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Financial Analysis
(E-reading, CloudDeakin)
Objectives
Financial analysis: aim and sources of risk
Assessing performance and risk
Common-size financial statements
Financial ratio analysis
Internal influences
External influences
Sources of information
Limitations
Concluding remarks
Exercises
2
Financial analysis
Aim
Operating decisions.
Investment decisions.
Financing decisions.
Dividend decisions.
Financial analysis
Sources of risk
Business risk
Financial risk
Technology
Competition
Regulation
Consumer taste
Interest rates
Type of funding
Steam Ltd
Current assets
Power Ltd
Ind. Ave.
$000
$000
112 118
16.1
83 560
6.8
8.9
Accounts receivable
99 725
14.4
283 861
23.2
13.9
Inventories
12 251
1.8
57 367
4.7
2.1
3 604
0.5
27 477
2.2
10.3
227 698
32.8
452 265
36.9
35.2
67 759
9.8
327 406
26.8
18.9
395 056
57.0
369 732
30.2
42.2
2 682
0.4
75 072
6.1
3.7
465 497
67.2
772 210
63.1
64.8
693 195
100.0
1 224 475
100.0
100.0
Non-current assets
Investments
Land, buildings, plant & equipment
Intangible assets
Total non-current assets
Total assets
5
Common
Size
Balance
Sheet
(Assets)
Steam Ltd
Current liabilities
Ind.
Ave.
$000
76 855
11.1
234 247
19.1
7.3
123 332
17.8
78 093
6.4
19.6
200 187
28.9
312 340
25.5
26.9
171 055
24.7
573 918
46.9
32.2
Total liabilities
371 242
53.6
886 258
72.4
59.1
Shareholders equity
321 953
46.4
338 217
27.6
40.9
693 195
100.0
100.0
100.0
Accounts payable
$000
Power Ltd
1 224 475
Common
Size
Balance
Sheet
(Liabilities & Equity)
Steam Ltd
Power Ltd
Ind. Ave.
$000
$000
639 731
100.0
1 624 341
100.0
100.0
47 378
7.4
40 538
2.5
3.7
493 765
77.2
1 447 113
89.1
85.8
98 588
15.4
136 690
8.4
10.5
Interest expense
15 628
2.4
51 108
3.1
2.8
Tax
33 676
5.3
20 303
1.3
2.6
49 284
7.7
65 279
4.0
5.1
Dividends
16 826
2.6
24 822
1.5
2.0
Sales revenue
Depreciation
Other expenses (incl. COGS)
EBIT
Market data
Market price/share at 30/6/X1
No. of shares (million)
$9.40
$5.14
77.9
195.8
Common
Size
Profit
and
Loss
Profitability ratios
Measure ability to earn profits steadily over an extended period of time.
Investment ratios
Measure efficiency in management of assets.
Financing ratios
Measure liquidity and solvency in the light of dividend policy.
Denominator
Notes:
Financing
Indicates how efficient a company has been in earning profits from its assets,
ignoring financing.
11
Notes:
ROA components
Asset
Gross
13
Steam Ltd Asset Turnover = 639 731 / 693 195 = 0.92 times
Power Ltd Asset Turnover = 1 624 341 / 1 224 475 = 1.33 times
Notes:
Decisions to buy new equipment, build up inventory levels and
grant credit reduce Asset Turnover.
Decision to run 3 (instead of 1 or 2) shifts per day increases
Asset Turnover.
It is common to use average total assets.
14
Notes:
Expense ratios
Measure
Can
cost structure.
16
Notes:
17
Notes:
Notes:
20
Steam Ltd Inventory Days Outstanding = (12 251 * 365) / 493 765 = 9 days
Power Ltd Inventory Days Outstanding = (57 367 * 365) / 1 447 113 = 14 days
Notes:
21
Notes:
Calculation
23
Steam Ltd Average Collection Period = (99 725 * 365) / 639 731 = 56 days
Power Ltd Average Collection Period = (283 861 * 365) / 1 624 341 = 63 days
Notes:
Calculation assumes that all sales are credit sales.
Results should be compared with credit terms: e.g, 30 days.
With the use of EFTPOS, the Average Collection Period for
many retailers in Australia is around 3 days.
It is common to use average receivables.
24
25
?
?
Steam Ltd Payables Days Outstanding = (76 855 * 365) / 639 731 = 44 days
Power Ltd Payables Days Outstanding = (234 247 * 365) / 1 624 341 = 52 days
Notes:
26
Cash Cycle
Measures how long it takes for inventories to be converted to cash.
As demand grows, inventories, receivables and payables grow. If not
carefully managed, liquidity problems may arise.
27
Notes:
It
28
29
Debt-to-Assets
Measures
30
Notes:
A high Debt-to-Assets ratio is indicative of a high level of
financial risk.
It is common to use average liabilities and assets.
31
Debt-to-Equity
Measures
32
Notes:
A high Debt-to-Equity ratio is indicative of a high level of
financial risk.
It is common to use average liabilities and shareholders
equity.
33
34
Notes:
Companies with stable income can accommodate lower Times
Interest Earned ratios.
Banks like to see Times Interest Earned greater than 3 before
they lend to businesses.
Some analysts use cash flow from operations instead of EBIT.
35
Current ratio
Measures the proportion of current assets to current liabilities.
Varies according to type of industry: e.g., manufacturers require higher
current ratio than service providers.
Affected by inventory valuation method.
Indicates safety margin for lenders of short-term funds.
36
Steam Ltd Current ratio = 227 698 / 200 187 = 1.1 times
Power Ltd Current ratio = 452 265 / 312 340 = 1.4 times
Notes:
If the Current ratio is too high it may be indicative of inefficient
management of working capital.
A Current ratio less than 1 is undesirable.
37
Quick ratio
Measures
38
Steam Ltd Quick ratio = (227 698 - 12 251) / (200 187 - 0) = 1.1 times
Power Ltd Quick ratio = (452 265 - 57 367) / (312 340 - 0) = 1.3 times
Notes:
39
40
Notes:
41
Earnings Yield
Measures
42
Notes:
44
Notes:
46
Notes:
47
Dividend Yield
48
Notes:
Dividend Payout
Measures
50
Notes:
Dividend Coverage
52
Notes:
53
54
Notes:
Calculation reflects the book value of assets, rather than their
market value.
A relatively high NAPS may be indicative of a potential
takeover.
55
Steam Ltd
Power Ltd
Industry
ROE
15.3%
19.3%
15.9%
ROA
14.2%
11.2%
12.1%
0.92 times
1.33 times
0.87 times
15.4%
8.4%
10.5%
Depreciation Expense
7.4%
2.5%
N.A.
Interest Expense
2.4%
3.1%
N.A.
Profitability ratios
Asset Turnover
Gross Profit Margin
56
Steam Ltd
Power Ltd
Industry
40.3 times
25.2 times
78 times
9 days
14 days
5 days
6.4 times
5.7 times
8.1 times
56 days
63 days
44 days
44 days
52 days
N.A.
Cash Cycle
21 days
25 days
N.A.
Investment ratios
Inventory Turnover
Inventory Days Outstanding
Receivables Turnover
57
Steam Ltd
Power Ltd
Industry
Debt-to-Assets
53.6%
72.4%
59.1%
Debt-to-Equity
115.3%
262%
N.A.
6.3 times
2.7 times
3.7 times
Current ratio
1.1 times
1.4 times
1.3 times
Quick ratio
1.1 times
1.3 times
1.2 times
Financing ratios
58
Steam Ltd
Power Ltd
Industry
63.3 cents
33.3 cents
N.A.
6.7%
6.5%
N.A.
PE
14.9 times
15.4 times
N.A.
DPS
21.6 cents
12.7 cents
N.A.
Dividend Yield
2.3%
2.5%
N.A.
Dividend Payout
34%
38%
N.A.
2.9 times
2.6 times
N.A.
$4.13
$1.73
N.A.
Dividend Coverage
NAPS
59
Seasonal patterns
Inventories typically build up prior to seasonal demand: e.g., Christmas, Easter,
Summer, Winter, etc.
Nature of product
Some products typically have higher turnover than others: e.g., fast food
compared to hardware.
60
61
change.
/ political factors.
The Australian
Analyst
62
reports.
63
Limitations - continued:
64
Do
X Do not
65
66