1、Chapter 6Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan1lFinancial StatementslA Possible Framework for AnalysislRatio AnalysislTrend AnalysislCommon-Size and Index AnalysisFinancial Statement AnalysisCopyright 2001
2、Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan2Uses of Financial Statement InformationlInternal uses:performance evaluationplanning for the futurelExternal uses:evaluation by outside partiesevaluation of main competitorsidentifyin
3、g potential takeover targetsCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan3lPlan-Focus on assessing the current financial position and evaluating potential firm opportunities.lControl-Focus on return on investment f
4、or various assets and asset efficiency.lUnderstand-Focus on understanding how suppliers of funds analyze the firm.Examples of Internal Uses of Statement AnalysisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan4lTrade
5、Creditors-Focus on the liquidity of the firm.lBondholders-Focus on the long-term cash flow of the firm.lShareholders-Focus on the profitability and long-term health of the firm.Examples of External Uses of Statement AnalysisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e b
6、y Van Horne and Wachowicz.Slides prepared by Wu Xiaolan5lIncome Statement A summary of a firms revenues and expenses over a specified period,ending with net income or loss for the period.Revenue Expenses IncomelBalance Sheet A summary of a firms financial position on a given date that shows total as
7、sets=total liabilities+owners equity.Primary Types of Financial StatementsCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan6The Balance SheetCurrentAssetsFixed Assets1.Tangible fixed assets2.Intangible fixed assetsNetW
8、orking CapitalCurrent LiabilitiesLong-Term DebtShareholders EquityTotal Value of AssetsTotal Value of Liabilities and Shareholders EquityCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan7Balance Sheet AnalysislWhen ana
9、lyzing a balance sheet,the financial manager should be aware of three concerns:Accounting liquidityDebt versus equityValue versus costCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan8Accounting Liquidity lRefers to th
10、e ease and quickness with which assets can be converted to cash.lCurrent assets are the most liquid.lSome fixed assets are intangible.lThe more liquid a firms assets,the less likely the firm is to experience problems meetingshort-term obligations.lLiquid assets frequently have lower rates of return
11、than fixed assets.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan9Debt versus EquitylGenerally,when a firm borrows it gives the bondholders first claim on the firms cash flow.lThus shareholders equity is the residual
12、 difference between assets and liabilities.lFinancial leverage increases the potential reward to shareholders,but also increases the potential for financial distress and business failure.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prep
13、ared by Wu Xiaolan10Value versus CostlGenerally Accepted Accounting Principles(GAAP)show that audited financial statements show assets at historical cost or book value.lMarket value is a completely different concept.Current value of a firm relates to market value,or the price that the asset would yi
14、eld in the current market place.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan11Income Statement ExampleSales$2000Costs 1400Depreciation 100EBIT 500Interest 100Taxable Income 400Taxes 200Net Income$200Dividends 80 A
15、ddition to R/E$120Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan12Income Statement AnalysislThere are three things to keep in mind when analyzing an income statement:1.GAAP2.Non Cash Items3.Time and CostsCopyright 2
16、001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan13Generally Accepted Accounting Principles(GAAP)lThe matching principal of GAAP dictates that revenues be matched with expenses.Thus,income is reported when it is earned,even thoug
17、h no cash flow may have occurred.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan14Income Statement AnalysislNon Cash Items Depreciation is the most apparent.No firm ever writes a check for“depreciation”.Another nonca
18、sh item is deferred taxes,which does not represent a cash flow.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan15Income Statement AnalysislTime and Costs In the short run,certain equipment,resources,and commitments of
19、 the firm are fixed,but the firm can vary such inputs as labor and raw materials.In the long run,all inputs of production(and hence costs)are variable.Financial accountants do not distinguish between variable costs and fixed costs.Instead,accounting costs usually fit into a classification that disti
20、nguishes product costs from period costs.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan16Trend/Seasonal ComponentHow much funding will be required in the future?Is there a seasonal component?Framework for Financial
21、AnalysisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan17Health of a FirmFinancial Ratios1.Individually2.Over time3.In combination4.In comparison1.Analysis of the funds needs of the firm.Framework for Financial Analy
22、sisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan18Examples:Volatility in salesVolatility in costsProximity to break-even point1.Analysis of the funds needs of the firm.2.Analysis of the financial condition and prof
23、itability of the firm.Business risk relates to the risk inherent in the operations of the firm.Framework for Financial AnalysisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan19A Financial Manager must consider all th
24、ree jointly when determining the financing needs of the firm.Framework for Financial AnalysisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan20Negotiationswithsuppliers ofcapital.Determiningthe financingneeds of the f
25、irm.Framework for Financial AnalysisCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan21Ratio AnalysislFinancial ratios are relationships determined from a firms financial information.lUsed to compare and investigate re
26、lationships between different pieces of financial information.lRatios eliminate the size problem.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan22Categories of Financial RatioslLiquidity-measures the firms short-term
27、 solvency.lCapital structure-measures the firms ability to meet long-run obligations(financial leverage).lAsset management(turnover)-measures the efficiency of asset usage.lProfitability-measures the firms ability to control expenses.lMarket value-per share ratiosCopyright 2001 Prentice-Hall,Inc.Fun
28、damentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan23Liquidity Ratios liabilitiesCurrent Inventory-assetsCurrent ratioQuick=liabilitiesCurrent assetsCurrent ratioCurrent=(Acid-Test ratio)Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management
29、,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan24Financial Leverage Ratios equity Totalassets Total multiplierEquity=equity Totaldebt Total ratioDebt/equity=Capitalization Totaldebt Long-term Total Capitalization Ratio=Interest charges EBIT ratiocoverage Interest=Copyright 2001 Prenti
30、ce-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan25Turnover RatiosReceivable AccountsSales turnover sReceivableturnoverInventory days 365 inventory in sales DaysInventorysold goods ofCost Turnover Inventory=Copyright 2001 Prentice-Hall,Inc
31、.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan26Just-in-timelAn approach to inventory management and control in which inventories are acquired and inserted in production at the exact times they are needed.lThe goal of a JIT system is not only redu
32、ce inventories but to continuously improve productivity,product quality,and manufacturing flexibility.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan27Turnover Ratios(continued)assets Total Sales over asset turn Tota
33、lassetscurrent-NonSales over asset turn Fixed turnoversReceivabledays 365 sreceivablein sales Days=Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan28Profitability RatiosSalesprofitNet margin Net Profit=100%assets Tota
34、lNet Profit after Taxes ROI=ROI =Net profit margin Total asset turnoverCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan29Profitability Ratios(continued)EquityAssetsAssetsSalesSalesprofitNet ROE=100%EquityprofitNet (RO
35、E)equity on Return=Net profit marginTotal asset turnoverEquity MultiplierCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan30Market Value Ratiosshareper Book valueshareper ueMarket val ratiobook-to-Marketshareper Earnin
36、gsshareper Price ratio ingPrice/earn=Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan31The Du Pont IdentitylBreaks ROE into three parts:operating efficiencyasset use efficiencyfinancial leveragemultiplierEquity over a
37、sset turn Total margin Profit EquityAssetsAssetsSalesSalesprofitNet ROE=Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan32The Du Pont ApproachReturn on equityReturn on assetEquity Multiplierprofit marginTotal Asset Tu
38、rnover Ratio11 Debt ratioAssetDebtAssetProfitSalesCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan33Benchmarks for ComparisonlTime-trend analysis-examine how a particular ratio(s)have performed historically.lPeer grou
39、p analysis-using similar firms(competitors)for comparison of results.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan34Problems with Ratio AnalysislNo underlying theory to identify correct ratios to use or appropriate
40、 benchmarks.lConsolidated financial statements are not appropriate to use.lFirms may use different accounting procedures.lFirms may have different recording periods.lOne-off events can severely affect financial performance.Copyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by
41、 Van Horne and Wachowicz.Slides prepared by Wu Xiaolan35BW Industry2.392.152.262.091.912.01Year200320022001l Ratio is stronger than the industry average.Liquidity Ratio ComparisonsCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by
42、 Wu Xiaolan36Current Ratio-Trend Analysis ComparisonCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan37BW Industry1.001.251.041.231.111.25Year200320022001l Ratio is weaker than the industry average.Liquidity Ratio Comp
43、arisonsCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared by Wu Xiaolan38Acid-Test Ratio-Trend Analysis ComparisonCopyright 2001 Prentice-Hall,Inc.Fundamentals of Financial Management,11/e by Van Horne and Wachowicz.Slides prepared b
44、y Wu Xiaolan39lThe current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable.lThis indicates that inventories are a significant problem for.lThe current ratio for has been rising at the same time the acid-test ratio has been declining.Summary of the Liquidity Trend Analyses
