4-1 Business Finance (MGT 232) Lecture 23. 4-2 Financial Statement Analysis

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Business Finance(MGT 232)

Lecture 23

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Financial Statement AnalysisFinancial Statement AnalysisFinancial Statement AnalysisFinancial Statement Analysis

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• Financial Statements• A Possible Framework for Analysis• Ratio Analysis• Trend Analysis• Common-Size and Index Analysis

Overview of the Last Lecture

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• Ratio Analysis– Liquidity Ratios– Leverage Ratios– Asset Management Ratios– Profitability Ratios– Market Value Ratios

Ratio Analysis

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Market Value RatiosMarket Value Ratios

• These ratios compare the price of the company's stock with different variables including the Earning per share (EPS), Dividend per share (DPS) etc

• These ratios compare the price of the company's stock with different variables including the Earning per share (EPS), Dividend per share (DPS) etc

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• EPS = Net Income to common share holders common stock outstanding

For Basket Wonders December 31, 2003

• EPS = Net Income to common share holders common stock outstanding


This indicates what is the earning on each share investment and what company is paying to its shareholders

Income Statement /Balance Sheet

And other indicators

Market Value Ratios

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Basket Wonders’ Income Statement

Basket Wonders’ Income Statement

Net Sales Rs. 2,211 Cost of Goods Sold bb 1,599 Gross Profit Rs. 612 SG&A Expenses cc 402 EBITd Rs. 210 Interest Expensee 59 EBT ff Rs. 151 Income Taxes 60 EATg

Rs. 91 Cash Dividends 38 Increase in REIncrease in RE Rs. 53 Rs. 53

Basket Wonders Statement of Earnings (in thousands) for Year Ending Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013December 31, 2013a

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Market Value RatioMarket Value Ratio

Suppose company have 1000 shareholders and company paid dividend of Rs. 5000 and market price of company’s stock is Rs. 20 per share

Net Income to common shareholder is 91(1000) = 91000

Total number of outstanding shares of the company is 4500

Suppose company have 1000 shareholders and company paid dividend of Rs. 5000 and market price of company’s stock is Rs. 20 per share

Net Income to common shareholder is 91(1000) = 91000

Total number of outstanding shares of the company is 4500

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BW Industry20.22 31.822.1 31.822.1 31.8

BW Industry20.22 31.822.1 31.822.1 31.8

Year201320122011

Earning per shareEarning per share

BW has a weak earning per share


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• DPS = Total Dividend common stock outstanding


• DPS = Total Dividend common stock outstanding


Indicates the amount of dividend being paid out on each share



Market Value Ratios

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• P/E= Market Price per share

EPS


• P/E= Market Price per share

EPS


Indicates how the investment community sees our company. A high P/E is considered a Good Sign.



Market Value Ratios

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BW Industry0.98 2.22.1 2.25.8 1.8

BW Industry0.98 2.22.1 2.25.8 1.8

Year201320122011

Price earning ratioPrice earning ratio

BW has a weak P/E ratio.


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• Dividend Payout = DPS/EPS


• Dividend Payout = DPS/EPS


This ratio indicates how much of the earnings of the company are paid out in the form of dividends.



Market Value Ratios

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BW Industry5.4% 6.5%4.9% 6.3%5.3% 6.3%

BW Industry5.4% 6.5%4.9% 6.3%5.3% 6.3%

Year201320122011

Dividend Payout RatioDividend Payout Ratio

BW has a weak Dividend Payout ratio.


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Dividend Yield = DPS . Market Price per share;


Dividend Yield = DPS . Market Price per share;


This ratio indicates dividend return to the shareholders of the company



Market Value Ratios

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BW Industry5% 6.8%4.9% 6.13%4.1% 6 %

BW Industry5% 6.8%4.9% 6.13%4.1% 6 %

Year201320122011

Dividend YieldDividend Yield

BW has a weak Dividend yield


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Common-size AnalysisCommon-size Analysis

An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income

statement items are divided by net sales or revenues.

It is also known as vertical analysis

An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income

statement items are divided by net sales or revenues.

It is also known as vertical analysis

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Basket Wonders’ Common Size Balance Sheets


Regular (thousands of $) Common-Size (%)

Assets 2011 2012 2013 2011 2012 2013

Cash 148 100 90 12.10 4.89 4.15

AR 283 410 394 23.14 20.06 18.17

Inv 322 616 696 26.33 30.14 32.09

Other CA 10 14 15 0.82 0.68 0.69

Tot CA 763 1,140 1,195 62.39 55.77 55.09

Net FA 349 631 701 28.54 30.87 32.32

LT Inv 0 50 50 0.00 2.45 2.31

Other LT 111 223 223 9.08 10.91 10.28

Tot Assets 1,223 2,044 2,169 100.0 100.0 100.0

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Liab+Equity 2011 2012 2013 2011 2012 2013

Note Pay 290 295 290 23.71 14.43 13.37

Acct Pay 81 94 94 6.62 4.60 4.33

Accr Tax 13 16 16 1.06 0.78 0.74

Other Accr 15 100 100 1.23 4.89 4.61

Tot CL 399 505 500 32.62 24.71 23.05

LT Debt 150 453 530 12.26 22.16 24.44

Equity 674 1,086 1,139 55.11 53.13 52.51

Tot L+E 1,223 2,044 2,169 100.0 100.0 100.0

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Basket Wonders’ Common Size Income Statements



2011 2012 2013 2011 2012 2013

Net Sales 1,235 2,106 2,211 100.0 100.0 100.0

COGS 849 1,501 1,599 68.7 71.3 72.3

Gross Profit 386 605 612 31.3 28.7 27.7

Adm. 180 383 402 14.6 18.2 18.2

EBIT 206 222 210 16.7 10.5 9.5

Int Exp 20 51 59 1.6 2.4 2.7

EBT 186 171 151 15.1 8.1 6.8

EAT 112 103 91 9.1 4.9 4.1

Cash Div 50 50 50 4.0 2.4 2.3

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Horizontal Analysis

• It shows the trend in accounts over the years

• It is also known as Percentage change or comparative analysis

• Formula:

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Horizontal Analysis

Assets 2012 2013 2013

Cash 100 90

AR 410 394

Inv 616 696

Other CA 14 15

Tot CA 1,140 1,195

Net FA 631 701

LT Inv 50 50

Other LT 223 223

Tot Assets 2,044 2,169

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Horizontal Analysis

Liab+Equity 2002 2003 2013

Note Pay 295 290

Acct Pay 94 94

Accr Tax 16 16

Other Accr 100 100

Tot CL 505 500

LT Debt 453 530

Equity 1,086 1,139

Tot L+E 2,044 2,169

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Horizontal Analysis

2002 2003 2013

Net Sales 2,106 2,211

COGS 1,501 1,599

Gross Profit 605 612

Adm. 383 402

EBIT 222 210

Int Exp 51 59

EBT 171 151

EAT 103 91

Cash Div 50 50

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Index AnalysisIndex Analysis

An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent)

and subsequent financial statement items are expressed as percentages of their values in the

base year.

An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent)

and subsequent financial statement items are expressed as percentages of their values in the

base year.

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Basket Wonders’ Indexed Balance Sheets


Regular (thousands of $) Indexed (%)

Assets 2011 2012 2013 2011 2012 2013

Cash 148 100 90 100.0 67.6 60.8

AR 283 410 394 100.0 144.9 139.2

Inv 322 616 696 100.0 191.3 216.1

Other CA 10 14 15 100.0 140.0 150.0

Tot CA 763 1,140 1,195 100.0 149.4 156.6

Net FA 349 631 701 100.0 180.8 200.9

LT Inv 0 50 50 100.0 inf. inf.

Other LT 111 223 223 100.0 200.9 200.9

Tot Assets 1,223 2,044 2,169 100.0 167.1 177.4

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Liab+Equity 2001 2002 2003 2001 2002 2003

Note Pay 290 295 290 100.0 101.7 100.0

Acct Pay 81 94 94 100.0 116.0 116.0

Accr Tax 13 16 16 100.0 123.1 123.1

Other Accr 15 100 100 100.0 666.7 666.7

Tot CL 399 505 500 100.0 126.6 125.3

LT Debt 150 453 530 100.0 302.0 353.3

Equity 674 1,086 1,139 100.0 161.1 169.0

Tot L+E 1,223 2,044 2,169 100.0 167.1 177.4

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Basket Wonders’ Indexed Income Statements

Basket Wonders’ Indexed Income Statements


2011 2012 2013 2011 2012 2013

Net Sales 1,235 2,106 2,211 100.0 170.5 179.0

COGS 849 1,501 1,599 100.0 176.8 188.3

Gross Profit 386 605 612 100.0 156.7 158.5

Adm. 180 383 402 100.0 212.8 223.3

EBIT 206 222 210 100.0 107.8 101.9

Int Exp 20 51 59 100.0 255.0 295.0

EBT 186 171 151 100.0 91.9 81.2

EAT 112 103 91 100.0 92.0 81.3

Cash Div 50 50 50 100.0 100.0 100.0

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Summary

• Market Value Ratios– EPS– DPS– DPO– P/E

• Common Size / Vertical Analysis• Horizontal Analysis• Trend/index analysis

Documents

4-1 Business Finance (MGT 232) Lecture 23. 4-2 Financial Statement Analysis