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Financial Statement Analysis: K R Subramanyam John J Wild

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259 views40 pages

Financial Statement Analysis: K R Subramanyam John J Wild

Uploaded by

Agus Tina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Financial

Statement
Analysis

K R Subramanyam
John J Wild

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Overview of Financial
1-2

Statement Analysis

1
CHAPTER
1-3

Business Analysis

Evaluate Prospects Evaluate Risks


1-4

Information Sources for Business


Analysis
1-5
1-6

Credit Analysis
1-7

Credit Analysis
Credit worthiness: Ability to honor credit obligations
(downside risk)

Liquidity Solvency
Ability to meet short- Ability to meet long-
term obligations term obligations
Focus: Focus:
• Current cash flows • Long-term profitability
• Make up of current • Capital structure
assets and liabilities
• Liquidity of assets
1-8

Equity Analysis
Assessment of downside risk and upside potential

Technical analysis / Fundamental Analysis


Charting
Determine Intrinsic value
• Patterns in price or without reference to
volume history of a price
stock
• Predict future price • Analyze and interpret
movements key factors
– Economy
– Industry
– Company
1-9
1-10

Accounting Analysis

Process to evaluate and adjust financial


statements to better reflect economic reality

Accounting
Risk
1-11

Financial Analysis

Process to evaluate financial position and


performance using financial statements

Profitability analysis — Evaluate return


on investments Common tools

Risk analysis ——— Evaluate riskiness


& creditworthiness Cash
Ratio
flow
analysis
analysis
Analysis of — Evaluate source &
cash flows deployment of funds
1-12

Prospective Analysis
Process to forecast future payoffs

Business Environment
& Strategy Analysis

Accounting Analysis

Financial Analysis

Intrinsic Value
1-13

Dynamics of Business Activities


Business Activities Time
1-14

Business Activities
1-15

Business Activities

Financing activities
• Owner (equity)
• Nonowner (liabilities)

Financing
1-16

Business Activities

Investing activities
• Buying resources
• Selling resources

Investing Financing

Investing = Financing
1-17

Business Activities

Operating Activities
Revenues and expenses from providing
goods and services
1-18

Financial Statements Reflect Business Activities


1-19

Financial Statements
1-20
1-21

Balance Sheet

Total Investing = Total Financing


= Creditor Financing + Owner Financing
1-22
1-23

Income Statement
Revenues – Cost of goods sold = Gross Profit
Gross profit – Operating expenses = Operating Profit

Colgate’s Profitability
(in $billions)

$12.238 - $5.536 = $6.701 Gross Profit


$6.701 - $4.5411 = $2.160 Operating profit
1-24
1-25

Statement of Cash Flows


1-26
1-27

Additional Information
(Beyond Financial Statements)
1-28

Analysis Preview
Yr1 Yr2 Yr3
Comparative Analysis

Purpose: Evaluation of consecutive financial


statements
Output: Direction, speed, & extent of any
trend(s)
Types:  Year-to-year Change Analysis
 Index-Number Trend Analysis
1-29

Analysis Preview
1-30

Analysis Preview
Common-Size Analysis

Purpose :  Evaluation of internal makeup


of financial statements
 Evaluation of financial statement
accounts across companies
Output: Proportionate size of assets,
liabilities, equity, revenues, &
expenses
1-31

Analysis Preview
1-32

Analysis Preview
1-33

Analysis Preview
Ratio Analysis
Purpose : Evaluate relation between two or
more economically important items
(one starting point for further analysis)
Output: Mathematical expression of relation
between two or more items
Cautions:  Prior Accounting analysis is important
 Interpretation is key - long vs short term
& benchmarking
1-34

Analysis Preview
Valuation
Valuation - an important goal of many types
of business analysis

Purpose: Estimate intrinsic value of a


company (or stock)
Basis: Present value theory (time value of
money)
1-35

Analysis Preview
Debt (Bond) Valuation

Bt is the value of the bond at time t


It +n is the interest payment in period t+n
F is the principal payment (usually the debt’s face value)
r is the investor’s required interest rate (yield to maturity)
1-36

Analysis Preview
Equity Valuation

Vt is the value of an equity security at time t


Dt +n is the dividend in period t+n
k is the cost of capital
E refers to expected dividends
1-37

Analysis Preview
Equity Valuation - Free Cash Flow to Equity
Model

FCFt+n is the free cash flow in the period t + n [often


defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E refers to an expectation
1-38

Analysis Preview
Equity Valuation - Residual Income Model

BV is the book value at the end of period t


t

Rit+n is the residual income in period t + n [defined as


net income, NI, minus a charge on beginning
book value, BV, or RIt = NIt - (k x BVt-1)]
k is the cost of capital
E refers to an expectation
1-39

Analysis in an Efficient Market


Three assumed forms of market efficiency

Weak Form - prices reflect information in


past prices
Semi-strong - prices reflect all public
Form information
Strong Form - prices reflect all public and
private information
1-40

Book Organization

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