Fundamentals of Corporate Finance Chapter 17 Financial Statement

Fundamentals of Corporate Finance Chapter 17 Financial Statement Analysis Fifth Edition Slides by Matthew Will Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 2 Topics Covered ÜFinancial Ratios ÜDu. Pont System ÜUsing Financial ratios ÜMeasuring Company Performance ÜThe Role of Financial Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 3 Type of Financial Ratios Ü Leverage ratios show heavily the company is in debt. Ü Liquidity ratios measure how easily the firm can lay its hands on cash. (對現金的掌控能力) Ü Efficiency or turnover ratios (or Activity ratios) measure how productively the firm is using its assets. Ü Profitability ratios are used to measure the firm’s return on its investments. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 4 Four Areas of Ratios Four areas of ratios: liquidity, turnover, profitability, and debt. ÜLiquidity ratios indicate a firm's ability to meet its maturing short-term obligations. ÜTurnover indicates how effectively a firm manages resources at its disposal to generate sales. ÜProfitability indicates the efficiency with which a firm manages resources. ÜDebt indicates the extent to which a firm is financed by debt. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 5 Financial Statements Ü Income Statement - Financial statement that shows the revenues, expenses, and net income of a firm over a period of time. Ü Common-Size Income - Statement Income statement that presents items as a percentage of revenues. Ü Balance Sheet - Financial statement that shows the value of the firm’s assets and liabilities at a particular time. Ü Common-Size Balance Sheet - Balance sheet that presents items as a percentage of total assets. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 6 Example of a Balance Sheet Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 7 Example of An Income Statement Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 8 Leverage Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 9 Leverage Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 10 Liquidity Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 11 Liquidity Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 12 Efficiency Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 13 Efficiency Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 14 Profitability Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 15 Profitability Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 16 Market Value Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 17 Market Value Ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 18 The Du. Pont System ÜA breakdown of ROE and ROA into component ratios Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 19 The Du. Pont System asset turnover Mc. Graw-Hill/Irwin Operating profit margin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 20 The Du. Pont System leverage asset ratio turnover Mc. Graw-Hill/Irwin Operating profit margin debt burden Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 21 Example of Du. Pont Analysis Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 22 The Du. Pont System of Analysis Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 23 Using Financial Ratios Source: U. S. Department of Commerce, Quarterly Financial Report for Manufacturing, Mining and Trade Corporations, December 2004. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 24 MVA & Economic Profit Market Value Added = The difference between the market value of common stock and its book value Economic Profit = capital invested multiplied by the spread between return on investment and the cost of capital. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 25 Residual Income & EVA Residual Income or EVA = Net Dollar return after deducting the cost of capital © EVA is copyrighted by Stern-Stewart Consulting Firm and used with permission. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 26 Measuring Performance Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 27 Measuring Performance Note: Economic value added is the rate of return on capital less the cost of capital times the amount of capital invested; e. g. , for Microsoft, EVA = (. 329 –. 177) × $204, 168 million Source: Data provided by Stern Stewart & Co. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 28 Financial Ratios and Default Risk Note: EBITDA is earnings before interest, taxes, depreciation, and amortization. Sources: Default rates from “Statement of Standard & Poor’s on Credit Rating Agencies to SEC, ” Public Hearing, November 2002; all other data from Standard & Poor’s. Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

17 - 29 Videos for Financial Ratios ÜUnderstand Financial Ratios https: //www. youtube. com/watch? v=U 5 r. RFh 32 g. QU Ü Du. Pont Analysis - Pat Obi https: //www. youtube. com/watch? v=t. X 9 ku. CZc. SK 8 Ü Du. Pont Analysis Pt. 1 (v) https: //www. youtube. com/watch? v=GFS-KZs. FQIA Ü Ratio Analysis https: //www. youtube. com/watch? v=Tz. W 5 f. Wq. Uw. ZM Ü 1 Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved