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Chapter01 - Subramanyam & Wild

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223 views

Chapter01 - Subramanyam & Wild

Ppt

Uploaded by

Maulina Tiar Rahmawati
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 40

Financial

Statement
Analysis

K R Subramanyam
John J Wild

McGraw-Hill/Irwi Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights


n reserved.
1-2

Overview of Financial
Statement Analysis

1
CHAPTE
R
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 Ability to meet
short-term obligations long-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
• Analyze and interpret
• Predict future price
movements key factors
– Economy
– Industry
– Company
1-9
1-10

Accounting Analysis

Process to evaluate and adjust financial


statements to better reflect economic reality

Acco
unting
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 Cash


& creditworthiness Ratio
flow
analysi
analysi
s
Analysis of — Evaluate source & s
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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