Financial analysis is a process of selecting, evaluating, and interpreting financial data, along with other pertinent information, in order to formulate an assessment of a company’s present and future financial condition and performance.
This document discusses investment appraisal techniques used to evaluate business investments. It introduces quantitative methods like payback period, average rate of return, and net present value to calculate the financial feasibility of projects. It also notes qualitative factors considered like risk, market environment, and management experience. The goal is to understand investment and recognize the importance of appraisal in informing capital expenditure decisions.
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
This document discusses various methods used for investment appraisal to assess whether investment projects are worthwhile. It describes payback period, accounting rate of return, internal rate of return, profitability index, and net present value. Net present value discounts future cash flows to account for the time value of money and allows comparison of projects. Internal rate of return identifies the discount rate that results in a net present value of zero. Investment appraisal helps firms evaluate projects and potential returns to determine which investments to make.
Organisational Performance Measures. This is only for study purpose, The content is refereed from various available sources. Through this, the learner, decision makers are may got benefited.
The document discusses the estimation of cash flows for capital budgeting and expenditure decisions. It defines capital expenditures as long-term investments like purchasing assets that generate cash flows beyond one year. It also discusses the importance of accurately estimating cash flows, the difficulties involved, and the key principles and components to consider when estimating cash flows for capital projects.
Financial Ratio Analysis of Samsung for the year 2013-2014Prinson Rodrigues
Financial Ratio Analysis of Samsung For the year 2013-2014
Current ratio
Quick ratio
Debt equity ratio
Capital turnover ratio
Fixed Assets Turnover ratio
Working capital turnover ratio
Stock turnover ratio
inventory conversion period
Debtors turnover ratio
Gross profit ratio
net profit ratio
etc
The bank manager met with the MD of HICL, a six-year-old consumer company going through rapid expansion. HICL is seeking medium-term financing of $1.2 million to consolidate operations across three locations into a new single office. The bank analyzed HICL's financial ratios and statements over several years, forecasted projections, and proposed a $1.25 million loan at 10% interest over 5 years, subject to certain conditions.
This document provides an overview of capital budgeting and cash flow analysis for investment projects. It defines key terms like capital expenditures, sunk costs, opportunity costs, and discusses how to estimate cash flows, including operating, terminal, and tax cash flows. It emphasizes the importance of using relevant cash flows to evaluate whether projects increase shareholder wealth.
This document discusses investment appraisal techniques used to evaluate business investments. It introduces quantitative methods like payback period, average rate of return, and net present value to calculate the financial feasibility of projects. It also notes qualitative factors considered like risk, market environment, and management experience. The goal is to understand investment and recognize the importance of appraisal in informing capital expenditure decisions.
Investment appraisal and company valuation methods for beginners.
Concepts such as time value of money, simple interest, compound interest, CARG, cash-flows, WACC, inflation, discounting and capitalizing cash-flows are covered; in order to analyse and determine the economic feasibility of a project and what is the intrinsic or fair value of a company introducing discounted cash-flow techniques and multiples valuation
This document discusses various methods used for investment appraisal to assess whether investment projects are worthwhile. It describes payback period, accounting rate of return, internal rate of return, profitability index, and net present value. Net present value discounts future cash flows to account for the time value of money and allows comparison of projects. Internal rate of return identifies the discount rate that results in a net present value of zero. Investment appraisal helps firms evaluate projects and potential returns to determine which investments to make.
Organisational Performance Measures. This is only for study purpose, The content is refereed from various available sources. Through this, the learner, decision makers are may got benefited.
The document discusses the estimation of cash flows for capital budgeting and expenditure decisions. It defines capital expenditures as long-term investments like purchasing assets that generate cash flows beyond one year. It also discusses the importance of accurately estimating cash flows, the difficulties involved, and the key principles and components to consider when estimating cash flows for capital projects.
Financial Ratio Analysis of Samsung for the year 2013-2014Prinson Rodrigues
Financial Ratio Analysis of Samsung For the year 2013-2014
Current ratio
Quick ratio
Debt equity ratio
Capital turnover ratio
Fixed Assets Turnover ratio
Working capital turnover ratio
Stock turnover ratio
inventory conversion period
Debtors turnover ratio
Gross profit ratio
net profit ratio
etc
The bank manager met with the MD of HICL, a six-year-old consumer company going through rapid expansion. HICL is seeking medium-term financing of $1.2 million to consolidate operations across three locations into a new single office. The bank analyzed HICL's financial ratios and statements over several years, forecasted projections, and proposed a $1.25 million loan at 10% interest over 5 years, subject to certain conditions.
This document provides an overview of capital budgeting and cash flow analysis for investment projects. It defines key terms like capital expenditures, sunk costs, opportunity costs, and discusses how to estimate cash flows, including operating, terminal, and tax cash flows. It emphasizes the importance of using relevant cash flows to evaluate whether projects increase shareholder wealth.
This document provides an overview of Southwest Airlines' business operations and financial performance. Some key points:
- Southwest operates a fleet of 694 planes, employs 46,000 people, and serves 97 destinations in the US and nearby international markets.
- It has adopted a low-cost business model and focuses on point-to-point routes rather than hubs. The acquisition of AirTran introduced some international flights and services at major airports.
- Major competitors include American, Delta, United, and JetBlue. Southwest saw revenue of $17 billion in 2012 and carried over 134 million passengers as the fourth largest US airline.
- Financial ratios show solid current ratio and times interest earned. Projections estimate 9
1) The document discusses various methods and considerations for capital investment and budgeting decisions, including determining relevant cash flows, accounting for inflation, and different approaches to calculating operating cash flow.
2) It emphasizes that capital budgeting decisions should be based on incremental after-tax cash flows rather than accounting profits and highlights factors like sunk costs, opportunity costs, and side effects.
3) The document provides a detailed example of a capital budgeting analysis for a company considering investing in a new machine and outlines the calculation of cash flows and net present value.
4) It addresses special considerations like how to incorporate inflation, evaluate projects of unequal lengths, and use
The document provides an overview of financial statement and ratio analysis. It discusses the objectives of ratio analysis which include standardizing financial information, evaluating current operations, and comparing performance. It then examines various types of ratios that can be analyzed including liquidity, investment/shareholders, gearing, profitability, and financial ratios. Specific ratios are defined under each category such as current ratio, quick ratio, debt-to-equity ratio, gross profit margin, return on capital employed, asset turnover, and stock turnover. The document emphasizes that multiple ratios should be analyzed over several years for accurate assessment of a firm's financial condition.
| Capital Budgeting | CB | Payback Period | PBP | Accounting Rate of Return |...Ahmad Hassan
After studying this, you should be able to:
• Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
• Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and accounting rate of return (ARR).
• Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. l Define, construct, and interpret a graph called an “NPV profile.”
• Understand why ranking project proposals on the basis of the IRR, NPV, and ARR methods “may” lead to conflicts in rankings.
• Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or ARR rankings.
• Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
• Explain the role and process of project monitoring, including “progress reviews” and “postcompletion audits.”
This document discusses various types of financial statement analysis including trend analysis, comparative statements, common size statements, and ratio analysis. It provides templates for comparative balance sheets and income statements showing calculations of amount and percentage changes between periods. It also includes templates for common size statements showing items as a percentage of total capital employed or net sales. Financial statement analysis is used to measure profitability, growth, financial strength, and solvency by analyzing relationships and trends over time from financial statements.
The document discusses various topics related to investment decisions and capital budgeting. It defines capital expenditures and discusses factors like cost of acquisition, addition/expansion costs, and R&D costs. It also summarizes various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Key evaluation criteria for investment decisions include NPV, IRR, and reconsider assumptions. The document also highlights potential conflicts between NPV and IRR methods.
1) The study examines the relationship between Economic Value Added (EVA) and share price for 10 companies listed on the BSE SENSEX index over an 8-year period from 2005 to 2012.
2) Regression analysis found that EVA had a negative or insignificant impact on share price, while earnings per share had the strongest influence.
3) It was concluded that EVA does not significantly influence share price for these companies, and that earnings per share is a more important determinant of share price movements.
Company X provides a document outlining key concepts in value based management including metrics like NOPAT, FCF, ROIC, WACC, and EVA. It discusses these concepts over 3 pages and provides examples of calculations for Company X in 2014-2016. Key metrics like ROIC increased substantially from 20.39% in 2014 to 60.31% in 2016 while WACC also increased from 15.19% to 24.35% over this period, leading to an expanding ROIC-WACC spread and indicating improved value creation.
The document discusses various capital budgeting techniques for evaluating investment projects. It outlines steps for estimating cash flows, including determining net cash outflows, annual cash flows, and final year cash flows. It then explains several evaluation techniques like average rate of return, payback period, discounted payback period, net present value, internal rate of return, and profitability index. The techniques consider factors like time value of money, risk, and whether the technique is consistent with maximizing shareholder wealth. NPV is highlighted as the preferred technique, though others provide supplementary insights into risk, costs, and returns.
The document discusses capital expenditures and tools for evaluating long-term investment decisions. It provides examples of how Netflix and AT&T used net present value (NPV) and internal rate of return (IRR) analyses to evaluate expanding their facilities. Both alternatives provided positive cash flows but expanding at the current facility was less capital intensive and avoided travel costs and time loss. The document also summarizes how Disney Cruise Line used NPV and IRR models to determine a new Mediterranean itinerary would have a 67% IRR and $6.4M NPV, leading them to approve the new route.
This document discusses capital budgeting and various capital budgeting techniques. It begins with an overview of capital budgeting decisions and examples. It then covers traditional capital budgeting methods like payback period and accounting rate of return. Finally, it discusses modern capital budgeting methods like net present value, internal rate of return, and profitability index. The document provides examples and explanations of each technique.
The document discusses various financial ratios used to analyze the financial performance of Atlas Honda, including liquidity, activity, debt, profitability, and market ratios. Many of Atlas Honda's ratios have improved over the past five years, such as current ratio, inventory turnover, asset turnover, times interest earned, net profit margin, return on assets, and return on equity. However, some ratios like quick ratio and debt ratio were still below target levels. Overall, the analysis indicates that Atlas Honda has generally strengthened its financial position in recent years through better working capital management and an increased focus on reducing debt.
This document discusses various financial ratios that can be used to analyze the financial performance and health of a company. It provides definitions and formulas for key liquidity ratios like current ratio and quick ratio, leverage ratios like debt-equity ratio, activity ratios like inventory turnover ratio and average collection period, and profitability ratios like gross profit margin ratio. Specific calculations are shown for a company to illustrate how to compute various ratios from the company's financial statements. The document emphasizes the importance of ratio analysis for evaluating a company's performance over time and in comparison to other companies.
Economic Value Added (EVA) is a metric developed by Stern Stewart & Co. in 1982 to evaluate business strategies and maximize long-term shareholder wealth. EVA is defined as net operating profit after taxes (NOPAT) minus the cost of capital. To calculate EVA, a company determines its NOPAT, weighted average cost of capital (WACC), and capital employed to see if it is generating returns above its cost of capital and creating economic value. EVA aims to align managerial decisions with shareholder interests.
Economic Value Added (EVA) is a measure of a company's true profit by taking into account the cost of capital used to generate earnings. EVA is calculated as net operating profit after tax minus a charge for the cost of capital employed. Using EVA rather than earnings allows companies to focus on generating returns that exceed the minimum required by shareholders and create real economic profit and shareholder value over time. Determining a company's cost of capital, which includes its cost of debt and equity, is necessary for accurately calculating EVA.
https://play.google.com/store/apps/details?id=com.mobincube.dw_swot_ppt_finance
20 most important financial ratios with financial ratio formulas and ratio interpretation.
The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes traditional methods like payback period and accounting rate of return, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. These time-adjusted methods account for the time value of money and required rate of return when analyzing projects. The document also discusses factors that introduce risk and uncertainty into capital budgeting decisions.
Capital Budgeting - With Real World Examplessunil Kumar
Capital budgeting is the planning process used to determine whether an organizations long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects can be done using the firms capitalization structures (debt, equity or retained earnings) to bring profit as well as to increase the value of the firm to the shareholders.
* Machine cost: $102,700
* Annual net cash inflows:
Year 1: $21,600
Year 2: $28,200
Year 3: $31,600
Year 4: $38,200
Year 5: $42,000
* Cumulative cash inflows:
Year 1: $21,600
Year 2: $21,600 + $28,200 = $49,800
Year 3: $49,800 + $31,600 = $81,400
* Payback period = Cost of investment / Annual cash inflow
= $102,700 / $31,600 = 3.25 years
Therefore, the payback period is
This document discusses various financial ratios used to analyze a company's financial statements. It defines key ratios such as current ratio, quick ratio, debt ratio, return on assets, gross profit margin, and dividend payout ratio. It explains how these ratios are calculated using figures from the income statement, balance sheet, and statement of cash flows. The ratios allow comparisons of a company's performance over time and against other companies to evaluate liquidity, profitability, leverage, and dividend policies.
This slides tackles about the Financial statement of the organisation and the needs to analysing it. It is very important especially that the company needs to make a sound judgment and decision to the operation of the company.
This document discusses working capital management. It covers:
- The goals of working capital management are adequate cash flow and productive use of resources. Internal and external factors affect working capital needs.
- Liquidity management requires addressing factors that delay cash collection or result in early cash payments. Primary sources of liquidity are cash balances, short-term financing, and cash flow management. Secondary sources include renegotiating debt or selling assets.
- Operating and cash conversion cycles measure how long it takes for inventory investment to generate cash. Longer cycles require more liquidity. Ratios are used to evaluate accounts receivable and inventory management.
This document provides an overview of Southwest Airlines' business operations and financial performance. Some key points:
- Southwest operates a fleet of 694 planes, employs 46,000 people, and serves 97 destinations in the US and nearby international markets.
- It has adopted a low-cost business model and focuses on point-to-point routes rather than hubs. The acquisition of AirTran introduced some international flights and services at major airports.
- Major competitors include American, Delta, United, and JetBlue. Southwest saw revenue of $17 billion in 2012 and carried over 134 million passengers as the fourth largest US airline.
- Financial ratios show solid current ratio and times interest earned. Projections estimate 9
1) The document discusses various methods and considerations for capital investment and budgeting decisions, including determining relevant cash flows, accounting for inflation, and different approaches to calculating operating cash flow.
2) It emphasizes that capital budgeting decisions should be based on incremental after-tax cash flows rather than accounting profits and highlights factors like sunk costs, opportunity costs, and side effects.
3) The document provides a detailed example of a capital budgeting analysis for a company considering investing in a new machine and outlines the calculation of cash flows and net present value.
4) It addresses special considerations like how to incorporate inflation, evaluate projects of unequal lengths, and use
The document provides an overview of financial statement and ratio analysis. It discusses the objectives of ratio analysis which include standardizing financial information, evaluating current operations, and comparing performance. It then examines various types of ratios that can be analyzed including liquidity, investment/shareholders, gearing, profitability, and financial ratios. Specific ratios are defined under each category such as current ratio, quick ratio, debt-to-equity ratio, gross profit margin, return on capital employed, asset turnover, and stock turnover. The document emphasizes that multiple ratios should be analyzed over several years for accurate assessment of a firm's financial condition.
| Capital Budgeting | CB | Payback Period | PBP | Accounting Rate of Return |...Ahmad Hassan
After studying this, you should be able to:
• Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability.
• Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and accounting rate of return (ARR).
• Explain the calculation, acceptance criterion, and advantages (over the PBP method) for each of the three major DCF methods. l Define, construct, and interpret a graph called an “NPV profile.”
• Understand why ranking project proposals on the basis of the IRR, NPV, and ARR methods “may” lead to conflicts in rankings.
• Describe the situations where ranking projects may be necessary and justify when to use either IRR, NPV, or ARR rankings.
• Understand how “sensitivity analysis” allows us to challenge the single-point input estimates used in traditional capital budgeting analysis.
• Explain the role and process of project monitoring, including “progress reviews” and “postcompletion audits.”
This document discusses various types of financial statement analysis including trend analysis, comparative statements, common size statements, and ratio analysis. It provides templates for comparative balance sheets and income statements showing calculations of amount and percentage changes between periods. It also includes templates for common size statements showing items as a percentage of total capital employed or net sales. Financial statement analysis is used to measure profitability, growth, financial strength, and solvency by analyzing relationships and trends over time from financial statements.
The document discusses various topics related to investment decisions and capital budgeting. It defines capital expenditures and discusses factors like cost of acquisition, addition/expansion costs, and R&D costs. It also summarizes various capital budgeting techniques like payback period, accounting rate of return, net present value, internal rate of return, and profitability index. Key evaluation criteria for investment decisions include NPV, IRR, and reconsider assumptions. The document also highlights potential conflicts between NPV and IRR methods.
1) The study examines the relationship between Economic Value Added (EVA) and share price for 10 companies listed on the BSE SENSEX index over an 8-year period from 2005 to 2012.
2) Regression analysis found that EVA had a negative or insignificant impact on share price, while earnings per share had the strongest influence.
3) It was concluded that EVA does not significantly influence share price for these companies, and that earnings per share is a more important determinant of share price movements.
Company X provides a document outlining key concepts in value based management including metrics like NOPAT, FCF, ROIC, WACC, and EVA. It discusses these concepts over 3 pages and provides examples of calculations for Company X in 2014-2016. Key metrics like ROIC increased substantially from 20.39% in 2014 to 60.31% in 2016 while WACC also increased from 15.19% to 24.35% over this period, leading to an expanding ROIC-WACC spread and indicating improved value creation.
The document discusses various capital budgeting techniques for evaluating investment projects. It outlines steps for estimating cash flows, including determining net cash outflows, annual cash flows, and final year cash flows. It then explains several evaluation techniques like average rate of return, payback period, discounted payback period, net present value, internal rate of return, and profitability index. The techniques consider factors like time value of money, risk, and whether the technique is consistent with maximizing shareholder wealth. NPV is highlighted as the preferred technique, though others provide supplementary insights into risk, costs, and returns.
The document discusses capital expenditures and tools for evaluating long-term investment decisions. It provides examples of how Netflix and AT&T used net present value (NPV) and internal rate of return (IRR) analyses to evaluate expanding their facilities. Both alternatives provided positive cash flows but expanding at the current facility was less capital intensive and avoided travel costs and time loss. The document also summarizes how Disney Cruise Line used NPV and IRR models to determine a new Mediterranean itinerary would have a 67% IRR and $6.4M NPV, leading them to approve the new route.
This document discusses capital budgeting and various capital budgeting techniques. It begins with an overview of capital budgeting decisions and examples. It then covers traditional capital budgeting methods like payback period and accounting rate of return. Finally, it discusses modern capital budgeting methods like net present value, internal rate of return, and profitability index. The document provides examples and explanations of each technique.
The document discusses various financial ratios used to analyze the financial performance of Atlas Honda, including liquidity, activity, debt, profitability, and market ratios. Many of Atlas Honda's ratios have improved over the past five years, such as current ratio, inventory turnover, asset turnover, times interest earned, net profit margin, return on assets, and return on equity. However, some ratios like quick ratio and debt ratio were still below target levels. Overall, the analysis indicates that Atlas Honda has generally strengthened its financial position in recent years through better working capital management and an increased focus on reducing debt.
This document discusses various financial ratios that can be used to analyze the financial performance and health of a company. It provides definitions and formulas for key liquidity ratios like current ratio and quick ratio, leverage ratios like debt-equity ratio, activity ratios like inventory turnover ratio and average collection period, and profitability ratios like gross profit margin ratio. Specific calculations are shown for a company to illustrate how to compute various ratios from the company's financial statements. The document emphasizes the importance of ratio analysis for evaluating a company's performance over time and in comparison to other companies.
Economic Value Added (EVA) is a metric developed by Stern Stewart & Co. in 1982 to evaluate business strategies and maximize long-term shareholder wealth. EVA is defined as net operating profit after taxes (NOPAT) minus the cost of capital. To calculate EVA, a company determines its NOPAT, weighted average cost of capital (WACC), and capital employed to see if it is generating returns above its cost of capital and creating economic value. EVA aims to align managerial decisions with shareholder interests.
Economic Value Added (EVA) is a measure of a company's true profit by taking into account the cost of capital used to generate earnings. EVA is calculated as net operating profit after tax minus a charge for the cost of capital employed. Using EVA rather than earnings allows companies to focus on generating returns that exceed the minimum required by shareholders and create real economic profit and shareholder value over time. Determining a company's cost of capital, which includes its cost of debt and equity, is necessary for accurately calculating EVA.
https://play.google.com/store/apps/details?id=com.mobincube.dw_swot_ppt_finance
20 most important financial ratios with financial ratio formulas and ratio interpretation.
The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes traditional methods like payback period and accounting rate of return, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. These time-adjusted methods account for the time value of money and required rate of return when analyzing projects. The document also discusses factors that introduce risk and uncertainty into capital budgeting decisions.
Capital Budgeting - With Real World Examplessunil Kumar
Capital budgeting is the planning process used to determine whether an organizations long term investments such as new machinery, replacement of machinery, new plants, new products, and research development projects can be done using the firms capitalization structures (debt, equity or retained earnings) to bring profit as well as to increase the value of the firm to the shareholders.
* Machine cost: $102,700
* Annual net cash inflows:
Year 1: $21,600
Year 2: $28,200
Year 3: $31,600
Year 4: $38,200
Year 5: $42,000
* Cumulative cash inflows:
Year 1: $21,600
Year 2: $21,600 + $28,200 = $49,800
Year 3: $49,800 + $31,600 = $81,400
* Payback period = Cost of investment / Annual cash inflow
= $102,700 / $31,600 = 3.25 years
Therefore, the payback period is
This document discusses various financial ratios used to analyze a company's financial statements. It defines key ratios such as current ratio, quick ratio, debt ratio, return on assets, gross profit margin, and dividend payout ratio. It explains how these ratios are calculated using figures from the income statement, balance sheet, and statement of cash flows. The ratios allow comparisons of a company's performance over time and against other companies to evaluate liquidity, profitability, leverage, and dividend policies.
This slides tackles about the Financial statement of the organisation and the needs to analysing it. It is very important especially that the company needs to make a sound judgment and decision to the operation of the company.
This document discusses working capital management. It covers:
- The goals of working capital management are adequate cash flow and productive use of resources. Internal and external factors affect working capital needs.
- Liquidity management requires addressing factors that delay cash collection or result in early cash payments. Primary sources of liquidity are cash balances, short-term financing, and cash flow management. Secondary sources include renegotiating debt or selling assets.
- Operating and cash conversion cycles measure how long it takes for inventory investment to generate cash. Longer cycles require more liquidity. Ratios are used to evaluate accounts receivable and inventory management.
The document discusses working capital management. It covers internal and external factors that affect working capital needs, managing liquidity through liquidity ratios and cash flow cycles, investing short-term funds, managing accounts receivable, inventory, accounts payable, and short-term financing sources. The document provides examples and formulas for calculating liquidity metrics, cash conversion cycles, and costs of short-term borrowing.
Financial Report and Ratio Analysis of Square Pharmaceuticals LimitedMD TOWFIQUR RAHMAN
This document analyzes the financial performance of Square Pharmaceuticals Ltd. for 2014-2015 using financial ratios. It provides Square's background and financial statements for the two years. The document then calculates and analyzes key ratios to evaluate Square's liquidity, activity, leverage, profitability, and growth. Specifically, it finds that in 2015 Square had a current ratio of 3.82 times, quick ratio of 2.52 times, inventory turnover of 4.51 times, and fixed asset turnover of 0.78 times. The analysis of ratios provides insight into Square's financial condition and efficiency over time.
The document discusses various aspects of working capital management including:
1. Operating cycle is the time duration from procurement of raw materials to realization of sales.
2. Working capital is the difference between current assets and current liabilities and is needed for day-to-day operations.
3. Operating cycle period is the sum of inventory conversion period and receivable conversion period, which are the times required to convert raw materials to finished goods and credit sales to cash respectively.
This document provides an overview of financial statement analysis. It discusses the different types of financial statements, including the income statement, balance sheet, and statement of cash flows. It then presents a framework for analyzing the financial needs and condition of a firm using various financial ratios. The ratios are categorized as liquidity, leverage, coverage, activity, and profitability ratios. The document concludes with explanations of common-size and index analyses for comparing financial statement items over time and across firms.
Ratio analysis is used to interpret financial statements and determine a firm's strengths, weaknesses, historical performance, and current condition. Key ratios measure liquidity, profitability, asset turnover, and solvency. Liquidity ratios like current and quick ratios assess short-term financial health. Profitability ratios like gross profit, operating, and net profit margins evaluate earnings. Turnover ratios like inventory and accounts receivable examine asset use efficiency. Solvency ratios such as debt-to-equity assess long-term financial stability. Ratio analysis provides insight into a business, but has limitations like difficulty in comparisons and impact of inflation.
This document analyzes the financial statements of Gul Ahmed Textile Mills Ltd from 2010-2013. It includes various liquidity, leverage, activity, and profitability ratios calculated from the company's balance sheets and income statements. The liquidity ratios show the company has a current ratio close to 1 and low quick ratios, indicating insufficient short-term assets to cover debts. Leverage ratios like debt-to-total assets of around 75% suggest high reliance on debt. Activity ratios show inventory turnover improving but average collection periods remaining high. Profitability ratios demonstrate fluctuating net profit margins and returns on assets and equity.
Analysis and Interpretation of Financial Statement.pptxmarvinrosel4
The document discusses various techniques for analyzing financial statements, including horizontal analysis, vertical analysis, ratio analysis, and calculations. It defines each technique and provides examples of key financial ratios used to evaluate a company's profitability, liquidity, solvency, operational efficiency, and financial health. These ratios include gross profit margin, return on assets, current ratio, debt-to-equity ratio, inventory turnover, and accounts receivable turnover. The document aims to teach learners how to interpret financial statement data using these analytical methods.
The document discusses working capital, which refers to the capital required to finance short-term operating needs like inventory, accounts receivable, and cash. It provides definitions of working capital concepts like net working capital, gross working capital, and operating cycle. It also examines different approaches to calculating and financing working capital, including the balance sheet approach, operating cycle approach, hedging/matching approach, conservative approach, and aggressive approach. Key points covered include the importance of adequate but not excessive working capital, factors that influence working capital needs, and the trade-offs between different financing approaches in terms of liquidity, risk and profitability.
Accounts payable and accounts receivable refer to money owed to and by a business for goods and services. Accrual accounting records income and expenses when incurred rather than when payment is made. Key financial documents include the income statement, balance sheet, and cash flow statement, which provide different perspectives on a company's performance over time. Financial ratios analyze relationships between financial metrics and compare performance to peers. Profitability, leverage, liquidity, and operating efficiency ratios assess different aspects of a company's financial health.
The document discusses financial statement analysis. It covers the three main financial statements: the balance sheet, income statement, and cash flow statement.
The balance sheet provides a snapshot of a company's financial position at a point in time, showing assets, liabilities, and shareholders' equity. The income statement indicates profits/losses over a period of time by comparing revenues and expenses. The cash flow statement provides insight into a company's sources and uses of cash.
The document also discusses ratio analysis, which is used to analyze a company's performance and financial position by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios cover areas like debt management, asset utilization, liquidity, profitability, and market
- Financial statement analysis is used by internal and external stakeholders to evaluate business performance and position. It includes tools like common size statements, trend analysis, ratio analysis, and other analytical techniques.
- Trend analysis refers to collecting and plotting financial data over multiple periods to identify patterns and project future trends. Ratio analysis compares various financial metrics like liquidity, asset management, leverage, and profitability ratios to evaluate a company's performance.
- Specific ratios discussed in the document include the current ratio, quick ratio, inventory turnover, receivables turnover, debt ratio, times interest earned, gross profit margin, net profit margin, return on investment, and return on equity. These ratios are calculated using figures from the sample
This document outlines the key topics covered in a money and finance management course, including chapters on business accounting. Chapter 3 focuses on accounting and discusses the aim of accounting, which is to report financial information about a business's performance, financial position, and cash flow. It explains that accounting information is compiled into common financial statements like the income statement, balance sheet, statement of cash flows, and statement of retained earnings. The balance sheet section describes how a balance sheet categorizes a company's assets, liabilities, and shareholders' equity, with assets divided into current and fixed assets. It also provides a sample balance sheet formula showing that total assets must equal the sum of total liabilities and shareholders' equity.
This document provides an overview of an accounting training workshop. It includes:
1) Objectives of helping participants understand key financial concepts and statements and make better business decisions.
2) An outline of course contents covering accounting principles, financial statement analysis, and key metrics.
3) Examples of accounting concepts discussed like the accounting equation, revenue and expense recognition, and the purpose of financial statements.
Financial Statements and Business Model Canvas_Nov5th.pptxRashmi Gowda KM
The document provides information on financial statements and the business model canvas. It defines financial statements as documents that show a company's financial status at a specific point in time, including balance sheets, income statements, cash flow statements, and statements of retained earnings. It then explains the key elements of each financial statement. The document also defines the business model canvas as a strategic management template used to develop and document business models using nine building blocks: key partners, key activities, value propositions, customer relationships, customer segments, key resources, distribution channels, cost structure, and revenue streams. It provides an example canvas for Uber.
The document discusses the needs and purposes of key financial statements including the income statement, balance sheet, and statement of cash flows. It explains the components and calculations of these statements. It also describes common financial ratios used in analysis of statements, such as liquidity, profitability, asset management, and leverage ratios. These ratios are used to evaluate a firm's performance and financial position over time and in comparison to other companies.
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Pages 347–348
Introduction
Financial analysis is a process of selecting, evaluating, and interpreting financial data, along with other pertinent information, in order to formulate an assessment of a company’s present and future financial condition and performance.
Information needed:
Financial disclosures (e.g., 10-K, annual report, 10-Q, 8-K)
Market data (e.g., market price of stock, volume traded, value of bonds)
Economic data (e.g., GDP, consumer spending)
LOS: Interpret common-size balance sheets and common-size income statements and demonstrate their use by applying either vertical analysis or horizontal analysis.
Pages 348–356
2. Common-Size Analysis
Common-size analysis is the restatement of financial statement information in a standardized form.
Horizontal common-size analysis uses the amounts in accounts in a specified year as the base, and subsequent years’ amounts are stated as a percentage of the base value.
Useful when comparing growth of different accounts over time.
When viewed graphically, reveals different growth patterns among accounts.
Vertical common-size analysis uses the aggregate value in a financial statement for a given year as the base, and each account’s amount is restated as a percentage of the aggregate.
Balance sheet: Aggregate amount is total assets.
Reveals proportion of asset investment among accounts.
Reveals capital structure (proportions of capital).
Income statement: Aggregate amount is revenues or sales.
Reveals profit margins.
LOS: Interpret common-size balance sheets and common-size income statements and demonstrate their use by applying either vertical analysis or horizontal analysis.
Pages 348–356
Example: Common-Size Analysis
Vertical common-size analysis: Take each account in a given year, and divide it by the total assets.
Horizontal common-size analysis: Take each account, and compare a given year’s value with the base year’s value (2008 in this case).
LOS: Interpret common-size balance sheets and common-size income statements and demonstrate their use by applying either vertical analysis or horizontal analysis.
Pages 348–356
Example: Common-Size Analysis
Interpretation:
The relative investment in fixed assets (currently around 52% of assets), when compared with current assets, has increased since 2008.
The proportion of assets that are current assets have decreased slightly over time.
LOS: Interpret common-size balance sheets and common-size income statements and demonstrate their use by applying either vertical analysis or horizontal analysis.
Pages 348–356
Example: Common-Size Analysis
Interpretation:
Net plant and equipment has increased more than other assets since 2008 (annual rate of 4%).
Intangibles have increased the least over time.
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 356–357
3. Financial Ratio Analysis
Classifying ratios:
Activity ratios
Effectiveness in putting asset investment to use.
Liquidity ratios
Ability to meet short-term, immediate obligations.
Solvency ratios
Ability to satisfy debt obligations.
Profitability ratios
Ability to manage expenses to produce profits from sales.
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 358–360
Activity Ratios
Turnover ratios reflect the number of times assets flow into and out of the company during the period.
A turnover is a gauge of the efficiency of putting assets to work.
Inventory turnover: How many times inventory is created and sold during the period.
Receivables turnover: How many times accounts receivable are created and collected during the period.
Total asset turnover: The extent to which total assets create revenues during the period.
Working capital turnover: The efficiency of putting working capital to work.
Note: A way of looking at turnover ratios is to consider that the denominator is the investment that is being put to work and the numerator is the result of that effort.
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 360–362
Operating Cycle Components
The operating cycle is the length of time from when a company makes an investment in goods and services to the time it collects cash from its accounts receivable.
The net operating cycle is the length of time from when a company makes an investment in goods and services, considering the company makes some of its purchases on credit, to the time it collects cash from its accounts receivable.
The length of the operating cycle and net operating cycle provides information on the company’s need for liquidity: The longer the operating cycle, the greater the need for liquidity.
Note: The operating cycle is also covered in Chapter 8, along with the formulas.
Discussion question: Why do we say that a company with a long operating cycle has a greater need for liquidity?
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 360–362
Operating Cycle Formulas
Number of days of inventory: Average time it takes to create and sell inventory.
Number of days of receivables: Average time it takes to collect on accounts receivable.
By using average day’s revenues, we are assuming that all sales are on credit. If not, this would be modified to reflect only credit sales.
Number of days of payables: Average time it takes to pay suppliers.
Key: The numerator is the “stock” of the denominator’s “flow.”
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 360–362
Operating Cycle Formulas
Operating cycle: Time from investment in inventory to collection of accounts.
Operating cycle = Number of days of inventory + Number of days of receivables
Net operating cycle: Time from investment in inventory to collection of accounts, considering the use of trade credit in purchases.
Net operating cycle = Number of days of inventory + Number of days of receivables − Number of days of payables
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 363–365
Liquidity
Liquidity is the ability to satisfy the company’s short-term obligations using assets that can be most readily converted into cash.
Liquidity ratios:
Current ratio: Ability to satisfy current liabilities using current assets.
Quick ratio: Ability to satisfy current liabilities using the most liquid of current assets.
Cash ratio: Ability to satisfy current liabilities using only cash and cash equivalents.
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 365–369
Solvency Analysis
A company’s business risk is determined, in large part, from the company’s line of business.
Financial risk is the risk resulting from a company’s choice of how to finance the business using debt or equity.
We use solvency ratios to assess a company’s financial risk.
There are two types of solvency ratios: component percentages and coverage ratios.
Component percentages involve comparing the elements in the capital structure.
Coverage ratios measure the ability to meet interest and other fixed financing costs.
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 366–368
Solvency Ratios
Component-Percentage Solvency Ratios
Debt-to-assets ratio
Debt−to−assets ratio = Total debt Total assets
Proportion of assets financed with debt.
Long-term debt-to-assets ratio
Long−term debt−to−assets ratio = Long−term debt Total assets
Proportion of assets financed with long-term debt.
Debt-to-equity ratio
Debt−to−equity ratio = Total debt Total shareholders′ equity
Debt financing relative to equity financing.
Financial leverage (also referred to as the equity multiplier)
Financial leverage = Total assets Total shareholders′ equity
Reliance on debt financing.
Coverage ratios
Interest coverage ratio
Interest coverage ratio = EBIT Interest payments
Ability to satisfy interest obligations.
Fixed charge coverage ratio
Fixed charge coverage ratio = EBIT + Lease payments Interest payments + Lease payments
Ability to satisfy interest and lease obligations.
Cash flow coverage ratio
Cash flow coverage ratio = CFO + Interest payments + Tax payments Interest payments
Ability to satisfy interest obligations with cash flows.
Cash-flow-to-debt ratio
Cash−flow−to− debt ratio = CFO Total debt
Length of time needed to pay off debt with cash flows.
Discussion question: Is it possible for a company to have solvency ratios, such as the debt-to-assets and debt-to-equity ratios, that are increasing over time, yet the coverage ratios are not increasing?
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 369–372
Profitability
Margins and return ratios provide information on the profitability of a company and the efficiency of the company.
A margin is a portion of revenues that is a profit.
A return is a comparison of a profit with the investment necessary to generate the profit.
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 369–370
Profitability Ratios: Margins
Each margin ratio compares a measure income with total revenues:
Gross profit margin = Gross profit Total revenue
Operating profit margin = Operating profit Total revenue
Net profit margin = Net profit Total revenue
Pretax profit margin = Earnings before taxes Total revenue
LOS: Calculate and interpret measures of a company’s operating efficiency, internal liquidity (liquidity ratios), solvency, and profitability, and demonstrate the use of these measures in company analysis.
Pages 371–372
Profitability Ratios: Returns
Each margin ratio compares a measure income with total revenues:
Operating return on assets = Operating income Average total assets
Return on assets = Net income Average total assets
Return on total capital = Net income Average interest−bearing debt + Average total equity
Return on equity = Net income Average shareholders′ equity
Operating return on assets = Operating income Average total assets
LOS: Calculate and interpret variations of the DuPont expression and demonstrate use of the DuPont approach in corporate analysis.
Pages 372–382
The DuPont Formulas
Return on equity
Net profit margin
Operating profit margin
Effect of nonoperating items
Tax effect
Total asset turnover
Financial leverage
LOS: Calculate and interpret variations of the DuPont expression and demonstrate use of the DuPont approach in corporate analysis.
Pages 378–379
Five-Component DuPont Model
The DuPont formulas involve the income statement and balance sheet relationships.
Starting with the return on equity, we can break the return on assets component into its own components to get a better idea of what drives the return.
LOS: Calculate and interpret variations of the DuPont expression and demonstrate use of the DuPont approach in corporate analysis.
Pages 372–382
Example: The DuPont Formula
Suppose that an analyst has noticed that the return on equity of the D Company has declined from FY2012 to FY2013. Using the DuPont formula, explain the source of this decline.
(millions) 2013 2012
Revenues $1,000 $900
Earnings before interest and taxes 400 380
Interest expense 30 30
Taxes 100 90
Total assets $2,000 $2,000
Shareholders’ equity $1,250 $1,000
LOS: Calculate and interpret variations of the DuPont expression and demonstrate use of the DuPont approach in corporate analysis.
Pages 372–382
Example: The DuPont Formula
2013 2012
Return on equity 0.20 0.22
Return on assets 0.13 0.11
Financial leverage 1.60 2.00
Total asset turnover 0.50 0.45
Net profit margin 0.25 0.24
Operating profit margin 0.40 0.42
Effect of nonoperating items 0.83 0.82
Tax effect 0.76 0.71
Notes for discussion:
Return on equity fell from 22% to 20%.
This change is a result of the drop in the financial leverage (from 2 to 1.6); the return on assets increased.
The return on assets increased from 11% to 13%.
The net profit margin improved (24% to 25%).
The asset turnover improved (0.45 times to 0.50 times).
The change in the net profit margin improved because of taxes taking a smaller portion of income (although operating profit margin declined from 42% to 40%).
LOS: Calculate and interpret basic earnings per share and diluted earnings per share.
LOS: Calculate and interpret book value of equity per share, price-to-earnings ratio, dividends per share, dividend payout ratio, and plowback ratio.
Pages 383–385
Other Ratios
Earnings per share is net income, restated on a per share basis:
Earnings per share = Net income available to common shareholders Number of common shares outstanding
Basic earnings per share is net income after preferred dividends, divided by the average number of common shares outstanding.
Diluted earnings per share is net income minus preferred dividends, divided by the number of shares outstanding considering all dilutive securities.
Book value per share is book value of equity divided by number of shares.
Price-to-earnings ratio (PE or P/E) is the ratio of the price per share of equity to the earnings per share.
If earnings are the last four quarters, it is the trailing P/E.
LOS: Calculate and interpret book value of equity per share, price-to-earnings ratio, dividends per share, dividend payout ratio, and plowback ratio.
Pages 383–385
Other Ratios
Measures of Dividend Payment:
Dividends per share (DPS) = Dividends paid to shareholders Weighted average number of ordinary shares outstanding
Dividend payout ratio= Dividends paid to common shareholders Net income attributable to common shares
Plowback ratio = 1 – Dividend payout ratio
The proportion of earnings retained by the company.
LOS: Calculate and interpret book value of equity per share, price-to-earnings ratio, dividends per share, dividend payout ratio, and plowback ratio.
Pages 383–385
Example: Shareholder Ratios
Calculate the book value per share, P/E, dividends per share, dividend payout, and plowback ratio based on the following financial information:
Book value of equity $100 million
Market value of equity $500 million
Net income $30 million
Dividends $12 million
Number of shares 100 million
LOS: Calculate and interpret book value of equity per share, price-to-earnings ratio, dividends per share, dividend payout ratio, and plowback ratio.
Pages 383–385
Example: Shareholder Ratios
Book value per share = $1.00
There is $1 of equity, per the books, for every share of stock.
P/E = 16.67
The market price of the stock is 16.67 times earnings per share.
Dividends per share = $0.12
The dividends paid per share of stock.
Dividend payout ratio = 40%
The proportion of earnings paid out in the form of dividends.
Plowback ratio = 60%
The proportion of earnings retained by the company.
LOS: Calculate and interpret book value of equity per share, price-to-earnings ratio, dividends per share, dividend payout ratio, and plowback ratio.
Page 386
Effective Use of Ratio Analysis
In addition to ratios, an analyst should describe the company (e.g., line of business, major products, major suppliers), industry information, and major factors or influences.
Effective use of ratios requires looking at ratios
Over time.
Compared with other companies in the same line of business.
In the context of major events in the company (for example, restructuring, mergers, or divestitures), accounting changes, and changes in the company’s product mix.
LOS: Demonstrate the use of pro forma income and balance sheet statements.
Pages 392–394
4. Pro Forma Analysis
(Information from Exhibit 9-20, p. 394)
Estimate typical relation between revenues and sales-driven accounts.
Estimate fixed burdens, such as interest and taxes.
Forecast revenues.
Estimate sales-driven accounts based on forecasted revenues.
Estimate fixed burdens.
Construct future period income statement and balance sheet.
LOS: Demonstrate the use of pro forma income and balance sheet statements.
Pages 398–400
Pro Forma Income Statement
(Example from pages 398–400)
Accounts that vary directly with sales:
Cost of goods sold (COGS)
Selling, general, and administrative expenses (SG&A)
Calculated:
Gross profit
Operating income
Earnings before taxes
Taxes
Net income
Accounts that depend on other accounts:
Interest expense (depends on long-term debt)
LOS: Demonstrate the use of pro forma income and balance sheet statements.
Pages 398–400
Pro Forma Balance Sheet
Accounts that are a percentage of revenues:
Current assets
Current liabilities
Net plant and equipment (can be based on a specific fixed asset turnover relationship)
Accounts that are assumed not to change
Common stock and paid-in capital
Accounts that are determined by other accounts:
Retained earnings
Accounts that are the direct result of decisions:
Treasury stock
Long-term debt (capital structure decision)