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Chap07

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  • 1. Fundamentals of Investments 7 C h a p t e r Earnings and Cash Flow Analysis second edition Valuation & Management Charles J. Corrado Bradford D. Jordan McGraw Hill / Irwin Slides by Yee-Tien (Ted) Fu
  • 2. Cash Flow is a Company’s Lifeblood.
  • 3. Earnings and Cash Flow Analysis
    • Our goal in this chapter is to acquaint you with the financial accounting concepts necessary to understand basic financial statements and perform earnings and cash flow analysis using these financial statements.
    Goal
  • 4. Sources of Financial Information
    • Company annual reports
    • Internet
      • The New York Stock Exchange at http://www. nyse .com
    • Securities and Exchange Commission (SEC)
      • Electronic Data gathering and Retrieval (EDGAR) archives (including 10Ks and 10Qs) accessible through the Internet ( http://www.sec. gov )
  • 5. Sources of Financial Information
    • SEC Regulation FD ( Fair Disclosure ) requires companies making a public disclosure of material nonpublic information to do so fairly without preferential recipients.
      • Most companies satisfy Regulation FD by distributing important announcements via e-mail alerts to those who register for the service.
  • 6. Financial Statements Balance sheet Accounting statement that provides a snapshot view of a company’s assets and liabilities on a particular date. Income statement Summary statement of a firm’s revenues and expenses over a specific accounting period, usually a quarter or a year.
  • 7. Financial Statements Cash flow statement Analysis of a firm’s sources and uses of cash over the accounting period, summarizing operating, investing, and financing cash flows.
  • 8. Work the Web
    • Look at the Investing Basics section at:
      • http://www. thestreet .com
  • 9. The Balance Sheet
    • Asset - Anything a company owns that has value.
    • Liability - A firm’s financial obligation.
    • Equity - An ownership interest in the company.
    • Fundamental accounting identity:
      • Assets = Liabilities + Equity
  • 10. The Balance Sheet 7 - McGraw Hill / Irwin
  • 11. The Balance Sheet
  • 12. The Income Statement
    • Income - The difference between a company’s revenues and expenses, used to pay dividends to stockholders or kept as retained earnings within the company to finance future growth.
    • Net income = Revenues – Expenses
      • = Dividends + Retained earnings
  • 13. The Income Statement
  • 14. The Cash Flow Statement
    • Cash flow - Income realized in cash form, whether from operations, investments, or financing activities.
  • 15. The Cash Flow Statement
  • 16. Performance Ratios and Price Ratios
    • Gross margin = Gross profit
      • Net sales
    • Operating margin = Operating income
      • Net sales
    • Return on assets (ROA) = Net income
      • Total assets
    • Return on equity (ROE) = Net income .
      • Stockholder equity
  • 17. Performance Ratios and Price Ratios
    • Book value = Stockholder equity
      • per share (BVPS) Shares outstanding
    • Earnings = Net income .
      • per share (EPS) Shares outstanding
    • Cash flow = Operating cash flow
      • per share (CFPS) Shares outstanding
  • 18. Performance Ratios and Price Ratios
    • Price-book (P/B) = Stock price
      • BVPS
    • Price-earnings (P/E) = Stock price
      • EPS
    • Price-cash flow (P/CF) = Stock price
      • CFPS
  • 19. Work the Web
    • Check out the security analysis sections at:
      • http://www. uoutperform .com
  • 20. Financial Statement Forecasting Pro forma financial statements Statements prepared using certain assumptions about future income, cash flow, and other items. Pro forma literally means according to prescribed form.
  • 21. The Pro Forma Income Statement
  • 22. The Pro Forma Cash Flow Statement
  • 23. The Pro Forma Balance Sheet 7 -
  • 24. Projected Profitability and Price Ratios Borg Corporation Original Optimistic Pessimistic Gross margin 22.22% 25% 20% Operating margin 7.78% 10.83% 3% ROA 3.64% 7.70% .77% ROE 7.29% 14.43% 1.54% BVPS $25 $28.63 $24.88 EPS $1.82 $4.13 $.38 CFPS $3.32 $3.98 $.48
  • 25. Projected Profitability and Price Ratios Borg Corporation Projected Stock Prices Optimistic Pessimistic BVPS  P/B $45.81 $39.81 EPS  P/E $90.86 $8.36 CFPS  P/CF $47.76 $5.76
  • 26. Work the Web
    • Visit the Education Center at:
      • http://www. investorsuniverse .com
  • 27. Adolph Coors Company Case Study
  • 28. Adolph Coors Company Case Study
  • 29. Adolph Coors Company Case Study 7 -
  • 30. Adolph Coors Company Case Study
  • 31. Adolph Coors Company Case Study
  • 32. Adolph Coors Company Case Study 7 -
  • 33. Adolph Coors Company Case Study Original + 10% – 10% Gross margin 40.88% 40.88% 40.88% Operating margin 6.90% 9.99% 3.13% ROA 5.97% 8.44% 2.95% ROE 10.97% 14.95% 4.75% BVPS $22.91 $26.18 $23.38 EPS $2.51 $3.91 $1.11 CFPS $4.62 $6.27 $3.47
  • 34. Adolph Coors Company Case Study Projected Stock Prices + 10% – 10% BVPS  P/B $58.27 $52.03 EPS  P/E $79.46 $22.54 CFPS  P/CF $69.19 $38.26
  • 35. Chapter Review
    • Sources of Financial Information
    • Financial Statements
      • The Balance Sheet
      • The Income Statement
      • The Cash Flow Statement
      • Performance Ratios and Price Ratios
  • 36. Chapter Review
    • Financial Statement Forecasting
      • The Pro Forma Income Statement
      • The Pro Forma Cash Flow Statement
      • The Pro Forma Balance Sheet
      • Projected Profitability and Price Ratios
    • Adolph Coors Company Case Study

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