Financial performance and position of a firm: Assets - Liabilities = book value of firm (stockholders’ equity) Revenues - ...
Revealing the environmental aspects of financial information Analysis framework: <ul><li>Environmental Assets: </li></ul><...
Example: An electric utility <ul><li>Environmental Assets: </li></ul><ul><li>Geothermal sources </li></ul><ul><li>Hydro po...
Using Financial Statements to predict future earnings and cash flows Book value <ul><li>Adjustments for: </li></ul><ul><li...
Analyzing financial accounting numbers 1. Assessing the business environment - Company’s strategy, type of industry, relat...
Assessing Earnings Quality <ul><li>Overstating operating performance (aggressive accounting practices) </li></ul><ul><li>A...
Financial Statement Analysis <ul><li>Comparisons across time </li></ul><ul><li>- GAAP requires disclosure of account numbe...
Comparisons within the Financial Statements Common-size Financial Statement On the  Income Statement , express all items a...
Comparisons within the Financial Statements Common-size Financial Statement 100% $  628 100% $  1,218 Total 66% $  415 54%...
Comparisons within the Financial Statements <ul><li>Financial Ratios </li></ul><ul><li>Profitability ratios </li></ul><ul>...
Financial Ratio Analysis <ul><li>Profitability Ratios </li></ul><ul><li>Return on Equity (ROE) </li></ul><ul><li>Net incom...
Financial Ratio Analysis <ul><li>Leverage Ratios </li></ul><ul><li>Common Equity Leverage </li></ul><ul><li>Net income / {...
Financial Ratio Analysis <ul><li>Solvency Ratios </li></ul><ul><li>Current Ratio </li></ul><ul><li>Current Liabilities / C...
Financial Ratio Analysis <ul><li>Asset Turnover Ratios </li></ul><ul><li>Receivables Turnover </li></ul><ul><li>Net Credit...
Financial Ratio Analysis <ul><li>Other Ratios </li></ul><ul><li>Earnings per Share </li></ul><ul><li>Net Income / Average ...
Some Ratios for Well-Known Companies 0.62 1.48 (0.01) 0.05 2.13 0.90 1.73 Price/Earnings ratio 1.61 4.56 (2.20) 1.03 0.66 ...
Upcoming SlideShare
Loading in...5
×

Financial Management, Course Slides, University of California ...

867

Published on

Published in: Technology
1 Comment
0 Likes
Statistics
Notes
  • Be the first to like this

No Downloads
Views
Total Views
867
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
23
Comments
1
Likes
0
Embeds 0
No embeds

No notes for slide

Financial Management, Course Slides, University of California ...

  1. 1. Financial performance and position of a firm: Assets - Liabilities = book value of firm (stockholders’ equity) Revenues - expenses = net income Revealing the environmental aspects of financial information Position of a firm Performance of a firm <ul><li>Environmental activities of a firm: </li></ul><ul><li>Prevention: Eliminate sources of environmental impact </li></ul><ul><li>Assessment: Measure & monitor potential sources of environmental impact </li></ul><ul><li>Control: Manage environmental impact to avoid environmental damage </li></ul><ul><li>Failure: Remediate environmental damage </li></ul>
  2. 2. Revealing the environmental aspects of financial information Analysis framework: <ul><li>Environmental Assets: </li></ul><ul><li>Prevention </li></ul><ul><li>Assessment </li></ul><ul><li>Control </li></ul><ul><li>Failure </li></ul><ul><li>Environmental Liabilities: </li></ul><ul><li>Prevention </li></ul><ul><li>Assessment </li></ul><ul><li>Control </li></ul><ul><li>Failure </li></ul><ul><li>Environmental Revenues: </li></ul><ul><li>Prevention </li></ul><ul><li>Assessment </li></ul><ul><li>Control </li></ul><ul><li>Failure </li></ul><ul><li>Environmental Expenses: </li></ul><ul><li>Prevention </li></ul><ul><li>Assessment </li></ul><ul><li>Control </li></ul><ul><li>Failure </li></ul>
  3. 3. Example: An electric utility <ul><li>Environmental Assets: </li></ul><ul><li>Geothermal sources </li></ul><ul><li>Hydro power </li></ul><ul><li>Wind power </li></ul><ul><li>Photovoltaic power </li></ul><ul><li>Environmental Liabilities: </li></ul><ul><li>Coal fired power plants </li></ul><ul><li>Nuclear power plants (?) </li></ul><ul><li>Environmental Revenues: </li></ul><ul><li>Electricity sales from renewable power sources </li></ul><ul><li>Revenues from demand-side management </li></ul><ul><li>Environmental Expenses: </li></ul><ul><li>Flue gas desulphurization </li></ul><ul><li>Development of CO 2 sequestration technology </li></ul><ul><li>Penalty for exceeding emission limits </li></ul>
  4. 4. Using Financial Statements to predict future earnings and cash flows Book value <ul><li>Adjustments for: </li></ul><ul><li>Business environment </li></ul><ul><li>Unrecorded events </li></ul><ul><li>Management bias </li></ul>True value <ul><li>Business environment </li></ul><ul><li>- What is the prognosis for the overall economy? </li></ul><ul><li>- What is the prognosis for the company’s industry? </li></ul><ul><li>- What is the company’s overall strategy? </li></ul><ul><li>- Does the company compete through product innovation or cost reduction? </li></ul><ul><li>Unrecorded events </li></ul><ul><li>- Human resources are not included in the balance sheet </li></ul><ul><li>- Most of the assets are carried at historical cost </li></ul><ul><li>- Statements ignore the effect of inflation (stable dollar assumption) </li></ul><ul><li>Management bias </li></ul><ul><li>- Statements are used by investors and creditors to assess and influence a firm </li></ul><ul><li>- Often, management salaries are directly tied to the financial performance and position of the firm </li></ul>
  5. 5. Analyzing financial accounting numbers 1. Assessing the business environment - Company’s strategy, type of industry, relationship to overall economy - Competitors, barriers to entry - Supply chain structure, bargaining power, relationship to suppliers and customers 2. Reading and studying the financial statements and footnotes - Audit Report - Identify key items on Financial Statements - Significant transactions (that reflect future transactions - earnings persistence) - Footnotes 3. Assessing earnings quality (Quality of FS information) - Overstating operating performance - Taking a Bath - Creating Hidden Reserves - Off-Balance-Sheet Financing 4. Analyzing the Financial Statements - Comparisons across time - Comparisons with the industry - Comparisons within the Financial Statements 5. Predicting future earnings and/or cash flows - After completion of the first four steps, analysts usually prepare predictions
  6. 6. Assessing Earnings Quality <ul><li>Overstating operating performance (aggressive accounting practices) </li></ul><ul><li>Accelerate the recognition of revenues </li></ul><ul><li>Defer the recognition of expenses </li></ul><ul><li>Taking a Bath </li></ul><ul><li>Use very conservative accounting methods and recognize accounting losses </li></ul><ul><li>in financial years that already have very poor performance </li></ul><ul><li>Creating Hidden Reserves </li></ul><ul><li>Use very conservative accounting methods and recognize accounting losses in very good financial years (to smooth out earnings over time) </li></ul><ul><li>Off-Balance-Sheet Financing </li></ul><ul><li>Structure financing transactions and use accounting methods so that debt does not need to be reported on the balance sheet </li></ul>
  7. 7. Financial Statement Analysis <ul><li>Comparisons across time </li></ul><ul><li>- GAAP requires disclosure of account numbers for current and preceding years (Balance sheet 2 years, all others 3 years) </li></ul><ul><li>- Often even longer time-series are published by the companies </li></ul><ul><li>- Historic trends as indicator of future trends </li></ul><ul><li>Comparisons within the industry </li></ul><ul><li>- Compare accounting numbers to those of similar companies (e.g. in same industry) </li></ul><ul><li>- Industry surveys report information concerning industry averages </li></ul><ul><li>- Different industries typically have different ‘normal’ accounting numbers (e.g. retailers have high inventory, pharmaceutical firms have large R&D costs) </li></ul><ul><li>Comparisons within the Financial Statements </li></ul><ul><li>- Common-size Financial Statements Facilitates identification of changes in the structure of financial flows and stocks </li></ul><ul><li>- Financial Ratios </li></ul><ul><li>Many ratios possible, no fixed rules </li></ul><ul><li>Typically, averages are used for stock numbers, i.e. balance sheet accounts </li></ul>Financial accounting numbers are only meaningful when compared to other relevant numbers (Is a reported income of $1 billion large or small?).
  8. 8. Comparisons within the Financial Statements Common-size Financial Statement On the Income Statement , express all items as percentages of net sales. On the Balance Sheet , express all items as percentages of total assets.
  9. 9. Comparisons within the Financial Statements Common-size Financial Statement 100% $ 628 100% $ 1,218 Total 66% $ 415 54% $ 663 Stockholders’ equity 13% $ 81 26% $ 318 Long-term liabilities 21% $ 132 20% $ 237 Current liabilities 100% $ 628 100% $ 1,218 Total 32% $ 202 43% $ 526 Long-term assets 68% $ 426 57% $ 692 Current assets Balance Sheet 5% $ 66 5% $ 88 Net income 21% $ (275) 20% $ (345) Expenses & charges 745% $ (947) 75% $ (1,284) Cost of sales 100% $ 1,288 100% $ 1,717 Net sales Income Statement 1999 1999 2000 2000
  10. 10. Comparisons within the Financial Statements <ul><li>Financial Ratios </li></ul><ul><li>Profitability ratios </li></ul><ul><li>Leverage ratios </li></ul><ul><li>Solvency ratios </li></ul><ul><li>Asset turnover ratios </li></ul><ul><li>Other ratios </li></ul>
  11. 11. Financial Ratio Analysis <ul><li>Profitability Ratios </li></ul><ul><li>Return on Equity (ROE) </li></ul><ul><li>Net income / Average Stockholders’ Equity </li></ul><ul><li>Return on Assets (ROA) </li></ul><ul><li>{Net Income + [Interest Expense · (1-Tax Rate)]} / Average Total Assets </li></ul><ul><li>Return on Sales (Profit Margin) </li></ul><ul><li>{Net Income + [Interest Expense·(1-Tax Rate)]} / Net Sales </li></ul>Profitability ratios These ratios relate financial returns to stockholders (net income) and creditors (interest payments) to a variety of account numbers.
  12. 12. Financial Ratio Analysis <ul><li>Leverage Ratios </li></ul><ul><li>Common Equity Leverage </li></ul><ul><li>Net income / {Net Income + [Interest Expense·(1-Tax Rate)]} </li></ul><ul><li>Capital Structure Leverage </li></ul><ul><li>Average Total Assets / Average Stockholders’ Equity </li></ul><ul><li>Debt / Equity Ratio </li></ul><ul><li>Average Total Liabilities / Average Stockholders’ Equity </li></ul><ul><li>Long-Term Debt Ratio </li></ul><ul><li>Long-term Liabilities / Total Assets </li></ul>Leverage ratios Leverage refers to using borrowed funds to generate returns for stockholders. E.g. borrowing at 8% and creating returns of 12% is using leverage effectively. Leverage creates additional returns, but also commits the firm to future cash obligations.
  13. 13. Financial Ratio Analysis <ul><li>Solvency Ratios </li></ul><ul><li>Current Ratio </li></ul><ul><li>Current Liabilities / Current Assets </li></ul><ul><li>Quick Ratio </li></ul><ul><li>(Cash + Marketable Securities + Net Accounts Reveivable) / Current Liabilities </li></ul><ul><li>Interest Coverage </li></ul><ul><li>(Net Income + Tax Expense + Interest Expense) / Interest Expense </li></ul><ul><li>Accounts Payable Turnover </li></ul><ul><li>Cost of Goods Sold / Average Accounts Payable </li></ul>Solvency ratios Solvency ratios measure a firms ability to meet its debt payments as the come due.
  14. 14. Financial Ratio Analysis <ul><li>Asset Turnover Ratios </li></ul><ul><li>Receivables Turnover </li></ul><ul><li>Net Credit Sales / Average Accounts Receivable </li></ul><ul><li>Inventory Turnover </li></ul><ul><li>Cost of Goods Sold / Average Inventory </li></ul><ul><li>Fixed Assets Turnover </li></ul><ul><li>Sales / Average Fixed Assets </li></ul><ul><li>Total Asset Turnover </li></ul><ul><li>Sales / Average Total Assets </li></ul>Asset turnover ratios These ratios measure the speed with which assets move through operations, i.e. the number of times that assets are acquired, used and replaced.
  15. 15. Financial Ratio Analysis <ul><li>Other Ratios </li></ul><ul><li>Earnings per Share </li></ul><ul><li>Net Income / Average Number of Common Shares Outstanding </li></ul><ul><li>Price / Earnings (P/E) Ratio </li></ul><ul><li>Market Price per Share / Earnings per Share </li></ul><ul><li>Dividend Yield Ratio </li></ul><ul><li>Dividends per Share / Market Price per Share </li></ul><ul><li>Stock Price Return </li></ul><ul><li>{Market Price (1) – Market Price (0) + Dividends} / Market Price (0) </li></ul>
  16. 16. Some Ratios for Well-Known Companies 0.62 1.48 (0.01) 0.05 2.13 0.90 1.73 Price/Earnings ratio 1.61 4.56 (2.20) 1.03 0.66 1.42 1.57 Earnings per share 0.54 0.06 1.05 2.52 2.75 0.66 1.21 Asset Turnover N/A N/A 10.79 5.53 60.38 N/A 5.52 Inventory Turnover 6.40 0.10 N/A 72.79 10.75 10.66 8.34 Receivables Turnover 5.05 1.64 (7.51) 136.86 N/A N/A 9.13 Interest Coverage 0.49 0.24 1.37 1.75 1.48 2.32 1.04 Current Ratio 2.19 13.83 7.70 1.45 2.41 1.32 3.85 Capital Structure Leverage 0.77 0.39 1.13 0.99 1.00 1.00 0.89 Common Equity Leverage 0.07 0.54 (0.39) 0.06 0.07 0.39 0.12 Profit Margin 0.04 0.03 (0.41) 0.15 0.20 0.26 0.14 Return on Assets 0.07 0.17 (3.56) 0.22 0.49 0.34 0.48 Return on Equity AT&T Bank of America Amazon Home Depot Dell Microsoft Colgate Palmolive
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×