Ongoing Operations of a Private Equity Firm - PowerPoint by ijc14606

VIEWS: 10 PAGES: 36

Ongoing Operations of a Private Equity Firm document sample

• pg 1
```									Financial Statement
Analysis
FIL 341
Prepared by Keldon Bauer
Ratio Analysis
   Financial ratios are the vital signs of the
   They are used to assess the health of the business.
   When they are off the norm, they should be taken
together with all known information to get a
correct diagnosis.
   Norms should be seen as a normal range, not
just one number.
Ratio Analysis
   Ratios also allow for better comparison
through time or between companies.
   As we look at each ratio, ask yourself what
the ratio is trying to measure and why is that
information important.
   Ratios are used both internally and externally.
Categories of Financial Ratios
   Short-term solvency or liquidity ratios
   Asset management or efficiency ratios
   Long-term solvency or financial leverage
ratios
   Debt coverage ratios
   Profitability ratio
   Market value ratios
Liquidity Ratios
   Relate short-term sources of and uses for
cash.
   Current Ratio:
Liquidity Ratios
   Quick (Acid Test) Ratio:
Liquidity Ratios
   Cash ratio:
Asset Management Ratios
   Purpose is to assess how well the firm is
managing assets
   Inventory turnover ratio (IT):
Asset Management Ratios
   Accounts receivable turnover (ART):
Asset Management Ratios
   Accounts payable turnover (APT):
Asset Management Ratios
   Fixed asset turnover (FAT):
Efficiency Ratios
   Total Asset Turnover (TAT):
Leverage Ratios
   Relate debt to equity sources of investment
funds .
   Debt Ratio:
Leverage Ratios
   Debt-Equity Ratio:
   Measures the proportion of debt to equity
currently used to finance the firm.
Coverage Ratios
   Measure of ability to meet debt contracts.
   Times Interest Earned (TIE) Ratio:
   Measures how many times the interest expense
could be covered by operating earnings.
Coverage Ratios
   EBITDA Ratio:
   Conservatively estimates how many times the
principal and interest payments could be made
from operating cash flow.
Profitability Ratios
   What’s the bottom line?
   Gross Profit Margin (GPM):
   Measures how much profit is gained due to
pricing.
Profitability Ratios
   Operating Profit Margin (OPM):
   Measures how much profit can be pulled through
ongoing operations.
Profitability Ratios
   Net Profit Margin (NPM):
   Measures how much money from every dollar is
pulled through as net profit.
Profitability Ratios
   Basic earning power ratio (BEP):
Profitability Ratios
   Return on Total Assets (ROA):
   This is a measure of the return on assets owned.
   Therefore, it is a measure of return to all invested
funds.
Profitability Ratios
   Return on Equity (ROE):
   This is a measure of return to the equity holder
(whether or not they get a dividend).
Profitability Ratios
   Return on Common Equity (ROCE):
   This is a measure of return to all equity holders.
Deriving the Du Pont Identity
   ROE = NI / TE
   Multiply by 1 and then rearrange
   ROE = (NI / TE) (TA / TA)
   ROE = (NI / TA) (TA / TE) = ROA * EM
   Multiply by 1 again and then rearrange
   ROE = (NI / TA) (TA / TE) (Sales / Sales)
   ROE = (NI / Sales) (Sales / TA) (TA / TE)
   ROE = PM * TAT * EM
Predicting Financial Distress
   Altman’s Z was developed using a Probit
model to estimate the probability that a firm
would go into bankruptcy.
   His model was not published.
   Since 1968, private firms have duplicated his
work to give us a similar model (only
published this time).
Predicting Financial Distress
   There are two models:
   For publicly traded companies:
   Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + X5
   For private firms:
   Z = 0.717X1+0.847X2+3.107X3+0.42X4+0.998X5
   Z is a normally distributed variable, where:
   Z<1.81 Bankruptcy is predicted within a year.
   1.81<Z<2.675 Financial distress, possible bankruptcy
   Z>2.675 No financial distress predicted
Predicting Financial Distress
   X1 = Net Working Capital /Total Assets
   X2 = Retained Earnings/Total Assets
   X3 = EBIT/Total Assets
   X4 = Market Value of All Equity/Book Value of
Total Liabilities
   In the private firm model Book Value of Equity is
substituted for Market Value of Equity
   X5 = Sales/Total Assets
   What does each variable measure?
Trend Analysis
   Seeing how ratios change over time.
   Are they getting better or worse over time?
   Helps to determine the direction the firm is
   Show example.
   Can be enhanced by graphing them.
Trend Analysis
Industry Averages
   To compare the firm’s performance to that of
similar firms, many use industry averages:
   Risk Management Association (RMA)
   Focuses on private companies.
   The target audience is commercial lenders.
   The source is also lenders.
   Industries are defined using NAICS system.
   Data are organized by size (assets or sales).
   Most ratios include upper/lower quartiles as well as
average.
Industry Averages
   Dunn and Bradstreets
   Focuses on publicly traded companies.
   Industries are defined using SIC system.
   Also used by SEC.
   Data are clumped together (no size adjustments).
   Most ratios include upper/lower quartiles as well as
average.
   But there are not many ratios covered.
Common Size Balance Sheet
Key Financial Ratios
Excel Language
   Logical operator IF
   To have Excel automatically test cell addresses,
use:
   =IF(Logical test, Value if true, Value if false)
   The logical test can use =, <, >, <>, <=, or >=.
   E.g. =IF(A5>1,6,0).
   Although the logical test usually uses values, it can use
labels.
   Value if true/false can be a value or a label.
   Values are entered directly.
   Labels are entered with quotation marks.
   Blanks are entered as “”.
Excel Language
   Logical operator IF – continued
   If the test is complex, either AND or OR should
be used.
   AND can be used if more than one logical test
must be passed for the values to be applied.
   OR can be used if at least one logical test must be
passed for the values to be applied.
   E.g. =IF(OR(A5>3, A5<-3), “Cool”, “Bummer”)
Excel Language
   Logical operator IF – continued
   The IF statement can contain another, nested IF
statement.
   E.g. =IF(A5>2.65, “Great”, IF(A5<0.86, “Crap”,
“Ok”)
   If many nested IF statements are contemplated, then
you should probably use a lookup table rather than a
nested IF statement.

```
To top