adjusted measure of variation. The coefficient of variation for a variable is its standard deviation divided by its expected value. Certainly, different industries have different levels of uncertainty about revenues, expenses, taxes, and non operating items. Comparing coefficients of variation for a firm across time, or among a firm and its peers, can aid the analyst is assessing both the relative and absolute degree of risk a firm faces in generating income for its investors. CV sales = SD of sales / mean sales CV operating income = SD of OI / mean operating income CV net income = SD of NI / mean net income
  • 67. – Business Risk Capital adequacy Typically refers to the ratio of some dollar measure of the risk, both operational and financial, of the firm to its equity capital. Other measures of capital are also used. A common measure of capital risk is value-at-risk, which is an estimate of the dollar size of the loss that a firm will exceed only some specific percent of the time, cover a specific period of time The performance of financial companies that lend funds is often summarized as the net interest margin, which is simply interest divided by the firm’s interest-earning assets. Banks are subject to minimum reserve requirement. Their ratios of various liabilities to their central bank reserves must be above the minimum. The ratio of a bank’s liquid assets to certain liabilities is called the liquid asset requirement
  • 68. Credit analysis Credit analysis is based on many of the ratios that we have already covered in this review. In assessing a company’s ability to sevice and repay its debt, analysts use Ratios have been used to analyze and predict firm bankruptcies. Z- score - Interest coverage ratios - Return of capital - Debt to assets ratios Useful in predicting firm bankruptcies (a low score indicates high probability of failure)
  • 69. – Segment Analysis A business segment is a portion of a larger company that accounts for more than 10% of the company’s revenues or assets, and is distinguishable from the company’s other lines of business in terms of the risk and return characteristics of the segment. Geographic segments are also identified when they meet the size criterion above and the geographic unit has a business environment that is different from that of other segments or the remainder of the company’s business. Both U.S. GAAP and IFRS require companies to report segment data, but the required disclosure items are only a subset of the required disclosures for the company as a whole. Nonetheless, an analyst can prepare a more detailed analysis and forecast by examining the performance of business or geographic segments separately. Segment profit margins, asset utilization (turnover), and return on assets can be very useful in gaining a clear picture of a firm’s overall operations. For forecasting, growth rates of segment revenues and profits can be used to estimate future sales and profits and to determine the changes in company characteristics over time.
  • 70. Example: illustrate how Boeing broke down its results into business segments in its 2006 annual report Boeing, Inc. Segment Reporting (Dollars in millions) Year ended December 31 2006 2005 2004 Revenues: Commercial airplanes Integrated defense systems: Precision engagement and mobility systems Network and space systems Support systems ____________________________________ Total integrated defense systems Boeing capital corporation Other Accounting differences/eliminations ____________________________________ Total revenues ____________________________________
  • 71. Module 6 How ratio analysis and other techniques can be used to model and forecast earnings corporatefinanceinstitute.com
  • 72. Three methods of examining the variability of financial outcomes around point estimates are : sensitivity analysis, scenario analysis, and simulation. Sensitivity analysis is based on “what if” questions such as : What will be the effect on net income if sales increase by 3% rather than the estimated 5%? Scenario analysis is based on specific scenarios and will also yield a range of values for financial statement items. Simulation is a technique in which profitability distributions for key variables are selected and a computer is used to generate a distribution of values for outcomes based on repeated random selection of values for the key variables.
  • 73. Words from the Wise THOMAS JEFFERSON: Never spend your money before you have earned it. Napoleon Bonaparte: Take time to deliberate, but when the time for action arrives, stop thinking and go. Peter R. Drucker: Management is doing thins right; leadership is doing the right thins. John F. Kennedy: Change is the law of life. And those who look only to the past or present are certain to miss the future

Notas do Editor

  1. Narration: It is required that the company hold an annual general meeting at a place and time disclosed to all investors weeks in advance. The date must be set 30 to 60 days in advance and the AGM must take place within 15 months of the previous AGM. An information circular goes out a certain time and issues that require shareholders to vote are presented. There are also important dates to observe around sending proxy materials for voting. IR should work closely with company legal counsel, the corporate secretary and the CFO on conducting the AGM and ensuring all mandatory dates are met. The annual general meeting is an opportunity to conduct public company business such as shareholder approval of issues that require approval such as director stock options or electing new directors to the board. While there is an AGM protocol to follow as per regulations, the company should take the opportunity to have the CEO or the Chairman of the Board speak to the shareholders about the activities of the company in the year preceding as well as corporate strategy looking forward, taking care of course to avoid any untimely disclosure. Investor Relations professionals may be asked to craft a powerpoint presentation for the Chairman specifically for the AGM. Typically all C-level management, the Chairman of the Board and the Board of Directors attend as well as IR if they are not otherwise represented on the C-team.
  2. Narration: It is required that the company hold an annual general meeting at a place and time disclosed to all investors weeks in advance. The date must be set 30 to 60 days in advance and the AGM must take place within 15 months of the previous AGM. An information circular goes out a certain time and issues that require shareholders to vote are presented. There are also important dates to observe around sending proxy materials for voting. IR should work closely with company legal counsel, the corporate secretary and the CFO on conducting the AGM and ensuring all mandatory dates are met. The annual general meeting is an opportunity to conduct public company business such as shareholder approval of issues that require approval such as director stock options or electing new directors to the board. While there is an AGM protocol to follow as per regulations, the company should take the opportunity to have the CEO or the Chairman of the Board speak to the shareholders about the activities of the company in the year preceding as well as corporate strategy looking forward, taking care of course to avoid any untimely disclosure. Investor Relations professionals may be asked to craft a powerpoint presentation for the Chairman specifically for the AGM. Typically all C-level management, the Chairman of the Board and the Board of Directors attend as well as IR if they are not otherwise represented on the C-team.
  3. Narration: It is required that the company hold an annual general meeting at a place and time disclosed to all investors weeks in advance. The date must be set 30 to 60 days in advance and the AGM must take place within 15 months of the previous AGM. An information circular goes out a certain time and issues that require shareholders to vote are presented. There are also important dates to observe around sending proxy materials for voting. IR should work closely with company legal counsel, the corporate secretary and the CFO on conducting the AGM and ensuring all mandatory dates are met. The annual general meeting is an opportunity to conduct public company business such as shareholder approval of issues that require approval such as director stock options or electing new directors to the board. While there is an AGM protocol to follow as per regulations, the company should take the opportunity to have the CEO or the Chairman of the Board speak to the shareholders about the activities of the company in the year preceding as well as corporate strategy looking forward, taking care of course to avoid any untimely disclosure. Investor Relations professionals may be asked to craft a powerpoint presentation for the Chairman specifically for the AGM. Typically all C-level management, the Chairman of the Board and the Board of Directors attend as well as IR if they are not otherwise represented on the C-team.
  4. Narration: It is required that the company hold an annual general meeting at a place and time disclosed to all investors weeks in advance. The date must be set 30 to 60 days in advance and the AGM must take place within 15 months of the previous AGM. An information circular goes out a certain time and issues that require shareholders to vote are presented. There are also important dates to observe around sending proxy materials for voting. IR should work closely with company legal counsel, the corporate secretary and the CFO on conducting the AGM and ensuring all mandatory dates are met. The annual general meeting is an opportunity to conduct public company business such as shareholder approval of issues that require approval such as director stock options or electing new directors to the board. While there is an AGM protocol to follow as per regulations, the company should take the opportunity to have the CEO or the Chairman of the Board speak to the shareholders about the activities of the company in the year preceding as well as corporate strategy looking forward, taking care of course to avoid any untimely disclosure. Investor Relations professionals may be asked to craft a powerpoint presentation for the Chairman specifically for the AGM. Typically all C-level management, the Chairman of the Board and the Board of Directors attend as well as IR if they are not otherwise represented on the C-team.
  5. Narration: It is required that the company hold an annual general meeting at a place and time disclosed to all investors weeks in advance. The date must be set 30 to 60 days in advance and the AGM must take place within 15 months of the previous AGM. An information circular goes out a certain time and issues that require shareholders to vote are presented. There are also important dates to observe around sending proxy materials for voting. IR should work closely with company legal counsel, the corporate secretary and the CFO on conducting the AGM and ensuring all mandatory dates are met. The annual general meeting is an opportunity to conduct public company business such as shareholder approval of issues that require approval such as director stock options or electing new directors to the board. While there is an AGM protocol to follow as per regulations, the company should take the opportunity to have the CEO or the Chairman of the Board speak to the shareholders about the activities of the company in the year preceding as well as corporate strategy looking forward, taking care of course to avoid any untimely disclosure. Investor Relations professionals may be asked to craft a powerpoint presentation for the Chairman specifically for the AGM. Typically all C-level management, the Chairman of the Board and the Board of Directors attend as well as IR if they are not otherwise represented on the C-team.
  6. Narration
  7. Narration: