I

Financial Management I
Ch3.
Working with Financial Statements

Sec.1
Cash Flow and Financial Statements
Sources of Cash * () * * Uses of Cash * ()

*
*
2

Sec.2 the Statement of Cash Flows

A common-Size Statement is a standardized financial statement presenting all items in percentage terms. Common-size balance sheet

Common-size income statement

Sec.2 (
Common-Base Year Financial StatementsTrend Analysis It is a standardized financial statement presenting all items relative to a certain base-year amount. Combined Common-Size and Base-Year Analysis * *

Sec.3 Ratio Analysis

() Short-term solvency, or liquidity, measures () Long-term solvency, or financial leverage, ratios () Asset management, or turnover, ratios

Profitability ratios
Market value ratios
5

1.()
Short-Term SolvencyLiquidityMeasures
Current ratio
Current assets Inventory Quick ( Acid-Test ) Ratio = Current liabilities Cash Cash ratio Current liabilities

Current assets Current liabilities

NWC NWC to total assets ratio = Total assets

Current assets Interval measure Average daily operating cos ts
6

Current ratio

Current assets Current liabilities

Unitdollars or times.

For creditors
For firm 11NCW0

Be affected by various types of transactions

()

Current assets Inventory Quick ( Acid-Test ) Ratio = Current liabilities

Inventoryleast liquid current asset. book values are least reliable. quality isnt considered.


Cash ratio
Cash Current liabilities
NWC Total assets
Current assets Average daily operating costs

NWC to total assets ratio = Interval measure

average daily operating costs =

Total costs excluding depreciation & interest 365

2. Long-Term Solvency Measures

( financial leverage ratio )
Total Debt Ratio =

Total assets Total equity Total assets

Long term debt Long-Term Debt Ratio = Long term debt Total equity
Times Interest Earned ( TIE ) = Cash Coverage Ratio =

EBIT Interest

EBIT Depreciation EBDIT Interest Interest

10

 Total Debt Ratio = Total assets Total equity

Total assets
Total debt Debt-equity ratio = Total equity Equity multiplier =

Equity multiplier =

Total assets Total equity

Total assets Total equity Total debt 1 Debt / equity ratio Total equity Total equity

Total Debt Ratio

Total equity 1 1 1 Total assets Equity multiplier

11

Long term debt Long-Term Debt Ratio = Long term debt Total equity
Short-Term Debts () Total capitalization = Long-Term Debt + Total Equity Total assets = Total capitalization + Short-Term Debts (current liabilities) Different people ( and different books ) mean different things by the term debt ratio.
12


Times Interest Earned ( TIE ) =

EBIT Interest *
* interest coverage ratio

Cash Coverage Ratio =

* TIE ratio

EBIT Depreciation EBDIT Interest Interest

* EBIT + Depreciation cash flow

13

3. or
Asset Managementor TurnoverMeasures
asset utilization ratios( Sales ) Inventory Turnover =
Cost of goods sold Inventory
Sales Account Receivable s

Receivables Turnover =
Total Asset Turnover =

Sales Total assets

Payables Turnover , NWC Turnover , Fixed Asset Turnover

14


Inventory Turnover and Days Sales in Inventory

Cost of goods sold Inventory Turnover = Inventory

Inventory Turnover

365 Days Sales in Inventory = Inventory Turnover

Inventory

15


Receivables Turnover and Days Sales in Receivables

Sales Receivables Turnover = Account Receivable s

365 Re ceivables Turnover ( Average Collection Period ACP )

Days Sales in Receivables =

Cost of good sold Payables Turnover = Account Payables

365 Payables Turnover

16

 Asset Turnover Ratio

1 Assets Sales NWC Turnover =

Sales NWC

Fixed Asset Turnover = Total Asset Turnover =

Sales Net fixed assets

Sales Total assets

17

4.Profitability Measures
Measure how efficiently the firm uses its assets and how efficiently the firm managers its operations. Net Income

Net income Profit Margin = Sales

Net income Return on Assets ( ROA ) = Total assets
Return on Equity ( ROE ) =

Net income Total equity

18

Net income Profit Margin = Sales

Sales Net Income

19

 ROA ROE
ROA=

Net income Total assets

Net income ROE= Total equity

ROE

ROAROE
ROAROE

20

5.Market Value Measures

publicly traded co.
Net income NI EPS = Shares outstanding -

PE ratio =

Price per share EPS

* 1 * () *
21

5.()
Market-to-Book Ratio =

Market value( MV ) per share Book value( BV ) per share

* MVBV *

22

Sec4. The Du Pont Identity

ROE Net income( NI ) Total equity( E )

NI Asset ( A) NI A E Asset A E Sales( S ) NI A S A E NI S A S A E

= Profit Margin Total Assets Turnover Equity Multiplier
= Operating efficiency Assets use efficiency Financial leverage
23

Sec4. The Du Pont Identity()

Operating efficiency ROA ROE Assets use efficiency ROA ROE Financial leverage ROE * ROAinterest rate on the debt * The use of debt financing has a number of other effects. ( )

24