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PowerPoint Diagram Pack

Financial Ratios/Comparables Analysis

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Evaluating Financial Ratios (or Comparables) is a crucial method for evaluating the financial and competitive health of a company relative to its competitive peers. This document provides an overview to Financial Analysis, as well as deep dive into 20 widely used Financial Ratios.

Profitability/ Efficiency Ratios Liquidity Ratios

3 Solvency Ratios 4 Investment Ratios

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Financial analysis Introduction

 Financial analysis consists of analyzing the financial performance of a company, over time and relative to its peers: In particular to understand whether and how companies create value Used to assess where a companys problems might lie Can be done internally for own company, or externally for competitors Ratios are especially useful in comparisons with competitors  Building on three different kind of financial statements, financial analysis allows either trends, ratios or cost structure analyses INPUTS TO FINANCIAL ANALYSIS DIMENSIONS OF FINANCIAL ANALYSIS Ratio/Trends Analysis
 Assess evolution of: Revenues, profits, and costs Capital base (debt, equity) Asset base (tangible, intangible)

The Balance Sheet The Profit and Loss (P&L) THIS Account

IS A PARTIAL Cashflow PREVIEW 

You can statement The Cash Flowpreview

the full PowerPoint document and download it at http://learnppt.com/powerpoint/ Cost Structure Analysis


Assesses/measures specific financial features of a firm

Breaks down cost structure into constituents (see cost structure analytic)
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Financial analysis introduction (cont.)

All of the statements are linked together and relate back to the ongoing activities of the firm.
BALANCE SHEET Summarizes the value of what a company owns less what it owes, and balances them with the sources of financing (debt and shareholders funds). Stated at a specified point in time (not for a period)

PROFIT AND LOSS P&LMatches costs to associated revenues in a given year to give a representative picture of profitability. Hence, assets are Depreciated over time and charged to P&L gradually as the asset is used up over its useful life to enable the revenues to be created. Opening BALANCE SHEET Assets Fixed Assets Working capital Financing Owners interests Outside liabilities

ONGOING STREAM OF EVENTS Transactions in year Cash received and paid credit given and received Trading Revenues Recorded in Year Expenditure Recorded in Year Other Capital Paid In Borrowing Assets Purchased

PROFIT AND LOSS ACCOUNT Revenues relevant to year = Income Expenditure relevant to year = -- Expenses Profit (loss)

THIS IS A PARTIAL PREVIEW

CASHFLOW STATEMENT Operating activities Investing activities Servicing of financing Taxation Financing

Closing BALANCE SHEET Assets Fixed Assets Working capital Financing Owners interests Outside liabilities

You can preview the full PowerPoint document and CASHFLOW download it at http://learnppt.com/powerpoint/

Shows the real cash flows associated with income and expenses in a given year, to show the actual change in cash position. Costs and revenues are not matched.
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Financial analysis introduction (cont.)

Definition of Common Financial Terms
Accounts Payable Accounts Receivable (or Trade Credit) Assets Book Value Capital Capitalization Cash flow Common Shares (or Common Stock) Cost of Goods Sold Cost of Debt Debt (Liability) Depreciation Money owed to suppliers  Money owed by customers  Things owned  The value at which an item is reported in financial statements (cf. market value)  The amount invested in a venture  Sum of all long-term sources of financing to the firm (equals total assets less current liabilities)  The amount of cash generated or consumed by an activity over a certain period of time  Securities representing an ownership in a firm  Cost of sales  Total of all costs required to acquire and prepare goods for sale  Yield to maturityA PARTIAL PREVIEW to maturity)frequently after tax, in on debt internal rate return THIS IS 1 minus (i.e. tax rate timesofthe yield to maturity which event it is the  An obligation to pay cash or to provide other goods or services to another party You can preview the full PowerPoint document and Reduction in the value of a long-lived asset from use or obsolescence. The decline is download it at http://learnppt.com/powerpoint/ recognized in accounting by a periodic allocation of the original cost of the asset to current operations

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Financial ratio analysis Introduction

What It Is   Ratios are measures of a firms specific financial features Financial ratios typically fall into four categories: Key strategic ratios 1 Profitability/ Efficiency Ratios Return on sales: Profit margin Gross margin Return on net assets Return on equity Other ratiosa Inventory turnover Days inventory Total asset turnover Days receivable Fixed asset utilisation Quick ratio Working capital Interest cover Why We Use It  Financial ratios help us diagnose the financial health of a firm:  Profitability/efficiency ratios measure how well a firm uses its assets to generate profits  Liquidity ratios measure a firms ability to meet short-term liabilities  Solvency ratios are an indicator of a firms financial strength (assess the mix of funds in the balance sheet and measure firms ability to withstand operating setbacks)  Investment ratios are indicative of the markets perceptions of a company. They are used mainly by investors to value a company. Strengths & Limitations

Liquidity Ratios

Current ratio

3 Solvency Ratios 4 Investment Ratios

 Strengths: Can be used to identify potential areas of improvement THIS IS A PARTIAL PREVIEW  Limitations: Dividend yield Price-earning ratio Accounting principles can differ making comparisons Youper share Earning yield PowerPoint document and can preview the full Earning difficult download Dividend cover it at http://learnppt.com/powerpoint/ managing year-end Need to be wary of management Dividend per share figures Book values for fixed assets may be out of date Debt equity ratio
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1 To be used selectively, according to the industry and/or the level of detail required.

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Financial ratio analysis how to do it

Key Strategic Ratios (1/5)
Profitability/Efficiency Ratios
Return on sales (ROS): Are goods sold at an appropriate price and produced efficiently? Two ratios reflect ROS:

Ratio Profit Margin (also known as operating margin)

Formula = PBIT Sales Where: PBIT: profit before interest and tax = Sales cost of goods sold operating expenses = Trading profit

What It Does Measures bottom line company profitability Indicates the effectiveness of sales and production in producing profit Constitutes a good ratio for comparing the performances of competitors in the same industry

Drivers Sales: Price Volume Operating expenses

Gross Margin

= Gross profit Sales THIS

revenue remaining after the IS A PARTIAL PREVIEWcost

Measures percentage of

Where: You can preview the and Gross profit download of goods = Sales cost it at http://learnppt.com/powerpoint/ sold
1 Costs that are altered by a change in output.

of goods sold is covered Constitutes a weak ratiolooks full variable1 costs only document PowerPoint at

Price Cost of producing goods

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Financial ratio analysis how to do it

Key Strategic Ratios (2/5)
Profitability/Efficiency Ratios (cont.)

Return on Net Assets (RONA): How profitable is this company?

Ratio RONA is also known as: Return on Asset (ROA) Return on Capital Employed (ROCE) Formula (Profit Before Interest + Tax)a Fixed Assets + (Current Assets Current Liabilities)b (Profit Margin x Asset Turnover) = a. Can be defined as profit after tax, but before deduction of interest. b. Current assets current liabilities = working capital. It represents the amount of day-to-day operating liquidity available to business. What It Does Measures profitability Measures how well assets have been employed, irrespective of how the company is financed Drivers Profit margin: Price Cost Asset turnover: Sales Capital employed

Return on Equity (ROE): What is shareholders profit?

Ratio ROE Formula = Profit After Tax Ordinary Fundsa What It Does Drivers Profit margin: Price Cost Asset turnover: Sales Capital employed Financing: Debt to equity ratio Cost of debt Tax-effectiveness
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THIS IS A PARTIAL PREVIEW

reserves You can preview the full PowerPoint document and Profit after tax used because it is the return download it subtracted. from which dividend is at http://learnppt.com/powerpoint/

a. Issued capital + capital reserves + revenues

Measures the return on ordinary shareholders funds: Assesses the efficiency with which the firm employs owners capita Measures return for shareholder

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Financial ratio analysis how to do it

Key Strategic Ratios (3/5)
Profitability/Efficiency Ratios (cont.) Current Ratio: Will the company have sufficient cash in the immediate future to meet its short-term liabilities? Ratio Current Ratio Formula Current Assets Current Liabilities What It Tells Drivers

Indicates a companys short Nature of the industry: term financial position: Some have to carry Compares the assets that will large stocks and, i.e.: (cash and nearturn into cash within the year have long production cash assets available to to the liabilities that must be cycles business) over paid within the year Others carry almost (upcoming cash A company with a low current no stock and receive requirements) ratio lacks liquidity in the more credit than they sense that it cannot reduce its give current asset investment to Type of current asset: supply cash to meet maturing Some are more liquid obligations: (i.e. easier to sell It must rely instead on readily) THIS IS A PARTIAL PREVIEW operating income and Volatility of working outside financing capital requirements You can preview the full PowerPointfeature of Debtor and creditor The most informative document and a current ratio is its normal level management: download it at http://learnppt.com/powerpoint/ and any trend from year to year Bargaining power of company

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Financial analysis illustrative output

Cashflow, $MM, 1983-1994

0 0 0
Tax

Trends in ratios can similarly be plotted

20 0 -20 - 0 - 0 - 0 -100

Dividends Interes t Capex (Net) Changes in work ing c apital O ther / E x traordinary item s Deprec iation P B IT Net Cas hflow Cum ulative Cas hflow

THIS IS A PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

Source: Dawson International

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0 1

1 1

2 1

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Financial ratio analysis illustrative output

A Dupont Tree (also known as RONA model) is a useful way to structure and present output.

Levers
UK External Sales

RONA/Dupont Model

Shareholder Value

EU and EFTA Sales Gross Sales Total Turnover

Margin

Rest of World Sales Intras-Group Sales Sales Trading Profit PBIT PAT

Raw Materials & Consumables

Cost of Sales

Total Costs

Subsidiaries Results

Taxes

Maintenance Total Employment External Costs Stock Revaluation Other Operating Costs Carriage RONOA Exceptional Items Intra-Group Materials Loose Plant, Spares & Tools Other Intra-Group Costs Tangible Assets Fixed Assets Net Operational Assets Net Assets Interest Sale of Fixed Assets Sale of Subsidiaries RONA

Costs

Depreciation and Grant Costs

$
Creditors (<1 year) Provisions and Accruals Cash / Loans Investments

Raw Materials

Stocks

THIS IS A PARTIAL PREVIEW

Working Capital

Asset Base

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Work in Progress Finished Goods Short Term Investments Trade Debtors Debtors Trade Creditors Creditors (<1 year)

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END OF PARTIAL PREVIEW You can preview the full PowerPoint document and download it at http://learnppt.com/powerpoint/

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