Note Taking - Corporate Finacial Statement Analysis

CORPORATE FINANCIAL STATEMENT
ANALYSIS
Outline of the course
1) Review financial statement

 Balance sheet
 Income statement
 Statement of cash flows
2) Financial analysis process

 Step 1: DuPont framework  ROE
o Leverage
o Efficiency
o Profitability
 Step 2: Common-size statement
o Commons-size income statement
o Common-size balance sheet
 Step 3: Additional ratios to asses a firm’s profitability, efficiency, and leverage
 Step 4: Follow-up with specific staff
I. A review of financial statement
1. The accounting equation

 There are 3 fundamental financial statement:
o Balance sheet: list of an organization’s asset and organization’s liabilities and equity
o Income statement: report of how much money a company is making
o Statement of cash flows: report of the amount of cash collected and cash paid by a company during a period
of time
2. Balance sheet
Assets = Liabilitties + Equity
 Liabilities: are obligations to repay money or to provide a service in the future

 Owner’s equity: money provided to the company by the owners
o Paid-in capital: owners put their own money (capital) into the business
o Retained earnings: keeping profits reinvested in the business
3. Income statement
Revenue – Expenses = Net income
 Revenue: is amount of assets henerated doing business

 Expenses: is amount of asstes consumed in doing business
 Net income: is net amount of assests generated by a business through operations
4. Statement of cash flows: The insight of accountants is to separate those cash flows in to 3 categories:
 Operating activies (which company does every single day):
o Collect cash
o Cash paid for investing
o Cash paid for wages, rent, advertising
 Investing activities (which happen occasionally):

o Investing in the business’s productive capacity
o Buying machines, new buildings or lands
o Financing activities:
 Borrowing money
 Repaying loans
 Cash from investors
 Paying dividends
II. FINANCIAL ANALYSIS PROCESS
1. Return on equity (ROE)

 Measure of the overall profitability of shareholder investment; Net income divided by equity
 The DuPont framework has 3 components:
Leverag Effieciency Profitability

e
Money  Buy assets  Generate sales  Generate income
 Leverage ratio
 How much money has been borrowed to purchase assets
 Formula:
Leverage ratio =
Total assets
Stockholder equity
 Efficiency ratio
 Measuring how much sales are generated from the company assets
 Formula:
Total sales
Effieciency ratio =
Total assets
 Profitabitity ratio
 Measuring how much income is generated from sales
 Formula:
Net income
Profitability ratio =
Sales
 Formula of ROE
ROE =
Total assets Total sales Net income
× ×
Stockholder equity Total assets Sales
Not good 10% Very good 20%
2. Common-size statement
 This converts a company’s raw financial statement number into percentage of total sales or percentage of total assets
 The purpose of common-size financial statements:
o To compare two companies for that matter, you have to do some kind of adjustment for size
o Common-size financial allows us to drill down into the financial statement and target where we will spend
our time and energy investigating differences
 Common-size income statement

Eachcategories∈income statement
Total sales
 Common-size balance sheet
Eachcategories∈balance sheet
Total assets
3. Additional ratios to asses a firm’s profitability, efficiency, and leverage
 Profitability ratios
 When we talk about profit, we have:
o Gross profit
o Operating income
o Operating profit
o Net earnings
Total revenue $110,360
Cost of revenue $38,353
Gross margin $72,007
R&D $14,726
S&M $17,469
Operating income $35,058
Other Income, net $1,416
Income before taxes $36,474
Income tax expense $19,903
Net income/ Net earnings $16,571
 Efficiency ratios
 The operating cycle: length of time when inventory is purchased by the company to when cash is collected from the
sale of inventory
Operating cycle = Number of day’s sales in inventory + Average collection period
 Number of day’s sales in inventory: tells me how long on average does my inventory stay with me until it’s sold
Cost of goods sold

Inventory turnover (per year) = =
Average inventory for the year
Cost of goods sold
( Beginning inventory for the year + Ending inventory ) ÷2
365
Day’s sales in inventory =
Inventory turnover
 Average collection period: tells me, om average, how long from when I sell sth on credit until I collect the cash
Net credit sales

Account recievable turnover (per year) = =
Average account receivable
Net credit sales
( Beginning balance+ Ending balance ) ÷ 2
Average colleciton period =

365
Account recievable turnover
 Leverage ratios
 Current ratio
o A measure of a company’s short-term leverage. It also a measure of lidiquity
o Current asset: is an asset expected to be used or turned into cash within a year (Ex: cash, AR, and inventory,
…)
o Current ratio should be greater than 2
Current ratio =
Current assets
Current liabilities
 Debt ratios
Liabilities
Debt ratio =
Assets
Debt-to-equity ratio =
Total liabilities
Total shareholder investment

Note Taking - Corporate Finacial Statement Analysis

Uploaded by

Copyright:

Available Formats

Note Taking - Corporate Finacial Statement Analysis

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Note Taking - Corporate Finacial Statement Analysis

Uploaded by

Copyright:

Available Formats

CORPORATE FINANCIAL STATEMENT

1) Review financial statement

2) Financial analysis process

I. A review of financial statement

1. The accounting equation

 Liabilities: are obligations to repay money or to provide a service in the future

 Revenue: is amount of assets henerated doing business

 Investing activities (which happen occasionally):

II. FINANCIAL ANALYSIS PROCESS

1. Return on equity (ROE)

Leverag Effieciency Profitability

 Common-size income statement

Operating cycle = Number of day’s sales in inventory + Average collection period

Cost of goods sold

Net credit sales

Average colleciton period =

You might also like