Chapter 5  Financial Analysis
Drivers of Firm’s Profitability and Growth (Figure 5-1) Growth and Profitability Product  Market Strategies Financial Mark...
Measuring Overall Profitability <ul><li>Return on Equity </li></ul><ul><ul><li>ROE = Net Income / Shareholder’s Equity </l...
Decomposing Profitability <ul><li>ROE = ROA  x  Financial Leverage </li></ul><ul><ul><ul><ul><li>= [Net Income / Assets] x...
Further Decomposition <ul><li>ROA = Profit Margin x Asset Turnover </li></ul><ul><li>Thus, </li></ul><ul><li>ROE = Profit ...
Assessing Operating Management Growth and Profitability Product  Market Strategies Financial Market Policies Operating  Ma...
Profit Margins <ul><li>Examples: </li></ul><ul><ul><li>Gross Margin = Gross Profit  /  Sales </li></ul></ul><ul><ul><li>Pr...
Evaluating Investment Management Growth and Profitability Product  Market Strategies Financial Market Policies Operating  ...
Working Capital <ul><li>Examples:  </li></ul><ul><ul><li>A/R Turnover </li></ul></ul><ul><ul><li>Inventory Turnover </li><...
Long-Term Assets Management <ul><li>Net L/T Assets is defined: </li></ul><ul><li>PPE </li></ul><ul><li>Intangibles </li></...
Efficiency of Long-term Assets <ul><li>Net L/T Asset Turnover: </li></ul><ul><ul><li>= Sales / Net Long-term Assets </li><...
Evaluating Financial Management Growth and Profitability Product  Market Strategies Financial Market Policies Operating  M...
Short-term Liquidity <ul><li>Examples: </li></ul><ul><ul><li>Current Ratio </li></ul></ul><ul><ul><li>Quick Ratio (Acid-te...
Debt and Long-term Solvency <ul><li>Examples: </li></ul><ul><ul><li>Liabilities-to-Equity Ratio </li></ul></ul><ul><ul><li...
Sustainable Growth Rate <ul><li>Calculation: </li></ul><ul><ul><li>SGR = ROE x ( 1 – Dividend Payout Ratio) </li></ul></ul...
Internal Growth Rate <ul><li>Calculation </li></ul><ul><li>Rate of growth attainable without any external financing. </li>...
Cash Flow Analysis <ul><li>Analyzing the Statement of Cash Flow </li></ul><ul><li>Organized (generally) as follows: </li><...
Upcoming SlideShare
Loading in …5
×

Chapter 5

584 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
584
On SlideShare
0
From Embeds
0
Number of Embeds
7
Actions
Shares
0
Downloads
16
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Chapter 5

  1. 1. Chapter 5 Financial Analysis
  2. 2. Drivers of Firm’s Profitability and Growth (Figure 5-1) Growth and Profitability Product Market Strategies Financial Market Policies Operating Management Investment Management Managing Rev And Expenses Managing Working Capital and PPE Financing Decisions Dividend Policy Managing Payout Managing Liab And Equity
  3. 3. Measuring Overall Profitability <ul><li>Return on Equity </li></ul><ul><ul><li>ROE = Net Income / Shareholder’s Equity </li></ul></ul><ul><li>Related to EPS. </li></ul>
  4. 4. Decomposing Profitability <ul><li>ROE = ROA x Financial Leverage </li></ul><ul><ul><ul><ul><li>= [Net Income / Assets] x [Assets / Equity] </li></ul></ul></ul></ul><ul><li>ROA – measure of returns on investments. </li></ul><ul><li>FL – measure of how the assets were financed. </li></ul>
  5. 5. Further Decomposition <ul><li>ROA = Profit Margin x Asset Turnover </li></ul><ul><li>Thus, </li></ul><ul><li>ROE = Profit Margin x Asset Turnover x Financial Leverage </li></ul>
  6. 6. Assessing Operating Management Growth and Profitability Product Market Strategies Financial Market Policies Operating Management Investment Management Managing Rev And Expenses Managing Working Capital and PPE Financing Decisions Dividend Policy Managing Payout Managing Liab And Equity
  7. 7. Profit Margins <ul><li>Examples: </li></ul><ul><ul><li>Gross Margin = Gross Profit / Sales </li></ul></ul><ul><ul><li>Profit Margin = Net Income / Sales </li></ul></ul>
  8. 8. Evaluating Investment Management Growth and Profitability Product Market Strategies Financial Market Policies Operating Management Investment Management Managing Rev And Expenses Managing Working Capital and PPE Financing Decisions Dividend Policy Managing Payout Managing Liab And Equity
  9. 9. Working Capital <ul><li>Examples: </li></ul><ul><ul><li>A/R Turnover </li></ul></ul><ul><ul><li>Inventory Turnover </li></ul></ul><ul><ul><li>A/P Turnover </li></ul></ul>
  10. 10. Long-Term Assets Management <ul><li>Net L/T Assets is defined: </li></ul><ul><li>PPE </li></ul><ul><li>Intangibles </li></ul><ul><li>Other Assets </li></ul><ul><li>(Cost Recovery) </li></ul><ul><li>(Non Interest-bearing L/T Liab) </li></ul><ul><li>------------------------------------- </li></ul><ul><li>Net L/T Assets </li></ul><ul><li>===================== </li></ul>
  11. 11. Efficiency of Long-term Assets <ul><li>Net L/T Asset Turnover: </li></ul><ul><ul><li>= Sales / Net Long-term Assets </li></ul></ul><ul><li>PPE Turnover: </li></ul><ul><ul><li>= Sales / Net PPE </li></ul></ul>
  12. 12. Evaluating Financial Management Growth and Profitability Product Market Strategies Financial Market Policies Operating Management Investment Management Managing Rev And Expenses Managing Working Capital and PPE Financing Decisions Dividend Policy Managing Payout Managing Liab And Equity
  13. 13. Short-term Liquidity <ul><li>Examples: </li></ul><ul><ul><li>Current Ratio </li></ul></ul><ul><ul><li>Quick Ratio (Acid-test Ratio) </li></ul></ul><ul><ul><li>Cash Ratio </li></ul></ul>
  14. 14. Debt and Long-term Solvency <ul><li>Examples: </li></ul><ul><ul><li>Liabilities-to-Equity Ratio </li></ul></ul><ul><ul><li>Debt-to-Equity Ratio </li></ul></ul>
  15. 15. Sustainable Growth Rate <ul><li>Calculation: </li></ul><ul><ul><li>SGR = ROE x ( 1 – Dividend Payout Ratio) </li></ul></ul><ul><ul><li>where </li></ul></ul><ul><ul><li>DPR = Cash Dividends Paid / Net Income </li></ul></ul><ul><li>Rate of growth attainable without changing financial ratios or issuing new shares. </li></ul>
  16. 16. Internal Growth Rate <ul><li>Calculation </li></ul><ul><li>Rate of growth attainable without any external financing. </li></ul>
  17. 17. Cash Flow Analysis <ul><li>Analyzing the Statement of Cash Flow </li></ul><ul><li>Organized (generally) as follows: </li></ul><ul><ul><li>Operating Activities </li></ul></ul><ul><ul><li>Investing Activities </li></ul></ul><ul><ul><li>Financing Activities </li></ul></ul><ul><ul><li>Cash Beginning of Year </li></ul></ul><ul><ul><li>------------------------------- </li></ul></ul><ul><ul><li>Cash End of Year </li></ul></ul><ul><ul><li>================== </li></ul></ul><ul><li>Example on Page 5-32. </li></ul>

×