Professional Documents
Culture Documents
Presenters name
Presenters title
dd Month yyyy
GRAPHICS: EXAMPLE
Operating Profit by Geographic Segment
22%
21%
19%
38%
North America
Europe/South Pacific
Latin America
Greater Asia/Africa
GRAPHICS: EXAMPLE
2011
2010
2009
2008
2007
Greater Asia/Africa
Europe/South Pacific
Latin America
North America
0
200
400
600
800
1000
1200
1400
1600
$ millions
GRAPHICS: EXAMPLE
Operating profit margin
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
REGRESSION: EXAMPLE
14.0
12.0
10.0
GDP Change
4.0
2.0
0.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
-2.0
-4.0
Sales Growth
Copyright 2013 CFA Institute
COMMON-SIZE ANALYSIS
Common-size analysis: Express financial data, including entire financial
statements, in relation to a single financial statement item or base.
Vertical common-size
- Balance sheet: Each item as a percent of total assets.
- Income statement: Each item as a percent of total net revenues.
- Cash flow: Each line as a percent of sales, assets, or total in and out.
- Highlights composition and identifies whats important.
Horizontal common-size
- Percentage increase or decrease of each item from the prior year or
showing each year relative to a base year.
- Highlights items that have changed unexpectedly or have
unexpectedly remained unchanged.
Assets
Cash
Receivables
Inventory
Fixed assets net of depreciation
Investments
Total Assets
Company 1 Company 2
% of Total % of Total
Assets
Assets
38
12
33
55
27
24
1
2
1
7
100
100
10
FINANCIAL RATIOS
Ratios
- Express one number in relation to another.
- Standardize financial data in terms of mathematical
relationships expressed as percentages, times, or days.
- Facilitate comparisonstrends and across companies.
Ratios are interrelated
11
RATIO ANALYSIS
How profitable was Company X?
15.26%
A ratio is NOT the answer (except sometimes on
an exam).
A ratio is an indicatorfor example, an indicator
of relative activity, profitability, liquidity, solvency.
12
RATIO ANALYSIS
How profitable was company X?
COMPANY XS PROFITABILITY
HAS IMPROVED. ITS NET
PROFIT MARGIN WAS 15.3%,
UP FROM 14.9% LAST YEAR.
13
RATIO ANALYSIS
How profitable was Company X?
COMPANY X WAS MORE PROFITABLE THAN
COMPANY Y AS EVIDENCED BY ITS NET
PROFIT MARGIN. COMPANY XS MARGIN OF
15.3% WAS HIGHER THAN COMPANY YS
MARGIN OF 12.0%.
14
15
16
Description
Activity ratios. How efficient are the firms operations
and the firms management of assets?
Liquidity
Solvency
Profitability
Valuation
17
Description
Activity ratios. How efficient are the firms operations
and the firms management of assets?
Liquidity
Solvency
Profitability
Valuation
18
MEASURE OF PROFITABILITY:
RETURN ON EQUITY (ROE)
What rate of return has the firm earned on the shareholders
equity it had available during the year?
Amount of return
Amount invested
Net income
Average equity
19
DECOMPOSE ROE
ROE =
Net income
Average equity
Net income
Average assets
Average assets
Average equity
ROA
Leverage
20
DECOMPOSE ROE
ROE =
ROA
Leverage
21
RETURN ON ASSETS
What rate of return has the firm earned on the assets it had available to
use during the year?
The general form of this computation is the same:
Amount of return
Rate of Return =
Amount invested
Two variants of ROA computation:
Net income
(1) ROA =
Average assets
(2)
ROA =
=
PROFITABILITY, COMPETITION,
AND BUSINESS STRATEGY
ROA =
Net income
Average assets
ROA =
Net income
Revenue
Revenue
Average assets
In other words,
ROA can
be thought
of as:
23
DECOMPOSING
RETURN ON EQUITY
ROE =
ROE =
Profit margin
Net income
Revenue
Turnover
Revenue
Average assets
Leverage
Average assets
Average equity
24
DECOMPOSING
RETURN ON EQUITY
Du Pont Analysis
25
Sales ($)
Net income (NI) ($)
Average assets ($)
Average equity ($)
Average liabilities ($)
Co. A
2,000
200
1,000
1,000
0
Co. B
4,000
200
2,000
1,000
1,000
Co. C
6,675
200
1,500
1,000
500
Averag
e
4,225
200
1,500
1,000
500
ROE (NI/Equity)
Net profit margin
(NI/Sales)
Turnover
(Sales/Assets)
Leverage
(Assets/Equity)
Copyright 2013 CFA Institute
26
Co. B
2,000
4,000
6,675
4,225
200
200
200
200
1,000
2,000
1,500
1,500
1,000
1,000
1,000
1,000
1,000
500
500
ROE (NI/Equity)
20.0%
20.0%
20.0%
20.0%
10.0%
5.0%
3.0%
4.7%
Turnover (Sales/Assets)
4.45
2.82
Leverage (Assets/Equity)
1.5
1.50
Sales ($)
NI ($)
Co. C
Average
27
AAPL
ROE
HPQ
27.19% 21.50%
Net income/Sales
Net profit
margin
DELL
61.19%
14.88%
7.04%
4.06%
Sales/Average assets
Asset
turnover
1.00
1.17
2.26
Average assets/
Average equity
Financial
leverage
1.83
2.61
6.67
28
DUPONT ANALYSIS :
FURTHER DECOMPOSITION
Net income
EBT
EBT
EBIT
EBIT
Revenue
Revenue
Average assets
Average assets
Average equity
29
30
DISCUSSION BY CATEGORY
Category
Activity
Description
Activity ratios. How efficient are the firms operations
and the firms management of assets?
Liquidity
Solvency
Profitability
Valuation
31
ACTIVITY RATIOS
Also known as asset utilization or operating efficiency ratios.
How efficiently is the firm using its assets? How many dollars of
sales was the firm able to generate from each dollar of assets?
Broadly
Asset turnover = Revenue/Average total assets
Low or declining ratios could mean
- Sales are sluggish,
- A heavy investment in assets (inefficient? plant modernization to
help in future? strategy shift?), and/or
- Asset mix changed.
Specifically, for fixed assets:
Fixed asset turnover = Revenue/Average net fixed assets
Can compute for any category of assets.
32
ACTIVITY RATIOS
Also known as asset utilization or operating efficiency ratios
Working capital turnover
Fixed asset turnover
Total asset turnover
Numerator
Revenue
Revenue
Revenue
Denominator
Average working capital
Average net fixed assets
Average total assets
33
Denominator
Inventory turnover
Cost of sales
Average inventory
Number of days in
period
Inventory turnover
Receivables turnover
Revenue
Average receivables
Number of days in
period
Receivables
turnover
Payables turnover
Purchases
Average trade
payables
Number of days in
period
Payables turnover
34
35
LIQUIDITY
How well positioned is the firm to meet its near-term
obligations?
Current ratio = Current assets/Current liabilities
Quick ratio = (Cash + Short-term marketable investments +
Account receivables)/Current liabilities
Cash ratio = (Cash + Short-term marketable investments)/
Current liabilities
36
DISCUSSION BY CATEGORY
Category
Activity
Description
Activity ratios. How efficient are the firms operations
and the firms management of assets?
Liquidity
Solvency
Profitability
Valuation
37
38
Numerator
Denominator
Total debt
Total debt
Total assets
Total debt + Total
shareholders equity
Total debt
Total shareholders equity
Average total assets Average total equity
EBIT
EBIT + Lease
payments
Interest payments
Interest payments + Lease
payments
39
DISCUSSION BY CATEGORY
Category
Activity
Description
Activity ratios. How efficient are the firms operations
and the firms management of assets?
Liquidity
Solvency
Profitability
Valuation
40
VALUATION RATIOS:
PRICE-TO-EARNINGS RATIO
P/E relates earnings per common share to the market price at
which the stock trades, expressing the multiple that the stock
market places on a firms earnings.
P/E
Price
Earnings per share
41
VALUATION RATIOS
Numerator
Denominator
P/E
P/CF
P/S
P/BV
Valuation ratios
42
DIVIDEND-RELATED QUANTITIES
Dividend yield
43
Numerator
EBIT or EBITDA
FFO to debt
FFO
Total debt
CFO (adjusted)
minus capital
expenditures
Total debt
Denominator
Gross interest (prior to
deductions for capitalized
interest or interest income)
Total debt
44
Credit Ratio
Numerator
Denominator
Return on capital
EBIT
Debt to EBITDA
Total debt to total debt
plus equity
Total debt
EBITDA
Total debt
45
46
MODEL BUILDING:
EXAMPLES OF POSSIBLE USES OF RATIOS
Sales forecast (percent change from horizontal common-size
income statement)
Expenses (from common-size income statement)
Gross profit (gross profit margin)
Operating profit (operating profit margin)
Assets (days receivable, days payable, PP&E turnover)
Liabilities (leverage ratios)
Cash flow
47
Sales forecast
Forecast
Debt
Forecast
Interest
Expense
Forecast
Cash Flow
Forecast
Income and
Taxes
Expenses
Gross Profit
Operating Profit
Assets
Liabilities
Cash Flow
48
49