Financial Statement Analysis K R Subramanyam John J
Financial Statement Analysis K R Subramanyam John J Wild Mc. Graw-Hill/Irwin Copyright © 2009 by The Mc. Graw-Hill Companies, Inc. All rights reserved.
10 -2 Credit Analysis 10 CHAPTER
10 -3 Credit analysis Liquidity Solvency • A company’s ability to meet short-term obligations. • A company’s ability to meet long-term obligations. – Are the company’s current assets adequate to its current liabilities? – How long is the company’s operating cycle? – How much of cash does the company generate from operations? – What is the company’s capital structure? – Is the company able to pay borrowings’ interests and principals when come due?
10 -4 Liquidity analysis Current assets Current ratio = Current liabilities Working capital Current assets – Current liabilities Cash & Cash equivalents + Marketable securities + Accounts receivable = Current liabilities Quick ratio Cash-to-current liabilities ratio = = Cash-to-current assets = ratio Cash & cash equivalents + marketable securities Current liabilities Cash & cash equivalents + marketable securities Current assets
10 -5 Example 1 As at 31/12/2011 VCS DAC HPS 1 Current ratio 0, 91 1, 19 4, 06 2 Quick ratio 0, 19 0, 60 3, 04
10 -6 Liquidity analysis CASH GENERATION ANALYSIS Operating cash flow Cash flow ratio = Current liabilities Cash-to-maturing debt ratio Operating cash flow = Maturing debts
10 -7 Liquidity analysis For the year ended Dec. 31, 2011 VCS DAC HPS 1, 047, 892 755, 232 (163, 851) 18, 523 8, 694 (7, 546) 4, 102 1, 711 4 Cash flow ratio -0. 16 -0. 41 0. 42 5 Cash-to-maturing debt ratio -0. 22 -0. 87 N/A 1 2 3 (in VND mil. ) Current liabilities at year end Maturing debts at year end Net cash flows form operating activities
10 -8 Liquidity analysis Purchasing Payments for purchasing Selling Collecting money from selling Payment period Days to sell inventory Collection period Operating cycle (cash cycle or net trade cycle)
10 -9 Liquidity analysis Operating cycle = Days to sell inventory + Collection period - Payment period
10 -10 Liquidity analysis Days to sell inventory = Average inventory ÷ Collection period = Payment period = Average account receivables Average account payables ÷ ÷ Cost of goods sold 360 Sales 360 Cost of goods sold 360
10 -11 Liquidity analysis Days to sell inventory = Average inventory ÷ Collection period = Payment period = Average account receivables Average account payables ÷ ÷ Cost of goods sold 360 Sales 360 Cost of goods sold 360
10 -12 Liquidity analysis Inventory turnover Accounts receivable turnover Accounts payable turnover Cost of goods sold = Average inventory Sales = Average accounts receivable = Cost of goods sold Average accounts payable
10 -13 Solvency analysis Capital Structure
10 -14
10 -15 Solvency analysis Total debt ratio (total debt-tototal capital ratio) Total debt-to-equity capital ratio Debt-to-equity ratio (Long-term debt to equity capital ratio) = Total liabilities Total capital = Total liabilities Shareholders’ equity = Long-term debt Shareholders’ equity
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10 -17 Solvency analysis Time interest earned ratio Earnings to fixed charges ratio EBIT = Interest expense = Earnings available for fixed charges Fixed charges Earnings available for fixed charges: • Pretax income from continuing operations • Interest incurred (both expensed and capitalized) • Interest portion of operating rental expenses.
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