of financial statements（国际投资英文版） ppt课件

Slides by: Pamela L. Hall, Western Washington University Analysis of Financial Statements Chapter 4 Francis & Ibbotson 1 1 Chapter 4: Analysis of Financial Statements Background Financial statements aid in the process of fundamental analysis Fundamental analysts evaluate financial ratios as an aid to determine if a security is over- or under-priced The efficient market theory suggests that publicly available financial statements offer nothing of value Professional security analysts have already discovered pertinent information and traded based on that information Francis & Ibbotson 2 2 Chapter 4: Analysis of Financial Statements Financial Statements Large public firms issue quarterly financial statements Small firms may only issue annual statements Closely-held corporations may not issue public financial statements Main financial statements Balance sheet Income and expense statement Statement of cash flows Francis & Ibbotson 3 3 Chapter 4: Analysis of Financial Statements Balance Sheet Represents historical value of firms assets, liabilities and stockholders equity on the day the accounting period ends Assets = Liability + Stockholders Equity Stockholders Equity represents firms net worth (Book value of owners equity) Most firms end the fiscal year on December 31 Francis & Ibbotson 4 4 Chapter 4: Analysis of Financial Statements KOs Balance Sheet Francis & Ibbotson 5 5 Chapter 4: Analysis of Financial Statements Income & Expense Statement Report the flows that occurred during the accounting period AKA profit and loss statement Sales Total Expenses = Income (Loss) Francis & Ibbotson 6 6 Chapter 4: Analysis of Financial Statements KOs Income & Expense Statement Francis & Ibbotson 7 7 Chapter 4: Analysis of Financial Statements Statement of Cash Flows Cash flows are the net cash remaining after all reinvestments have been deducted Cash flow is not affected by Accelerated depreciation rules Arbitrary inventory valuation rules Accrual methods of accounting Accounting income is more ambiguous than a firms cash flows Francis & Ibbotson 8 8 Chapter 4: Analysis of Financial Statements KOs Statement of Cash Flows Francis & Ibbotson 9 9 Chapter 4: Analysis of Financial Statements KOs Statement of Cash Flows Francis & Ibbotson1010Chapter 4: Analysis of Financial Statements KOs Cash Flows Cash flows provided by (used in):199719981999 Operations4,0333,4333,883 Investment activities(1,082)(1,557)(1,551) Free cash flow2,9511,8762,332 Cash flows used in: Financing Share repurchases(1,262)(1,563)(15) Other financing activities(1,833)230(456) Exchange(134)(28)(28) Increase (Decrease) in cash304(89)(37) KO generates tremendous cash flows from operations KO uses its large cash flows for reinvesting within the firm, joint ventures, stock repurchases and cash dividends. Francis & Ibbotson1111Chapter 4: Analysis of Financial Statements Sources of Financial Statements Publicly traded companies in the U.S. are required to make full disclosure of their financial statements Usually a phone call or letter is all that is needed & firm will mail statements to you SECs Electronic Data Gathering Analysis and Retrieval (EDGAR) System has the information for free at /edgarhp.htm Not user friendly EDGAR Online at and FreeEDGAR at are more user friendly but not all the data is free Hoovers On-Line at , PR Newswire at and Yahoo!Finance at offer additional information Francis & Ibbotson1212Chapter 4: Analysis of Financial Statements Common-Sized Financial Statements Express each item as a percentage of a common base number Such as Assets or Sales Useful when comparing A firm over time Different sized firms Firms from different countries Francis & Ibbotson1313Chapter 4: Analysis of Financial Statements KOs Common-Sized Balance Sheet Francis & Ibbotson1414Chapter 4: Analysis of Financial Statements KOs Common-Sized Income & Expense Statement Francis & Ibbotson1515Chapter 4: Analysis of Financial Statements Analysis of Sales and Competition KO manufactures syrups for the following products Coke Products (70% of total sales) Classic Coke Diet Coke Decaffeinated Diet Coke Cherry Coke Diet Cherry Coke Non-Coke soft drinks (21% of total sales) Sprite Fanta TAB Nestea Diet Sprite Mr. PiBB Fresca POWERaDE Mello Yello Lift Barqs Specialty local drinks Francis & Ibbotson1616Chapter 4: Analysis of Financial Statements Analysis of Sales and Competition Food Sales Fruit juices generate 9% of total sales Minute Maid juice Hi-C Fruitopia In the 1970s and 80s KO also sold Wines Straws Plastic cups Water conditioning equipment Discontinued these product lines to focus on core business. Francis & Ibbotson1717Chapter 4: Analysis of Financial Statements Analysis of Sales and Competition KO products made up 18% of the non- alcoholic soft drinks purchased in the world in 1999 Sales have grown at 6% annually for the last decade EPS grew at 4.8% during the same period Francis & Ibbotson1818Chapter 4: Analysis of Financial Statements Analysis of Sales and Competition KO sells its products in 200 countries Only 21% are made in the U.S. where KO is headquartered. Francis & Ibbotson1919Chapter 4: Analysis of Financial Statements Analysis of Sales and Competition Company strengths Multinational diversification Differentiated product line Executives forecast a continuation of past growth Main competitor PepsiCo Only weak line is the food products line Francis & Ibbotson2020Chapter 4: Analysis of Financial Statements Financial Ratios A financial ratio combines multiple values to produce a new, meaningful value Used to quantify, summarize and interpret financial data Types of ratios Solvency or liquidity ratio Measure firms ability to meet short-term obligations Turnover ratios Measure rate of activity Coverage ratios Measure extent to which the firms earnings can cover debt-related expenses Francis & Ibbotson2121Chapter 4: Analysis of Financial Statements Financial Ratios Leverage ratios Measure extent to which firm has been financed by creditors Profitability ratios Measures productivity of money invested in firm Per share data Examines items that affect common stocks market price per share Growth ratios Measures contribution of various items to firms development Risk analysis ratios Measures variability Francis & Ibbotson2222Chapter 4: Analysis of Financial Statements Solvency (Liquidity) Ratios Current Ratio Formula Current Assets Current Liabilities Values 1997: 0.81 1998: 0.74 1999: 0.66 For every $1 in current liabilities the firm had $0.66 in current assets. KO did not quite have enough current assets to pay its bills. If the firms inventory becomes worthless, KO does not have enough liquid current assets to pay its bills. Quick ratio is more discriminating than Current Ratioonly includes the most liquid assets. Quick Ratio Formula (Current Assets Inventory) Current Liabilities Values 1997: 0.68 1998: 0.64 1999: 0.55 Francis & Ibbotson2323Chapter 4: Analysis of Financial Statements Solvency (Liquidity) Ratios Even though KO has experienced huge cash flows, the firms current and quick ratios are quite low Thus, the solvency ratios did not tell the whole story Francis & Ibbotson2424Chapter 4: Analysis of Financial Statements Turnover Ratios Inactive assets might not be generating earnings Turnover ratios help pinpoint the non-earning assets Receivables Turnover Ratio Formula Annual credit sales Accounts receivable Values 1997: 11.51 1998: 11.29 1999: 11.02 Receivables turn over slightly less than once a month. Is this too low/high? Cannot be determined without knowing firms credit policy and industry customs. Francis & Ibbotson2525Chapter 4: Analysis of Financial Statements Inventory Turnover Formula Annual sales (at cost) Average Inventory (at cost) Values 1997: 6.27 1998: 6.25 1999: 5.58 Turnover Ratios Collection Period Formula Accounts receivable Average days sales Values 1997: 31.71 days 1998: 32.32 days 1999: 33.14 days Acceptable value depends on product being sold and credit terms. Need more information before we can evaluate these values. Francis & Ibbotson2626Chapter 4: Analysis of Financial Statements Turnover Ratios Asset Turnover Ratio Formula Annual Sales Total Assets Values 1997: 1.11 1998: 0.98 1999: 0.92 Needs to be compared to competitors values. Equity turns over faster than assets because firm uses financial leverage. Equity Turnover Ratio Formula Annual Sales Equity Values 1997: 2.58 1998: 2.24 1999: 2.08 Francis & Ibbotson2727Chapter 4: Analysis of Financial Statements Coverage Ratios Times Interest Earned Formula Annual operating income Annual interest payment Some financial analysts prefer to use the pre-tax gross income instead of operating income Some analysts use all debt-service charges, lease payment and cash dividends on preferred stock instead of interest payment alone. KOs income can fall 98.07% (1 (1/51.7 times) before it will be insufficient to cover the firms interest expense. Values 1997: 106.40 1998: 85.64 1999: 51.71 Francis & Ibbotson2828Chapter 4: Analysis of Financial Statements A Cash Flow Ratio Two values from the Income & Expense Statement can be used to define a companys cash flow Earnings before interest and taxes (EBIT) Depreciation/Amortization Allocates an assets cost over its useful life A non-cash expense deducted from revenue Reduces taxes KOs 1999 cash flow is EBIT of $3,982 + Depreciation of $792 = $4,774 Can now calculate the Cash flow-to-long-term-debt ratio 4,774 854 = 5.59 Francis & Ibbotson2929Chapter 4: Analysis of Financial Statements Financial Leverage Ratios Total Debt to Total Asset Ratio Formula Total debt Total assets Values 1997: 0.57 1998: 0.56 1999: 0.56 Total Debt to Total Equity Formula Total debt Total equity Values 1997: 131.7 1998: 127.8 1999: 127.3 Francis & Ibbotson3030Chapter 4: Analysis of Financial Statements Financial Leverage Ratios Long-term Debt to Equity Formula Long-term debt Equity Values 1997: 0.31 1998: 0.25 1999: 0.24 Long-term Debt to Capitalization Formula Long-term debt Capitalization Values 1997: 0.24 1998: 0.20 1999: 0.19 Sum of permanent current liabilities, long-term debt, preferred stock and stockholders equity. Francis & Ibbotson3131Chapter 4: Analysis of Financial Statements Financial Leverage Ratios Total Asset to Equity Ratio Formula Total assets Equity Values 1997: 231.7% 1998: 227.8% 1999: 227.3% Financial ratios are sometimes calculated with market values rather than book values Often more realistic and relevant Francis & Ibbotson3232Chapter 4: Analysis of Financial Statements Profitability Ratios Net Profit Margin Formula Net income Sales Values 1997: 0.22 or 22% 1998: 0.19 or 19% 1999: 0.12 or 12% An appropriate standard is needed to interpret a profit margin. A dollars worth of assets yielded about 11 of after- tax earnings in 1999. Return on Asset Formula Net income Total assets Values 1997: 0.24 or 24% 1998: 0.18 or 18% 1999: 0.11 or 11% Francis & Ibbotson3333Chapter 4: Analysis of Financial Statements Profitability Ratios Return on Equity (ROE) Formula Net income Equity Values 1997: 0.57 or 57% 1998: 0.42 or 42% 1999: 0.26 or 26% If a firm has zero debt, its ROA and ROE are equal. If the rate does not exceed current interest rates, the firm is not earning enough to pay its debts. Long-Term Capitals Pretax Rate of Return Formula (Interest + Pretax earnings) Capitalization Values 1997: 0.75 or 75% 1998: 0.58 or 58% 1999: 0.37 or 37% Francis & Ibbotson3434Chapter 4: Analysis of Financial Statements Per Share Data for Common Stock Earnings Per Share (EPS) Formula Net income # of common shares outstanding Values 1997: $1.67 1998: $1.43 1999: $0.98 Cash Dividend Per Share Formula Total corporate dividend # of common shares outstanding Values 1997: $0.56 1998: $0.60 1999: $0.64 Francis & Ibbotson3535Chapter 4: Analysis of Financial Statements Per Share Data for Common Stock Payout Ratio Formula Cash dividends per share EPS Values 1997: 0.336 or 33.6% 1998: 0.419 or 41.9% 1999: 0.653 or 65.3% Measures the percentage of earnings the firm pays out as a dividend. Measures the percentage of earnings the firm retains. Retention Rate Formula Retained Earnings Net income Values 1997: 0.664 or 66.4% 1998: 0.581 or 58.1% 1999: 0.350 or 35.0% Francis & Ibbotson3636Chapter 4: Analysis of Financial Statements Per Share Data for Common Stock Price-Earnings Ratio (P-E) Formula Market price per share EPS Values 1997: Low of 32 to high of 47 1998: Low of 36 to high of 56 1999: Low of 48 to high of 72 Francis & Ibbotson3737Chapter 4: Analysis of Financial Statements Analyzing and Interpreting Ratios DuPont Analysis Allows for a thorough analysis of ROE Francis & Ibbotson3838Chapter 4: Analysis of Financial Statements KOs DuPont Analysis Year Asset Turnover Financial Leverage Profit MarginROE 19901.102.4113.50%35.91% 19911.142.4013.98%38.17% 19921.182.8412.73%42.80% 19931.162.6215.58%47.47% 19941.172.6515.78%48.79% 19951.202.7916.57%55.38% 19961.162.6318.70%56.73% 19971.122.3221.88%56.76% 19980.982.2818.78%42.04% 19990.922.2712.27%25.52% Profit Margin rose and then fell over the decade. Asset Turnover rose and then fell over the decade. The increased use of financial leverage increased ROE through 1996. Francis & Ibbotson3939Chapter 4: Analysis of Financial Statements Analysis of Growth Common stock price appreciation depends on various factors Growth financed internally depends on the amount of retained earnings A corporations growth rate depends on the return on equity Growth rate = RR x ROE Substituting the three-part DuPont ROE equation, we obtain Shows that multiple factors influence growthone factor can rise and another fall and growth can remain unchanged. Francis & Ibbotson4040Chapter 4: Analysis of Financial Statements Risk Analysis As a firms risk increases Investors demand higher interest rates (returns) Thus, the price of the firms bonds and stocks will drop (inverse relationship) How do you measure risk? Coefficient of variation Standard deviation average value Rescales different-size standard deviations to make them easily comparable Francis & Ibbotson4141Chapter 4: Analysis of Financial Statements Risk Analysis Business risk Determined by volatility of operating income Arises from fluctuations in sales and production costs Financial risk Arises due to the use of financial leverage (debt) Francis & Ibbotson4242Chapter 4: Analysis of Financial Statements Ratio Standards of Comparison Cross-Sectional standards Compare a firms financial ratios to other firms or industry average Industry averages are published by companies such as Moodys Standard & Poors Fitchs Value Line Duff and Phelps Dunn and Bradstreet Can reveal a firms strengths/weaknesses compared to other firms Francis & Ibbotson4343Chapter 4: Analysis of Financial Statements Ratio Standards of Comparison Time-Series standards Compare a firm to its own ratios from other years Helps highlight trends/changes that have occurred Francis & Ibbotson4444Chapter 4: Analysis of Financial Statements Potential Problems with Financial Analys