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Cash Flows and Financial Analysis
Users of Financial Information <ul><li>  </li></ul><ul><li>Investors and Financial Analysts </li></ul><ul><ul><li>Make jud...
SOURCES OF FINANCIAL INFORMATION <ul><li>Annual Report </li></ul><ul><ul><li>Management's report card to stockholders on o...
STATEMENT of CASH FLOWS <ul><li>Businesses  run on cash , not accounting profits </li></ul><ul><li>Statement of Cash Flows...
Building the Statement of Cash  Flows – Basic Approach   <ul><li>Build a Statement of Cash Flows from two balance sheets a...
Buying a Car on Credit Joe Jones and His New Car 6
Cash Flow Rules <ul><li>Asset  Increase   = Use </li></ul><ul><li>Asset  Decrease   = Source </li></ul><ul><li>Liability  ...
Buying and Selling Cars - Sally Smith and Her Two Cars 8
Business Cash Flows <ul><li>Three sources of cash flows : </li></ul><ul><li>Operating Activities  – day-to-day activities ...
BUSINESS CASH FLOWS   Figure 3.2 10
Free Cash Flows <ul><li>Cash generated beyond reinvestment needs is free cash flow </li></ul><ul><li>Net cash flow less no...
RATIO ANALYSIS <ul><li>Pairs of financial statement numbers formed into ratios </li></ul><ul><li>Ratios highlight differen...
CATEGORIES OF RATIOS <ul><li>Five Classifications </li></ul><ul><li>Liquidity </li></ul><ul><li>Asset Management </li></ul...
LIQUIDITY RATIOS <ul><li>Measure the ability to meet short term financial obligations </li></ul><ul><li>Current Ratio  –  ...
LIQUIDITY RATIOS <ul><li>Quick Ratio (Acid Test) –  A liquidity measure that does not depend on inventory </li></ul>15
ASSET MANAGEMENT RATIOS <ul><li>The fundamental efficiency with which a company is run   </li></ul><ul><li>AVERAGE COLLECT...
ASSET MANAGEMENT RATIOS <ul><li>INVENTORY TURNOVER   </li></ul><ul><li>Measures efficiency of inventory use </li></ul><ul>...
ASSET MANAGEMENT RATIOS <ul><li>FIXED ASSET TURNOVER AND TOTAL ASSET TURNOVER  </li></ul><ul><li>Measure the relationship ...
DEBT MANAGEMENT RATIOS <ul><li>Measures the firm’s debt level relative to assets, equity, and income </li></ul><ul><li>DEB...
DEBT MANAGEMENT RATIOS <ul><li>DEBT TO EQUITY RATIO  </li></ul><ul><li>Measures the mix of debt and equity within total ca...
DEBT MANAGEMENT RATIOS <ul><li>TIMES INTEREST EARNED (TIE) </li></ul><ul><li>Measures the number of times interest can be ...
DEBT MANAGEMENT RATIOS <ul><li>Cash Coverage </li></ul><ul><li>A variation on TIE. Adds depreciation to EBIT to better app...
DEBT MANAGEMENT RATIOS <ul><li>FIXED CHARGE COVERAGE </li></ul><ul><li>A variation on TIE to include lease payments as fix...
PROFITABILITY RATIOS <ul><li>Relative measures of the firm’s money-making success </li></ul><ul><li>RETURN ON SALES (ROS) ...
PROFITABILITY RATIOS <ul><li>RETURN ON ASSETS (ROA) </li></ul><ul><li>Measures the overall ability of the firm to utilize ...
PROFITABILITY RATIOS <ul><li>RETURN ON EQUITY (ROE) </li></ul><ul><li>The most fundamental profitability ratio </li></ul><...
MARKET VALUE RATIOS <ul><li>PRICE / EARNINGS RATIO (P/E) </li></ul><ul><li>Measures the market’s opinion of the stock as a...
MARKET VALUE RATIOS <ul><li>MARKET TO BOOK VALUE RATIO </li></ul><ul><li>Total value of the equity on the balance sheet </...
Financial Ratios 29
Financial Ratios 30
Financial Ratios 31
Limitations and Weaknesses of Ratio Analysis <ul><li>Diversified Companies </li></ul><ul><ul><li>Analysis of consolidated ...
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Cash flows and financial anayisis ppt @ bec doms

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  • Transcript of "Cash flows and financial anayisis ppt @ bec doms"

    1. 1. Cash Flows and Financial Analysis
    2. 2. Users of Financial Information <ul><li> </li></ul><ul><li>Investors and Financial Analysts </li></ul><ul><ul><li>Make judgments about the firm’s securities </li></ul></ul><ul><ul><li>Financial Analysts report to investment community </li></ul></ul><ul><li>Vendors </li></ul><ul><ul><li>Sell to the firm on credit </li></ul></ul><ul><li>Management </li></ul><ul><ul><li>Hi-light areas in which attention will improve performance </li></ul></ul>2
    3. 3. SOURCES OF FINANCIAL INFORMATION <ul><li>Annual Report </li></ul><ul><ul><li>Management's report card to stockholders on own performance </li></ul></ul><ul><ul><li>Positively biased </li></ul></ul><ul><ul><li>The primary source of financial information </li></ul></ul><ul><ul><li>Required of publicly traded companies </li></ul></ul><ul><ul><li>Must be audited </li></ul></ul><ul><li>Other Sources </li></ul><ul><li>Reports from brokerage firms and advisory services </li></ul><ul><li>Value Line </li></ul>3
    4. 4. STATEMENT of CASH FLOWS <ul><li>Businesses run on cash , not accounting profits </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><ul><li>Also called or Sources and Uses of Cash or Statement of Changes in Financial Position </li></ul></ul><ul><ul><li>Shows where money comes from - goes to </li></ul></ul><ul><ul><li>Developed from the Income Statement and Balance Sheet </li></ul></ul>4
    5. 5. Building the Statement of Cash Flows – Basic Approach <ul><li>Build a Statement of Cash Flows from two balance sheets and an income statement </li></ul><ul><li>Analyze where money has come from and gone to by : </li></ul><ul><ul><li>Adjusting net income for non-cash items </li></ul></ul><ul><ul><li>Analyzing changes between beginning </li></ul></ul><ul><ul><li>and ending Balance Sheets </li></ul></ul><ul><ul><ul><li>Classify as sources or uses of cash </li></ul></ul></ul><ul><li>Begin with a personal example </li></ul>5
    6. 6. Buying a Car on Credit Joe Jones and His New Car 6
    7. 7. Cash Flow Rules <ul><li>Asset Increase = Use </li></ul><ul><li>Asset Decrease = Source </li></ul><ul><li>Liability Increase = Source </li></ul><ul><li>Liability Decrease = Use </li></ul>7
    8. 8. Buying and Selling Cars - Sally Smith and Her Two Cars 8
    9. 9. Business Cash Flows <ul><li>Three sources of cash flows : </li></ul><ul><li>Operating Activities – day-to-day activities </li></ul><ul><li>Investing Activities – firm buys or sells fixed assets that enable it to do business, long-term purchases, and sales of financial assets. </li></ul><ul><li>Financing Activities – borrow money, pay off loans, sell stock, pay dividends . </li></ul>9
    10. 10. BUSINESS CASH FLOWS Figure 3.2 10
    11. 11. Free Cash Flows <ul><li>Cash generated beyond reinvestment needs is free cash flow </li></ul><ul><li>Net cash flow less non-operating cash requirements (such as worn out fixed assets) </li></ul><ul><li>If negative, then borrow or sell equity </li></ul>11
    12. 12. RATIO ANALYSIS <ul><li>Pairs of financial statement numbers formed into ratios </li></ul><ul><li>Ratios highlight different aspects of performance </li></ul><ul><li>The current ratio measures liquidity - ability to pay bills in the short run </li></ul>12 Current Assets: Money coming in within a year Current Liabilities: Money going out within a year Needed for solvency: Current ratio >> 1.0
    13. 13. CATEGORIES OF RATIOS <ul><li>Five Classifications </li></ul><ul><li>Liquidity </li></ul><ul><li>Asset Management </li></ul><ul><li>Debt Management </li></ul><ul><li>Profitability </li></ul><ul><li>Market Value </li></ul><ul><ul><li>Ratios Don’t Provide Answers - </li></ul></ul><ul><li> They Help You Ask the Right Questions </li></ul>13
    14. 14. LIQUIDITY RATIOS <ul><li>Measure the ability to meet short term financial obligations </li></ul><ul><li>Current Ratio – primary measurement of a company’s liquidity </li></ul>14 (Examples from Belfry Company)
    15. 15. LIQUIDITY RATIOS <ul><li>Quick Ratio (Acid Test) – A liquidity measure that does not depend on inventory </li></ul>15
    16. 16. ASSET MANAGEMENT RATIOS <ul><li>The fundamental efficiency with which a company is run </li></ul><ul><li>AVERAGE COLLECTION PERIOD (ACP) – the time it takes to collect on credit sales </li></ul>16 Interpretation : Customers pay slowly OR there are a few very old accounts that will probably never be collected.
    17. 17. ASSET MANAGEMENT RATIOS <ul><li>INVENTORY TURNOVER </li></ul><ul><li>Measures efficiency of inventory use </li></ul><ul><li>Interpretation : Too much inventory is expensive to carry. Too little causes stockouts which lead to inefficient production and lost sales </li></ul>17
    18. 18. ASSET MANAGEMENT RATIOS <ul><li>FIXED ASSET TURNOVER AND TOTAL ASSET TURNOVER </li></ul><ul><li>Measure the relationship of the firm’s assets to a year’s sales </li></ul><ul><li>Interpretation : Are there idle or inefficient assets? </li></ul>18
    19. 19. DEBT MANAGEMENT RATIOS <ul><li>Measures the firm’s debt level relative to assets, equity, and income </li></ul><ul><li>DEBT RATIO </li></ul><ul><li>Uses a broad concept of debt including current liabilities </li></ul><ul><li>A high debt ratio is viewed as risky by investors </li></ul>19
    20. 20. DEBT MANAGEMENT RATIOS <ul><li>DEBT TO EQUITY RATIO </li></ul><ul><li>Measures the mix of debt and equity within total capital. </li></ul><ul><li>An important risk measurement - a high debt level burdens the income statement with excessive interest making failure more likely. </li></ul><ul><li>Debt to Equity Ratio = Long Term Debt : Equity </li></ul><ul><li>Debt to Equity = $6,200 : $3,300 = 1.9 : 1 </li></ul><ul><li>(Stated as 1.9 to 1, since $6,200/$3,300 = 1.9) </li></ul>20
    21. 21. DEBT MANAGEMENT RATIOS <ul><li>TIMES INTEREST EARNED (TIE) </li></ul><ul><li>Measures the number of times interest can be paid out of earnings before interest and taxes (EBIT) </li></ul>21
    22. 22. DEBT MANAGEMENT RATIOS <ul><li>Cash Coverage </li></ul><ul><li>A variation on TIE. Adds depreciation to EBIT to better approximate the cash available to interest. </li></ul>22
    23. 23. DEBT MANAGEMENT RATIOS <ul><li>FIXED CHARGE COVERAGE </li></ul><ul><li>A variation on TIE to include lease payments as fixed financial charges equivalent to interest </li></ul><ul><li>Interpretation : Business failure is often a result of the inability to pay interest. Coverage ratios measure the interest burden relative to the ability to pay. </li></ul>23
    24. 24. PROFITABILITY RATIOS <ul><li>Relative measures of the firm’s money-making success </li></ul><ul><li>RETURN ON SALES (ROS) </li></ul>24
    25. 25. PROFITABILITY RATIOS <ul><li>RETURN ON ASSETS (ROA) </li></ul><ul><li>Measures the overall ability of the firm to utilize the assets in which it has invested to earn a profit </li></ul>25
    26. 26. PROFITABILITY RATIOS <ul><li>RETURN ON EQUITY (ROE) </li></ul><ul><li>The most fundamental profitability ratio </li></ul><ul><li>Measures the firm’s ability to earn a return on the owners’ invested capital. </li></ul>26
    27. 27. MARKET VALUE RATIOS <ul><li>PRICE / EARNINGS RATIO (P/E) </li></ul><ul><li>Measures the market’s opinion of the stock as an investment </li></ul><ul><li>Interpretation : The amount investors will pay for each dollar of earnings. Based primarily on expected growth . </li></ul>27
    28. 28. MARKET VALUE RATIOS <ul><li>MARKET TO BOOK VALUE RATIO </li></ul><ul><li>Total value of the equity on the balance sheet </li></ul>28
    29. 29. Financial Ratios 29
    30. 30. Financial Ratios 30
    31. 31. Financial Ratios 31
    32. 32. Limitations and Weaknesses of Ratio Analysis <ul><li>Diversified Companies </li></ul><ul><ul><li>Analysis of consolidated results generally offers limited insight </li></ul></ul><ul><li>Window Dressing </li></ul><ul><ul><li>Yearend efforts to make ratios look good </li></ul></ul><ul><li>Accounting Principles </li></ul><ul><ul><li>Allow a great deal of reporting latitude </li></ul></ul>32
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