Financial statement Analysis
Financial Statement Analysis
Main contents .o The maior financial statements 8 Standard financial ratios .o Ratio decomposition analysis Asset utilization ratios s Comparability problems ss Accounting V.S. Economic earnings y
Main Contents ❖ The major financial statements ❖ Standard financial ratios ❖ Ratio decomposition analysis ❖ Asset utilization ratios ❖ Comparability problems ❖ Accounting v.s. Economic earnings
The Major Financial Statements Accounting data are useful in assessing the t a economic prospects of the firm. An investor can use financial data as inputs into stock analysis and estimate the intrinsic value of common stocks 8. There are three basic sources of data The income statement The balance sheet The statement of cash flows
The Major Financial Statements ❖ Accounting data are useful in assessing the economic prospects of the firm. – An investor can use financial data as inputs into stock analysis and estimate the intrinsic value of common stocks. ❖ There are three basic sources of data: – The income statement – The balance sheet – The statement of cash flows
The Major Financial Statements ☆ The income statement Table Is a summary of the profitability of the firm over a period of time such as a year. Some terms Revenue, expense, net earning or profit Cost of goods sold, general and administrative expense, interest expense, tax on earnings Operating revenue, operating cost, operating income, earning before interest taxes (EBIT)
The Major Financial Statements ❖ The income statement – Table – Is a summary of the profitability of the firm over a period of time such as a year. – Some terms • Revenue, expense, net earning or profit • Cost of goods sold, general and administrative expense, interest expense, tax on earnings • Operating revenue, operating cost, operating income, earning before interest & taxes (EBIT)
The Major Financial Statements The balance sheet Table Provide a snapshot of the financial condition of the firm at a particular time. Some terms. Asset, liability, net worth or stockholder's equity Current asset, long-term asset Current liability, long-term debt Par value of stock, capital surplus(additional paid-in capital), retained earnings
The Major Financial Statements ❖ The balance sheet – Table – Provide a snapshot of the financial condition of the firm at a particular time. – Some terms: • Asset, liability, net worth or stockholder’s equity • Current asset, long-term asset • Current liability, long-term debt • Par value of stock, capital surplus(additional paid-in capital), retained earnings
The Major Financial Statements . The statement of cash flows Table A statement showing a firm's cash receipts and cash payments generated by the firms operations, t./f investments and financial activities during a specified perio Accrual method of accounting v.s. Transaction basic method It provides evidence on the well-being of a firm
The Major Financial Statements ❖ The statement of cash flows – Table – A statement showing a firm’s cash receipts and cash payments generated by the firm’s operations, investments and financial activities during a specified period. – Accrual method of accounting v.s. Transaction basic method – It provides evidence on the well-being of a firm
Return On Equity ( ROE) . Past roe v.s. Future roe ROE is one of the two basic factors in deter-mining a firm's growth rate of earnings A high ROE in the past does not necessarily imply a firms future roe will be high A declining ROE is evidence that the firms new investments have offer a lower ROE than its past investment It is expectations of future dividends and earnings that determine the intrinsic value of a company's stock
Return On Equity (ROE) ❖ Past ROE v.s. Future ROE – ROE is one of the two basic factors in deter-mining a firm’s growth rate of earnings. • A high ROE in the past does not necessarily imply a firm’s future ROE will be high. • A declining ROE is evidence that the firm’s new investments have offer a lower ROE than its past investment. • It is expectations of future dividends and earnings that determine the intrinsic value of a company’s stock
Return On Equity ( ROE) Financial leverage and roe ROE=Net prott EBIT-Interest- Taxe q itv Equity (1-Tax rate) (EBIT-Taxes) Equity (1- Tax rate)AxAs中 ql ul =(1-TROA×+D)-1×号] E =(1-TROA+(ROA-1)2]
Return On Equity (ROE) ❖ Financial leverage and ROE (1 )[ ( ) ] (1-T)[ROA ] (1-Tax rate) E (E D ) Equity (ROA Assets-Interest rate debt) Equity (1-Tax rate)(EBIT-Taxes) Equity EBIT-Interest-Taxes Equity Net profit E D E D -T ROA ROA i i ROE = + − = − = = = = +
Return On Equity ( ROE) .. An example Table Business risk: ebit and roa Financial risk:E and roe 8. Some conclusions: If there is no debt or roa= interest rate, its roe will simply equal (l-tax rate)"ROA If ROA exceeds the rate, the firm earns more on its a money than it pays out to creditors
Return On Equity (ROE) ❖ An example – Table – Business risk: EBIT and ROA – Financial risk: E and ROE ❖ Some conclusions: – If there is no debt or ROA= interest rate, its ROE will simply equal (1-tax rate)*ROA – If ROA exceeds the rate, the firm earns more on its money than it pays out to creditors
Return On Equity ( ROE) Increase debt will make a positive contribution to a firm's roe only if the firms ROA exceeds the interest rate on the debt Financial leverage increases the risk of the equity holder returns Even if financial leverage increase the expected ROE, it does not imply the market value of equity will be higher. Financial leverage increases the risk of the firms quity as surely as it raises the expected ROE
Return On Equity (ROE) – Increase debt will make a positive contribution to a firm’s ROE only if the firm’s ROA exceeds the interest rate on the debt. – Financial leverage increases the risk of the equity holder returns • Even if financial leverage increase the expected ROE, it does not imply the market value of equity will be higher. • Financial leverage increases the risk of the firm’s equity as surely as it raises the expected ROE
