微观经济学Financial-statement-analysis.ppt

微微观经济学学Financial statement analysisBASICS OF FINANCIAL STATEMENT ANALYSISAnalysing financial statements involves evaluating 3 characteristics of an entity:LiquidityInterests short-term creditorsProfitabilityInterests non-current creditors and shareholders GearingInterests non-current creditors and shareholdersPowerPoint presentation by Dr Anne Abraham,University of Western Sydney2Need for comparative analysisIntra-entity basis Comparisons within a single entity(detects changes in financial relationships and trends)Industry averages Between entities in same industry(determines position relative to others)Inter-entity basisBetween other entities(indicates competitive position)PowerPoint presentation by Dr Anne Abraham,University of Western Sydney3LO1Tools of financial statement analysisHorizontal analysis Evaluates a series of financial data over timeVertical analysis Evaluates financial items in relation to a base amountRatio analysis Evaluates a comprehensive range of financial relationships representing different aspects of an entitys activitiesPowerPoint presentation by Dr Anne Abraham,University of Western Sydney4HORIZONTAL ANALYSISAlso called trend analysisUsed to evaluate a series of financial statement data over a period of timeAnalyses increases or decreases that have occurred from a particular base yearChanges may be expressed as either dollar amounts or percentagesPowerPoint presentation by Dr Anne Abraham,University of Western Sydney5LO2HORIZONTAL ANALYSIS continuedOne year is selected as the base year and then increases or decreases are based on the formulaAlternatively,formula can be expressed as the current year in relation to the base yearPowerPoint presentation by Dr Anne Abraham,University of Western Sydney6 Current results in =Current year amount relation to base period Base year amount Change since =Current year amount Base year amountbase period Base year amount Trend analysis compares a single observation over several years.We can use the trend analysis to construct graphs so we can see trends over time.Trend AnalysisVERTICAL ANALYSISAlso called common size analysisEvaluates financial statement data by expressing each item as a percentage of a base amount to indicate relative magnitudeUseful for comparing companies of different sizesCalculated percentages can also be tracked over time to determine patterns of changePowerPoint presentation by Dr Anne Abraham,University of Western Sydney8LO3Lets take a look at the information from the comparative Lets take a look at the information from the comparative income statements of Dodson Industries,Inc.for 2008 and income statements of Dodson Industries,Inc.for 2008 and 2007.We will prepare a common-size income statement.2007.We will prepare a common-size income statement.Common Size AnalysisCommon Size AnalysisWe would We would perform perform the same the same calculations calculations for the for the Balance Balance Sheet and Sheet and have total have total assets assets equal 100%.equal 100%.Common Size AnalysisRATIO ANALYSISRatio analysis expresses the relationship among selected items of financial statement dataIt can be used to make:Intra-company comparisonsIndustry average comparisonsInter-entity comparisonsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney12LO4Liquidity ratiosMeasure short-term ability of an entity to pay its debts and meet unexpected needs for cashImportant to bankers,suppliers and other short-term creditors1.Current ratioIndicates short term debt paying ratioPowerPoint presentation by Dr Anne Abraham,University of Western Sydney13=Current ratio Current assets .Current liabilitiesLiquidity ratios continued2.Acid-test ratioMeasure of an entitys immediate short-term liquidityAlso called the quick ratio Excludes inventory and prepaid assets which are the least liquid current assetsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney14=Acid-test ratioCash+Short-term investments+Receivables(net)Current liabilitiesLiquidity ratios continued3.Receivables turnoverIndicates the effectiveness of credit collection policiesMeasures the number of times,on average,receivables are collected during the periodPowerPoint presentation by Dr Anne Abraham,University of Western Sydney15=Receivables turnover Net credit sales .Average net receivablesLiquidity ratios continued4.Inventory turnoverReflects the effectiveness of inventory managementMeasures the number of times,on average,inventory is sold during the periodPowerPoint presentation by Dr Anne Abraham,University of Western Sydney16=Inventory turnoverCost of salesAverage inventoryProfitability ratios5.Profit marginAffects the entitys ability to obtain debt and equity financingOften used as ultimate test of managements operating effectivenessMeasure of the percentage of each dollar of sales that results in profitPowerPoint presentation by Dr Anne Abraham,University of Western Sydney17=Profit margin on salesProfitNet salesProfitability ratios continued6.Cash return on salesIndicates the entitys effectiveness at generating cash from operating activitiesMeasure of the percentage of each dollar of sales that results in cash from operating activitiesPowerPoint presentation by Dr Anne Abraham,University of Western Sydney18=Cash return on salesNet cash from operating activitiesNet salesProfitability ratios continued7.Gross profit marginHigher gross profit margin would contribute to an improvement in the profit ratioMeasure of the percentage of each dollar of sales that results in gross profitPowerPoint presentation by Dr Anne Abraham,University of Western Sydney19=Gross profit marginGross profitNet salesProfitability ratios continued8.Expense ratioAny reduction in expense ratio has a favourable impact on profit marginMeasure of the percentage of each dollar of sales that results in gross profitPowerPoint presentation by Dr Anne Abraham,University of Western Sydney20=Expense ratioExpenses(excluding tax)Net salesProfitability ratios continued9.Asset turnoverMeasures how effectively an entity uses its assets to generate salesMay vary considerably among industriesPowerPoint presentation by Dr Anne Abraham,University of Western Sydney21=Asset turnover Net sales .Average assetsProfitability ratios continued10.Return on assets(ROA)Measures overall profitability with respect to investment in assetsMeasures how much profit is generated for each dollar carrying amount of assetsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney22=Return on assets Profit .Average assetsProfitability ratios continued11.Return on equity(ROE)Measures profitability from the equity holders viewpointFormula when preference shares are on issuePowerPoint presentation by Dr Anne Abraham,University of Western Sydney23=Return on ordinaryshareholders equity Profit Preference dividends .Average ordinary shareholders equity=Return onequity Profit .Average equityProfitability ratios continued12.Earnings per share(EPS)Measure of the profit earned on each ordinary share on issueRefers to amount of profit applicable to ordinary shareholders,and so any preference dividends declared must be deducted from profitPowerPoint presentation by Dr Anne Abraham,University of Western Sydney24=Earningsper share Profit .Weighted average ordinary shares issuedProfitability ratios continued13.Priceearnings ratio(PE)Often-quoted measure of ratio of market price of each ordinary share to earnings per shareReflects investors assessments of an entitys future earningsIndicates how many years of current EPS investors are prepared to pay to acquire the sharePowerPoint presentation by Dr Anne Abraham,University of Western Sydney25=Priceearnings ratio Market price per shareEarnings per shareProfitability ratios continued14.Payout ratioMeasures the percentage of profits distributed in the form of cash dividendsEntities with high growth rates generally have low payout ratios because they reinvest most of their profit in the firmPowerPoint presentation by Dr Anne Abraham,University of Western Sydney26=Payout ratioCash dividendsProfitGearing ratios15.Debt to total assets ratio(DA)Indicates degree of leverageMeasures percentage of total assets provided by creditorsThe higher the ratio,the greater the risk the entity may be unable to meet its maturing obligationsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney27=Debt to total assets Total debt .Total assetsGearing ratios continued16.Times interest earnedIndicates entitys ability to sustain debt by measuring its ability meet interest payments as they become dueMeasures the number of times interest obligations can be covered by operating profitPowerPoint presentation by Dr Anne Abraham,University of Western Sydney28=Times interestearnedProfit before income taxes and interest expenseInterest expenseGearing ratios continued17.Cash debt coverageIndicates entitys ability to repay liabilities from cash generated from operating activities,without having to liquidate assets used in operationsReflects the whole period,not just a single point in timePowerPoint presentation by Dr Anne Abraham,University of Western Sydney29=Cash debt coverageNet cash flows provided in operating activitiesAverage total liabilitiesRatio interrelationshipsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney30From Management Point of View S efficiency AProfitability health P growth C +L if neededRatio interrelationships continuedReturn on assets=profit margin x asset turnover=profit x net sales .net sales average total assetsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney32NORMAL EARNINGS AND IRREGULAR ITEMSNormal earnings means the normal level of profit likely to be achieved in future periodsDiffers from profit by amount of irregular items includingWrite downs of assetsRestructuring activitiesDiscontinued operationsDisposals of PPELitigation settlementsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney33LO5Discontinued operationsA discontinued operation is a component of an entity that is being disposed of or is classified as held for saleCarrying amounts of assets are measured at fair value less costs of disposalResults of discontinuing operations should be excluded when estimating future profitsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney34Discontinued operations continuedDiscontinued operations should be disclosed on the income statement as a single line item:Sum of after-tax profit or loss from discontinued operationsAfter-tax gain or loss arising from restatement of assets of discontinued operationsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney35Discontinued operations continuedDisclosures required on the income statement or in notes:Revenue,expense and pre-tax profit or loss from discontinuing operationsGain or loss on measuring assets of discontinued operations at fair value and the associated tax effectNet cash flows from the operating,investing and financing activities of the discontinued operationsPowerPoint presentation by Dr Anne Abraham,University of Western Sydney36Change in accounting policyA change in accounting policy occurs when the policy used in the current year is different from the one used in the preceding yeare.g.,change in inventory costing methods,such as from FIFO to average costTwo types of changes:Changes in accounting standardsVoluntary changesPowerPoint presentation by Dr Anne Abraham,University of Western Sydney37Change in accounting policy continuedWhen a change in accounting policy has occurred The new policy should be used in reporting results of operations for the current yearThe cumulative effect of the change on all prior year income statements should be disclosed net of tax in a special section immediately preceding profitPowerPoint presentation by Dr Anne Abraham,University of Western Sydney38Change in accounting estimatesChanges in accounting estimates are recognised retrospectively and included in the income statement in the period in which the change occursEntities must disclose the nature and amount of accounting estimate changePowerPoint presentation by Dr Anne Abraham,University of Western Sydney39Comprehensive incomeIncludes all changes in shareholders equity during a period except those resulting from Investments by shareholdersDistributions to shareholdersPowerPoint presentation by Dr Anne Abraham,University of Western Sydney40LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS1.EstimatesFinancial statements contain many estimates e.g.,-allowance for doubtful debts-depreciation expense-costs of warranties If estimates are inaccurate,the financial ratios and percentages will also be inaccuratePowerPoint presentation by Dr Anne Abraham,University of Western Sydney41LO6Limitations continued2.CostMany items are carried at historic costThis does not account for price-level changes3.Alternative accounting methodsDifferences in accounting policies for the similar financial activities are often allowede.g.,methods of depreciationPowerPoint presentation by Dr Anne Abraham,University of Western Sydney42Limitations continued4.Atypical dataSome end-of-period data may not represent normal business conditions5.Diversification of entitiesDiversification within entities limits usefulness of financial statement analysisSegment data may provide more relevant and comparable informationPowerPoint presentation by Dr Anne Abraham,University of Western Sydney43Reading AssignmentChapter 19A comprehensive reading of the whole chapter is required,together with the Bikes R US Ltd as an IllustrationMake sure you can memorize all ratio formulaeChapter 19:Mastering the Summary of ratios on P.783-784 Formulae will not be given in examinationGo through Demonstration Problem 1 and 2 on P.791-794Questions 1,11,14,21,24 BE19.3,BE19.7,BE19.8,BE19.9,BE19.13E19.3,E19.5,E19.7P19.1,P19.3,P19.7BYP19.2 BYP19.5,BYP19.8Suggested questions to ensure your lecture understandingIncome Available to Ordinary ShareholdersNet Income Prefer.Share Dividends=Matrix,Inc.reports net income of$128,387.Matrix has 1,000 Matrix,Inc.reports net income of$128,387.Matrix has 1,000 shares of$100 par value,8%,cumulative preferred stock shares of$100 par value,8%,cumulative preferred stock outstanding.outstanding.Earnings Per Shares(EPS)BasicBasicEPSEPS=$1.00(rounded)=$1.00(rounded)=$128,387$128,387$8,000$8,000120,250120,250Weighted Average Shares