Finansal Yönetim Financial Analysis Chapter McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Analysis 33- 2 Chapter Outline Ratio analysis and its importance • Use of ratio for measurements • The DuPont system of analysis • Trend analysis • Evaluation of reported income to identify • distortion3- 3 Ratio Analysis Financial ratios • Used to weigh and evaluate the operating – performance of a firm Used to compare performance record as against – similar firms in the industry Analyzing ratios and numerical calculations – Such data is provided by various organizations –3- 4 Ratios and their Classification A. Profitability ratios 1. Profit margin 2. Return on assets (investment) 3. Return on equity B. Asset utilization ratios 4. Receivable turnover 5. Average collection period 6. Inventory turnover 7. Fixed asset turnover 8. Total asset turnover3- 5 Ratios and their Classification (cont ’ d) C. Liquidity ratios 9. Current ratio 10. Quick ratio D. Debt utilization ratios 11. Debt to total assets 12. Times interest earned 13. Fixed charge coverage3- 6 Types of Ratios Profitability ratios • Measurement of the firm’s ability to earn an – adequate return on: Sales • Assets • Invested capital • Asset utilization ratios • Measures the speed at which the firm is turning – over accounts receivable3- 7 Types of Ratios (cont ’ d) Liquidity ratios • Emphasizes the firm’s ability to pay off short- – term obligations as and when due Debt utilization ratios • Estimates the overall debt position of the firm – Evaluates in the light of asset base and earning – power3- 8 Financial Statement for Ratio Analysis3- 9 Profitability Ratios3- 10 DuPont System of Analysis A satisfactory return on assets might be • derived through: A high profit margin – A rapid turnover of assets (generating more – sales per dollar of its assets) Or both – Return on assets (investment) = Profit margin × Asset turnover 3- 11 DuPont System of Analysis (cont ’ d) A satisfactory return on equity might be • derived through: A high return on total assets – A generous utilization of debt – Or a combination of both – Return on equity = Return on assets (investment) (1 – Debt/Assets)3- 12 DuPont Analysis3- 13 Return of Wal-Mart versus Macy ’ s using the Du Pont method of analysis, 20073- 14 Asset Utilization Ratios These ratios relate the balance sheet to the • income statement3- 15 Asset Utilization Ratios (cont ’ d) 3- 16 Liquidity Ratios 3- 17 Debt Utilization Ratios Measures the prudence of the debt • management policies of the firm3- 18 Debt Utilization Ratios (cont ’ d) Fixed charge coverage measures the firm’s • ability to meet the fixed obligations Interest payments alone are not considered • Income before interest and taxes ……………… ..\$550,000 Lease payments …………………………………… \$50,000 Income before fixed charges and taxes ………… \$600,000 3- 19 Ratio Analysis3- 20 Trend Analysis3- 21 Trend Analysis in the Computer Industry3- 22 Impact of Inflation on Financial Analysis Inflation • Revenue is stated in current dollars – Plant, equipment, or inventory may have been – purchased at lower price levels Profits may be more a function of increasing – prices than due to good performance3- 23 Comparison of Replacement and Historical Cost Accounting3- 24 Comparison of Replacement and Historical Cost Accounting (cont ’ d) Replacement cost – reduces income but • increases assets An increase lowers the debt-to-assets ratio – A decrease indicates decrease in the financial – leverage of the firm A declining income results in a decreased ability – to cover interest costs3- 25 Impact of Disinflation on Financial Analysis Disinflation • Financial assets such as stocks and bonds have – the potential to do well – encouraging investors Tangible assets do not have the potential – Deflation • Actual reduction of prices affecting everybody – due to bankruptcies and declining profits3- 26 Other Elements of Distortion in Reported Income Effect of changing prices • Reporting of revenues • Treatment of nonrecurring items • Tax write-off policies •3- 27 Income Statements3- 28 Explanation of Discrepancies (cont ’ d) Sales • Firm may defer recognition until each payment is – received or full recognition at earliest possible date Cost of goods sold • Use of different accounting principles – LIFO – versus FIFO3- 29 Explanation of Discrepancies (cont ’ d) Extraordinary gains/losses • Inclusion of events in computing current income – or leaving them out Net income • Use of different methods of financial reporting –