Financial Statement Analysis F F MPresentation Transcript
FINANCE FOR MANAGERS
COURSE LECTURER ShumailaParacha Assistant Professor Course Code: 0387 MBA Program Academic Year Fall 2010
Financial Statement Analysis A thorough financial statement analysis include: Ratio Analysis Trend Analysis Common Size Analysis Percent Change Analysis Du Pont Analysis
TREND ANALYSIS Trend analysis is about plotting ratio over time. Trends give clues as to whether a firms financial condition is likely to improve or to deteriorate.
TREND ANALYSIS This graph shows that MicroDrive’s ROE has been declining since 1998, even though the industry average has been relatively stable. All the other ratios can be analyzed similarly. ROE (%) Rate of Return on Equity 1997-2001
Common Size Analysis Common Size analysis is used to identify trends in financial statements. Common size is also useful in comparative analysis. In common size analysis all income statement items are divided by sales ( common size income statement shows each item as % of sales) and all balance sheet items are divided by total assets (common size balance shows each item as a % of total assets).
Common Size Analysis The advantage of common size analysis is : It facilitates comparisons of balance sheets and income statements over time and across companies.
Percent Change Analysis Percent Change analysis is also used to identify trends in financial statements. In this type of analysis, growth rates are calculated for all income statement items and balance sheet accounts.
Du Pont Analysis The profit margin times the total asset turnover is called Du Pont equation and it gives rate of return on assets. ROA= Profit margin X Total asset turnover = (Net income/Sales) X (Sales/Total assets) If the company is financed only with common equity, the ROA and ROE would be same because total assets equal total equity.
Du Pont Analysis However if a company use debt than ROE must be greater than ROA. Specifically the ROA can be multiplied by the equity multiplier. Equity Multiplier (EM) = total assets / equity Firms that use large amounts of debt financing (more leverage) will have a high EM-the more the debt the less the equity, hence the higher the EM.
Du Pont Analysis ROE depends on its ROA and its use of leverage ROE = ROA x EM ROE = (net income/total assets) x (total assets/equity) So the extended Du Pont Equation is: ROE = (Profit Margin)(Total Assets t/o)(EM)
Comparative ratios and Benchmarking Ratio analysis involves comparisons – a company’s ratios are compared with those of other firms in the same industry, that is to industry average figures. However some firms go a step further – they also compare their ratios with those of a smaller set of leading companies in that industry. This technique is called Benchmarking. The bench marking setup makes it easier for company’s to see exactly where the company stands relative to its competition.
Follow up Task! Read chapter – 3 “Analysis of financial Statements” from Book : Fundamentals of Financial Management (Brigham)Ed-10 or Ch-4 in Ed 11. Read lecture slides. Hear audio recording of lecture. Solve the relevant questions at the end of chapter. You can access lecture slides and audio recording from file server. Written quiz from lec-1 till end of this lecture in the following class