Financial Analysis by 4k75yts4

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									          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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