Financial Analysis Presented By: Jeff McCurdy Jason Weir Lee Andersen Presentation Overview Definition Value Ratios Limitations Resources Questions Definition Financial analysis is used as a tool for providing critical insight about a company’s financial condition and future competitive ability. Financial Analysis Value Information can be obtained very quickly especially for publicly held companies. Information is usually freely available, and requires a relatively low investment to perform analysis. Allows one to compare a company’s performance with it’s past performance and find established trends, both good and bad. Financial Analysis Value Can compare company’s performance with that of competitors. Provides the ability to compare the firm’s performance with that of it’s industry standard. Can condense huge amounts of information into a handful of meaningful numbers. Financial Analysis Value By doing the financial analysis it should be clear whether or not the company can afford a proposed course of action. Helps point out areas of potential concern. Where do the numbers for analysis come from? Income Statement: Summarizes the results of a company’s operation, in terms of revenues and expenses for a given accounting period. Balance Sheet: Statement detailing what a company owns (assets) and claims against the company (liabilities and owner’s equity) on a particular date. 5 Types of Ratios Liquidity Ratios Leverage Ratios Activity Ratios Profitability Ratios Growth Ratios Financial Analysis Using Ratios Liquidity Ratios These ratios indicate the ease of turning assets into cash. In general the higher the ratio the better especially if the company is relying on creditor money to finance its assets. Source: Financial Ratio and Statement Analysis; p. 409 Liquidity Ratios Current Ratio Current Assets Current Liabilities Demonstrates the extent to which a firm can meet it’s short term obligations. Liquidity Ratios Quick Ratio Current assets – Inventory Current Liabilities Demonstrates the extent to which a firm can meet it’s short term obligations without relying upon the sale of it’s inventories. Leverage Ratios Leverage Ratios: This group of ratios is designed to help the analyst assess the degree of financial risk that a business faces. By looking at leverage ratios the analyst can decide whether the firms level of debt is appropriate or not. Leverage Ratios Debt to Total Assets Ratio Total Debt Total Assets The percentage of total funds that are provided by creditors. Leverage Ratios Debt to Equity Ratio Total Debt Total Stockholders’ Equity The percentage of total funds provided by creditors versus by the owners. Leverage Ratios Long Term Debt-to-Equity Ratio Long-Term Debt Total Stockholders’ Equity The balance between debt and equity in a firm’s long-term capital structure. Activity Ratios Activity Ratios: • Also called efficiency ratios. These are a group of ratios that measure inventory levels, accounts receivable days, fixed and total asset turnover rates and sales ratios. Activity Ratios Inventory Turnover Ratio Sales Inventory of finished goods Demonstrates whether a firm holds excessive stocks of inventories and whether a firm is selling its inventories slowly compared to the industry average. Activity Ratios Accounts Receivable Turnover Annual Credit Sales Accounts Receivable The average length of time it takes a firm to collect on credit sales. (in a percentage term) Activity Ratios Fixed Assets Turnover Sales Fixed Assets Measures sales productivity and plant and equipment utilization. Activity Ratios Total Assets Turnover Sales Total Assets This demonstrates whether a firm is generating a sufficient volume of business for the size of its asset investment. Activity Ratios Average Collection Period Accounts Receivable Total credit sales/365 days The average length of time it takes a firm to collect on credit sales in days. Profitability Ratios Profitability Ratios: Used to assess the profitability of a firm and changes in its profit performance. These ratios are probably the most important indicators of a business’ past financial success as well as growth potential. Profitability Ratios Gross Profit Margin Sales – Cost of Goods Sold Sales The total margin available to cover operating expenses and yield a profit. Profitability Ratios Operating Profit Margin Earnings before interest and taxes Sales Profitability without concern for taxes and interest. Profitability Ratios Net Profit Margin Net Income Sales After tax profits per dollar of sales Profitability Ratios Return on Total Assets (ROA) Net Income Total Assets After tax profits per dollar of assets; this ratio is also called return on investment. (ROI) Profitability Ratios There are also profitability ratios that are used more for investment purposes. Such as: Return on Stockholders’ Equity-ROE Earnings Per Share-EPS Price-earning Ratio-PE Growth Ratios Growth Ratios: Sales Growth: Measures the annual percentage growth rate for total sales in the firm. Income Growth: Measures the annual percentage growth rate for profits within the firm. Limitations of Financial Analysis Financial ratios have some limitations that must be considered when the analyst uses them in analyzing a company. Limitations Ratios alone do not offer any strategic guidance. They only point to the strengths and weaknesses in the past. Are based on historical accounting information. Limitations Ratios ignore intangible assets such as: Employees, Brand Names, and Intellectual Capital. Ratios may be misleading depending on the company strategy. Comparing your company to industry average may lead to being stuck in the middle. Limitations Internal comparisons may be growing, but the company is slipping compared to rivals. There may be differences in accounting practices that may skew the numbers. Limitations Ratios may be easy to rely on, but they are not all encompassing. Reliable analysis depends upon accurate input. Analysis does not account for outside influences. Resources Robert Morris Associates Dun & Bradstreet The Almanac of Business and Industrial Financial Ratios The Quarterly Financial Report for Manufacturing Corporations Source: The Techniques of Strategic and Competitive Analysis: p. 413-414 Resources Standard & Poor’s Industry Surveys Value Line Investment Surveys Published financial statements on the internet. Trade Associations Source: The Techniques of Strategic and Competitive Analysis: p. 413-414 Sources The Techniques of Strategic and Competitive Analysis p. 400-418 Financial Statement Analysis Chapter 11; Exhibit 11-8. p.426-427 Financial Accounting Concepts 3rd Ed. p. 118,379,120 & 231. Managerial Accounting 10th Ed. p. 45-48. Question???
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