A Practical Approach to Financial Statement Analysis


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A Practical Approach to Financial Statement Analysis

  1. 1. A Practical Approach to Financial Statement Analysis* presented to CMA Business Credit Services Western Region Credit Conference October 6, 2006 presented by Kathleen Tomlin, CCE Central Concrete Supply Co., Inc. & Central Precast Concrete US Concrete Companies *Pocket protector and eyeshade not included
  2. 2. Where do I start? <ul><li>Definitions </li></ul><ul><ul><li>Accounting Lingo </li></ul></ul><ul><ul><li>Concepts </li></ul></ul><ul><li>Types of Statements </li></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Funds Flow </li></ul></ul><ul><li>What do they mean? </li></ul><ul><ul><li>Ratios </li></ul></ul><ul><ul><li>Analysis </li></ul></ul>
  3. 3. Definitions <ul><li>What is Accounting? </li></ul><ul><li>FASB </li></ul><ul><li>GAAP </li></ul><ul><li>SEC </li></ul><ul><li>10-K </li></ul><ul><li>10-Q </li></ul><ul><li>Auditor </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Accruals </li></ul><ul><li>Depreciation </li></ul><ul><li>LIFO/FIFO </li></ul>
  4. 4. Accounting Watchdogs <ul><li>FASB – Financial Accounting Standards Board </li></ul><ul><li>SEC–Securities & Exchange Commission </li></ul><ul><li>Auditors </li></ul><ul><li>Sarbanes-Oxley </li></ul><ul><li>GAAP-Generally Accepted </li></ul><ul><li>Accounting Principles </li></ul>
  5. 5. Types of Financial Statements <ul><li>Annual Statements </li></ul><ul><li>Interim Statements </li></ul><ul><li>Estimated Statements </li></ul><ul><li>Consolidated </li></ul><ul><li>Combined </li></ul><ul><li>ProForma “Forecast” </li></ul>
  6. 6. Balance Sheet <ul><li>Assets = Liabilities & Shareholders’ Equity </li></ul><ul><li>A snapshot at a </li></ul><ul><li>point in time </li></ul>
  7. 7. Assets <ul><li>Current Assets </li></ul><ul><ul><li>Cash </li></ul></ul><ul><ul><li>Marketable Securities </li></ul></ul><ul><ul><li>Accounts Receivable </li></ul></ul><ul><ul><li>Notes Receivable </li></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><ul><li>Prepaid Expenses </li></ul></ul>
  8. 8. Other A ss ets <ul><li>Fixed Assets (Net of Depreciation) </li></ul><ul><li>Leases </li></ul><ul><li>Investment and Advances to Subsidiaries </li></ul><ul><li>Miscellaneous Assets </li></ul><ul><li>Intangibles </li></ul>
  9. 9. Liabilities <ul><li>Current Liabilities </li></ul><ul><ul><li>Accounts Payable </li></ul></ul><ul><ul><li>Notes Payable </li></ul></ul><ul><ul><li>Advance Payments </li></ul></ul><ul><ul><li>Wages, Taxes and Accruals </li></ul></ul><ul><ul><li>Miscellaneous Obligations </li></ul></ul><ul><li>Other Liabilities </li></ul><ul><ul><li>Long Term Debt </li></ul></ul><ul><ul><li>Deferred Income </li></ul></ul>
  10. 10. Net Worth <ul><li>Unincorporated: Capital </li></ul><ul><li>Corporations </li></ul><ul><ul><li>Preferred Stock </li></ul></ul><ul><ul><li>Common Stock </li></ul></ul><ul><ul><li>Paid-in Capital </li></ul></ul><ul><ul><li>Retained Earnings </li></ul></ul>
  11. 11. Accruals <ul><li>Matching of revenues and expenses to a particular accounting period </li></ul><ul><ul><li>Regardless of when revenue is collected or when expenses are paid!! </li></ul></ul>
  12. 12. Depreciation <ul><li>Allocating the cost of an asset over the estimated life of the asset… </li></ul><ul><li>Life of over one year </li></ul><ul><li>Accounted for as an expense </li></ul><ul><li>No cash outlay! </li></ul>
  13. 13. Income Statement <ul><li>Sales </li></ul><ul><li>- Cost of Goods Sold </li></ul><ul><ul><li>= Gross Profit </li></ul></ul><ul><li>- Expenses </li></ul><ul><ul><li>= Net Operating Income </li></ul></ul><ul><li>- Other Income & Expenses </li></ul><ul><li>- Extraordinary Items </li></ul><ul><li>- Federal Income Taxes </li></ul><ul><ul><li>= Net Income </li></ul></ul><ul><ul><li>Retained Earnings </li></ul></ul>
  14. 14. Statement of Cash Flows <ul><li>Cash inflow and outflow </li></ul><ul><ul><li>By operating activities </li></ul></ul><ul><ul><li>By investing activities </li></ul></ul><ul><ul><li>By financing activities </li></ul></ul><ul><li>Shows changes over time </li></ul>
  15. 15. Operating Activities <ul><li>Inflows </li></ul><ul><ul><li>Revenue from sales, services </li></ul></ul><ul><ul><li>Interest & dividends </li></ul></ul><ul><li>Outflows </li></ul><ul><ul><li>Payments for inventory </li></ul></ul><ul><ul><li>Operating expenses & purchases </li></ul></ul><ul><ul><li>Interest payments </li></ul></ul><ul><ul><li>Taxes </li></ul></ul>
  16. 16. Investing Activities <ul><li>Inflows </li></ul><ul><ul><li>Sales of long-term assets (PP&E) </li></ul></ul><ul><ul><li>Sales of debt or securities </li></ul></ul><ul><ul><li>Returns from loans (to others) </li></ul></ul><ul><li>Outflows </li></ul><ul><ul><li>Acquisition of long-term assets </li></ul></ul><ul><ul><li>Purchases of debt or securities </li></ul></ul><ul><ul><li>Loans made (to others) </li></ul></ul>
  17. 17. Financing Activities <ul><li>Inflows </li></ul><ul><ul><li>From borrowing </li></ul></ul><ul><ul><li>From issuance of equity </li></ul></ul><ul><li>Outflows </li></ul><ul><ul><li>Payment of debt (principal) </li></ul></ul><ul><ul><li>Repurchase of shares </li></ul></ul><ul><ul><li>Payment of dividends </li></ul></ul>
  18. 18. Trend Analysis <ul><li>Helps determine the trend of operations </li></ul><ul><li>Compare current financials with prior periods (2 or more) </li></ul><ul><li>Compare statements of like dates (year to year, quarter to quarter) to eliminate seasonal variations </li></ul>
  19. 19. Trend Analysis (cont) <ul><li>Same accounting techniques should be used by firm (LIFO vs FIFO, Accrual vs. Cash, etc.) </li></ul><ul><li>Comparisons between changes in percentages from period to period </li></ul><ul><li>Comparison between changes in ratios from period to period </li></ul>
  20. 20. What are creditors looking for??? <ul><li>Short-term Creditors </li></ul><ul><ul><li>Current Assets </li></ul></ul><ul><ul><li>Long-Term Creditors </li></ul></ul><ul><ul><li>Profitability & Return on Investment </li></ul></ul>
  21. 21. Types of Ratios <ul><li>Liquidity </li></ul><ul><ul><li>Measures the firm’s ability to meet its short-term obligations </li></ul></ul><ul><ul><ul><li>Current Current Assets/Current Liabilities </li></ul></ul></ul><ul><ul><ul><li>Quick Or Acid Current Assets-Inventory </li></ul></ul></ul><ul><ul><ul><li>Current Liabilities </li></ul></ul></ul>
  22. 22. Types of Ratios-Leverage <ul><li>Measures the extent to which the firm has been financed by debt. </li></ul><ul><li>Debt to Total Assets </li></ul><ul><li>Times Interest Earned (Earnings before </li></ul><ul><li>Taxes/Interest Charges) </li></ul><ul><li>Current Liabilities to Net Worth </li></ul>
  23. 23. Types of Ratios-Activity <ul><li>Measures how effectively the firm has been using its resources. </li></ul><ul><li>Inventory Turnover (Sales/Inventory) </li></ul><ul><li>Avg Collection Period (Receivables/Sales per Day) </li></ul>
  24. 24. Types of Ratios-Profitability <ul><li>Measures management’s overall effectiveness as shown by the returns generated on sales and investment. </li></ul><ul><li>Profit Margin on Sales (Net Income/Sales) </li></ul><ul><li>Return on Total Assets (Net Income/Total Assets) </li></ul><ul><li>Return on Net Worth (Net Income/Net Worth) </li></ul>
  25. 25. You can get the answers! <ul><li>Your personal network </li></ul><ul><li>Anscers.com </li></ul><ul><li>Community Bulletin Board </li></ul><ul><li>Encyclopedia of Credit </li></ul>
  26. 26. With just a little work…