Financial Accounting Analysis Financial Statement Unbiased Accounting Recasting

Financial & Accounting Analysis Financial Statement Unbiased Accounting Recasting Financial Statement: firms could adopt different classifications 1

Financial Analysis A valid instrument which the analyst uses to understand what has happened and what will happen to the business Ratio Analysis It is useful for making forecasts of the firm’s future performance Cash Flow Analysis It is useful to examine the firm’s liquidity 2

Financial Analysis Ratio Analysis Financial tools Cash Flow Analysis Two main comparisons Time-series comparison Cross-sectional comparison Purpose: Understand Better the Business 3

Ratio Analysis The value of a firm is based upon its profitability and growth Product Financial market strategy Operating Investment Financing Dividend Management strategy policies 4

Business Activities Recasting Balance Sheet ASSETS CAPITAL Capital markets The firm Net Operating Financial Assets (NOA) (NFA) Shareholders Equity Financial liabilities Operating Liabilities Operating Activities Financing Activities 5

Business Activities Recasting Balance Sheet Net Non current Intangible/Tangibl e Assets Non-Current - Other non-current Assets liabilities Operating Assets (NOA) Inventories Net Working Capital Trade Receivables Other current assets - Trade Payables - Current Liabilities 6

Business Activities Recasting Income Statement Operating Gross Profit Income Ebitda/Ebit NOPAT Financial Sales Cost of sales Other operating expenses Amortisation, Profit After Interests before taxes Interest expense Income taxes Profit after taxes Tax expense Earning to Shareholders Net Profit Dividend, etc. . Income Interest income 7

Business Activities Cash Flow Statement Balance sheet 2006 Balance sheet 2007 Cash Flow From Operations Assets Liabilities Cash Flow From Investments Cash Flow From Cash&Cas h Financing Act. Equ. (1459) Equ. (1755) Cash Flow to Equity 8

Business Activities Measuring Profitability INCOME STATEMENT NET PROFIT ROE SHAREHOLDERS’ EQUITY RETURN ON EQUITY BALANCE SHEET 9

Business Activities The Main Meanings of ROE Firm’s Managers’ Abnormal Performance Behaviour Return Good indicator, even if not sufficient, to explain the general profitability of the business Are Managers good to employ financial capitals in profitable investments? ? Does the business generates profit more than its cost of equity capital ? ? 10

Business Activities Decomposing Profitability Net Profit Assets ROE ROA X Financial Leverage Assets Shareholders’ equity 11

Business Activities Decomposing Profitability Net Profit Sales ROA ROS X Asset Turnover Sales Assets 12

Business Activities Decomposing Profitability NOPAT Net assets ROE Operating ROA + ( Spread x Net Financial Leverage) (Operating ROA – Net Interest after tax/Net Debt) Net debt Equity 13

Ratio Analysis The value of a firm is based upon its profitability and growth Operating Management Product Financial market strategy Investment Management Financing strategy Dividend policies 14

Business Activities Operating Management Product market strategy Operating Management Gross Profit Margin Sales – Cost of sales NOPAT Margin EBITDA Margin ROS Sales NOPAT Sales EBITDA Sales Efficiency of operating management 15

Business Activities Investment Management Product market strategy Working Capital Management Investment Management Non-current assets Asset turnover Management 16

Business Activities Investment Management Inventories Management Working Capital Receivables Management Payables Management (Operating current assets – Operating current liabilties) 17

Business Activities Investment Management Inventories Cost of sales Turnover Inventories It is expected to have a high rotation of inventories Inventories Management Days’ Inventories Average cost of sale x day 18

Business Activities Investment Management Trade Receivables Turnover Trade Sales Trade receivables It is better to give less credit to your clients receivables management Days’ Receivables Inventories Average sales x day 19

Business Activities Investment Management Trade Payables Turnover Purchases Trade payables It is better to receive more credit from your suppliers Trade payables management Days’ Payables Trade payables Average cost of materials x day 20

Business Activities Investment Management Net non-current Sales assets turnover Net non-current assets Management PP&E turnover Sales Net property, plant & equipment It is defined as = (Total non current assets – Non-interest-bearing – Non-current liabilities) 21

Business Activities Product Management Answer these questions? ? How well does the company manage its inventories? If inventories ratios are changing, what is the underlying Management systems? Are new product being planned? How well does the company manage its credit policies? Is the company artificially increasing sales by loading distribution channels? Is the company take advantage of trade credit? Is it relying too much on trade credit? Are the company’s investment in plant and equipment consistent with its competitive strategy? 22

Business Activities Financial Management Financial market strategy Current liabilities & short-term liquidity Financial Management Debt & long-term solvency Financial Leverage 23

Business Activities Financial Management Current ratio Quick ratio Current liabilities & short-term liquidity Cash ratio Current assets Current liabilities Current assets - Inventory Current liabilities Cash & cash equivalents Current liabilities Operating Cash Flow from operations cash flow ratio Current liabilities 24

Business Activities Financial Management Liabilities to Total liabilities equity ratio Equity Debt to (Current debt + Non-current debt) equity ratio Equity Debt & longterm solvency Net Debt to equity ratio Interest Coverage Ratio Net Debt to capital ratio (Net Financial Position ) Equity (C. D. + Non-C. D. ) 25 (C. D. + Non-C. D. + Equity)

Business Activities Sustainable Growth Sustainable growth rate Dividend Policy ROE - ( 1 - Dividend Payout ratio) Cash dividends paid Net Profit 26

Business Activities Cash Flow Analysis Ratio Analysis/ Accrual Accounting Cash Flow Analysis/ Cash Accounting It is a document contained in the Financial Statement for firms which are obliged to adopt IFRS Balance Sheet Income Statement Cash Flow Statement 27

Business Activities Cash Flow Analysis Is the cash flow from operating positive or negative? If it is negative, what are the reasons? How much cash did the company invest in growth? Did the company use internal cash flow to finance growth, or did it rely on external financing? Did the company pay dividends from internal free cash flow, or did it rely on external financing? What type of external financing does the company rely on? 28

Prospective Analysis Forecasting Strategy analysis Valuation Accounting analysis Financial analysis 29

Prospective Analysis Performance Forecast Earnings Balance Sheet Cash Flow Forecasting growth in sales Increases in Working Capital Decreases in cash inflows 30

Prospective Analysis Growth in sales Forecastes Key drivers Expenses follow the sales’ growth Sales Profit margin forecast Investment and Plant track sales 31

Prospective Analysis Points of departure 2000 2005 2007 2008 2009 Period of time in which the The past performances of the business prospective analysis starts 2010 2013 Past, present and future information are integrated are well-known together Purpose: Getting to a good and reasonable valuation of the business 32

Prospective Analysis Points of departure Making long-term forecasts Assumptions for future years Time-series behavior of ratios already analysed Analysis of the context Sales Prediction Previous analysis Retail firm Consider previous years sales Expansion in new stores 33

Prospective Analysis Main questions z Firms strategy: x. What lines of business is it likely to be in? x. Are new products likely? (Customer acceptance for new? ) x. What is the product quality strategy? x. At what point in the product life cycle is the firm? x. What is the firm’s acquisition and takeover strategy? z Market for the products: x. How will consumer behaviour change? x. What is the elasticity of demand for products? x. Are substitute products emerging? 34

Prospective Analysis New markets Pricing plan Marketing Plan Promotion & Advertising Brand management 35