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    Financial Statement Analysis: K R Subramanyam John J Wild

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    Sakshi Sharma

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    Financial Statement Analysis: K R Subramanyam John J Wild

    Uploaded by

    Sakshi Sharma
    176 views40 pages

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    Chapter 1_BAV

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    Copyright:

    © All Rights Reserved
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    Download as ppt, pdf, or txt
    176 views40 pages

    Financial Statement Analysis: K R Subramanyam John J Wild

    Uploaded by

    Sakshi Sharma

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 40

    Financial

    Statement
    Analysis

    K R Subramanyam
    John J Wild

    McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    1-2

    Overview of Financial
    Statement Analysis

    1
    CHAPTER
    1-3

    Business Analysis

    Evaluate
    EvaluateProspects
    Prospects Evaluate
    EvaluateRisks
    Risks
    1-4

    Information Sources for Business


    Analysis
    1-5
    1-6

    Credit Analysis
    1-7

    Credit Analysis
    Credit
    Creditworthiness:
    worthiness:Ability
    Abilityto
    tohonor
    honorcredit
    creditobligations
    obligations
    (downside
    (downsiderisk)
    risk)

    Liquidity
    Liquidity Solvency
    Solvency
    Ability
    Abilityto
    tomeet
    meetshort-
    short- Ability
    Abilityto
    tomeet
    meetlong-
    long-
    term
    termobligations
    obligations term
    termobligations
    obligations
    Focus:
    Focus: Focus:
    Focus:
    ••Current
    Currentcash
    cashflows ••Long-term
    flows Long-termprofitability
    profitability
    ••Make
    Makeupupofofcurrent ••Capital
    current Capitalstructure
    structure
    assets
    assetsand
    andliabilities
    liabilities
    ••Liquidity
    Liquidityof
    ofassets
    assets
    1-8

    Equity Analysis
    Assessment
    Assessmentof
    ofdownside
    downsiderisk
    riskand
    andupside
    upsidepotential
    potential

    Technical
    Technicalanalysis
    analysis/ / Fundamental
    FundamentalAnalysis
    Analysis
    Charting
    Charting Determine
    DetermineIntrinsic
    Intrinsicvalue
    value
    ••Patterns
    Patternsin
    inprice
    priceor without
    volume
    or withoutreference
    referenceto to
    volumehistory
    historyof
    ofaa price
    price
    stock
    stock
    ••Predict ••Analyze
    Analyzeand
    andinterpret
    interpret
    Predictfuture
    futureprice
    price key
    movements
    movements keyfactors
    factors
    –– Economy
    Economy
    –– Industry
    Industry
    –– Company
    Company
    1-9
    1-10

    Accounting Analysis

    Process to evaluate and adjust financial


    statements to better reflect economic reality

    Accounting
    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


    & creditworthiness Cash
    Ratio
    flow
    analysis
    analysis
    Analysis of — Evaluate source &
    cash flows deployment of funds
    1-12

    Prospective Analysis
    Process
    Processto
    toforecast
    forecastfuture
    futurepayoffs
    payoffs

    Business
    BusinessEnvironment
    Environment
    &&Strategy
    StrategyAnalysis
    Analysis

    Accounting
    AccountingAnalysis
    Analysis

    Financial
    FinancialAnalysis
    Analysis

    Intrinsic
    IntrinsicValue
    Value
    1-13

    Dynamics of Business Activities


    Business
    BusinessActivities
    Activities Time
    Time
    1-14

    Business Activities
    1-15

    Business Activities

    Financing
    Financingactivities
    activities
    • •Owner
    Owner(equity)
    (equity)
    • •Nonowner
    Nonowner(liabilities)
    (liabilities)
    1-16

    Business Activities

    Investing
    Investingactivities
    activities
    • •Buying
    Buyingresources
    resources
    • •Selling
    Sellingresources
    resources

    Investing
    Investing==Financing
    Financing
    1-17

    Business Activities

    Operating
    OperatingActivities
    Activities
    Revenues
    Revenuesand
    andexpenses
    expensesfrom
    fromproviding
    providing
    goods
    goodsand
    andservices
    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

    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

    Btt is the value of the bond at time t


    Itt +n
    +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

    Vtt is the value of an equity security at time t


    Dtt +n
    +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
    t+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


    tt

    Rit+n
    t+n
    is the residual income in period t + n [defined as
    net income, NI, minus a charge on beginning
    book value, BV, or RItt = NItt - (k x BVt-1
    t-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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