PM Job Search Council Info Session - PMI Silver Spring Chapter
Financial Analysis 2.pptx
1.
2. Key Financial Statements
• Balance Sheet
• Income Statement
• Statement of Stockholders’
Equity
• Statement of Cash Flows
3-2
Understanding Financial
Statements
3. Balance sheet – provides a snapshot of a
firm’s financial position at one point in
time.
Income statement – summarizes a firm’s
revenues and expenses over a given
period of time.
Statement of cash flows – reports the
impact of a firm’s activities on cash flows
over a given period of time.
Statement of stockholders’ equity – shows
how much of the firm’s earnings were
retained, rather than paid out as
dividends.
3-3
4. Snack food company that underwent
major expansion in 2014.
So far, expansion results have been
unsatisfactory.
◦ Company’s cash position is weak.
◦ Suppliers are being paid late.
◦ Bank has threatened to cut off credit.
Board of Directors has ordered that
changes must be made!
3-4
Example
9. 3-9
Total
Common Stock Retained Stockholders’
Shares Amount Earnings Equity
Balances, 12/31/15 100,000 $460,000 $203,768 $663,768
2015 Net income (160,176)
Cash dividends (11,000)
Addition (subtraction)
to retained earnings (171,176)
Balances, 12/31/16 100,000 $460,000 $ 32,592 $492,592
10. 3-
10
Operating Activities
Net income ($160,176)
Depreciation and amortization 116,960
Increase in accounts payable 378,560
Increase in accruals 353,600
Increase in accounts receivable (280,960)
Increase in inventories (572,160)
Net cash provided by operating activities ($164,176)
11. 3-
11
Long
-
Term Investing Activities
Additions to property, plant,
& equipment ($711,950
)
Net cash used in investing activities ($711,950
)
Financing Activities
Increase in notes payable $436,808
Increase in long
-
term debt 400,000
Payment of cash dividends (11,000
)
Net cash provided by financing activities $825,808
Summary
Net decrease in cash ($ 50,318)
Cash at beginning of year 57,600
Cash at end of year $ 7,282
12. Net cash from operations = -$164,176,
mainly because of negative NI.
The firm borrowed $836,808 to meet its
cash requirements.
Even after borrowing, the cash account
fell by $50,318.
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12
13. AT operating income = EBIT(1 – Tax
rate)
AT operating income14 = -$130,948(1 –
0.4)
= -$130,948(0.6)
= -$78,569
AT operating income13 = $114,257
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13
17. Accounting statements insufficient for
evaluating managers’ performance
because they do not reflect market values.
Performance Measures
MVA = Difference between market value and
book value of a firm’s common equity.
(P0 x Number of shares) – Book value.
EVA = Estimate of a business’ true economic
profit for a given year.
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17
Total invested
capital
Cost of
capital
EBIT(1 – T) – x
18. MVA14 = ($2.25 x 100,000) – $492,592
= -$267,592
MVA13 = ($8.50 x 100,000) – $663,768
= $186,232
Shareholder wealth has been destroyed!
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19. If EVA is positive, then AT operating
income > cost of capital needed to
produce that income.
Positive EVA on annual basis helps to
ensure MVA is positive.
MVA is applicable to entire firm, while
EVA can be calculated on a divisional
basis as well.
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20. Probably not.
A/P increased 260%, over the past year,
while sales increased by only 76%.
If this continues, suppliers may cut off
D’Leon’s trade credit.
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21. NO, the negative after-tax operating
income and decline in cash position
shows that D’Leon is spending more on
its operations than it is taking in.
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22. If competitors match terms, and sales remain
constant...
◦ A/R would .
◦ Cash would .
If competitors don’t match, and sales double...
◦ Short-run: Inventory and fixed assets to
meet increased sales. A/R , Cash .
Company may have to seek additional
financing.
◦ Long-run: Collections increase and the
company’s cash position would improve.
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23. D’Leon financed its expansion with
external capital.
D’Leon issued long-term debt which
reduced its financial strength and
flexibility.
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24. YES, the company would still have to
finance its increase in assets. Looking to
the Statement of Cash Flows, we see that
the firm made an investment of $711,950
in net fixed assets. Therefore, they would
have needed to raise additional funds.
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25. No effect on physical assets.
Fixed assets on the balance sheet would
decline.
Net income would decline.
Tax payments would decline.
Cash position would improve.
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26. Donna Jamison, a recent graduate of the University with four years of banking
experience, was recently brought in as assistant to the chairman of the board of
Computer Industries, a manufacturer of electronic calculators.
The company doubled its plant capacity, opened new sales offices outside its home
territory, and launched an expensive advertising campaign. Computer’s results were not
satisfactory, to put it mildly. Its board of directors, which consisted of its president and
vice-president plus its major stockholders (who were all local business people), was
most upset when directors learned how the expansion was going. Suppliers were being
paid late and were unhappy, and the bank was complaining about the deteriorating
situation and threatening to cut off credit. As a result, Al Watkins, Computer’s president,
was informed that changes would have to be made, and quickly, or he would be fired.
Also, at the board’s insistence Donna Jamison was brought in and given the job of
assistant to Fred Campo, a retired banker who was Computer’s chairman and largest
stockholder. Campo agreed to give up a few of his golfing days and to help nurse the
company back to health, with Jamison’s help.
Jamison began by gathering financial statements and other data. Assume that you are
Jamison’s assistant, and you must help her answer the following questions for Campo.
Mini
30. Prepare a Cash Flow Statement using the Balance Sheet and the
income statement information in the above three slides and
answer the following questions:
1. What effect did the expansion have on sales and net income? What
effect did the expansion have on the asset side of the balance
sheet? What effect did it have on liabilities and equity?
2. What do you conclude from the statement of cash flows?
3. What is free cash flow? Why is it important? What are the five uses
of FCF?
4. What are operating current assets? What are operating current
liabilities? How much net operating working capital and total net
operating capital does Computer have?
5. What are Computer’s net operating profit after taxes (NOPAT)
and free cash flow (FCF)?
