Kế toán, kiểm toán - Chapter 11: Financial statement analysis

CHAPTER 11FINANCIAL STATEMENT ANALYSISMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objectives How can liquidity measures be influenced by the inventory cost-flow assumption used?How do suppliers and creditors use a customer’s payment practices to judge liquidity?What are the influences of alternative inventory cost-flow assumptions and depreciation methods on turnover ratios?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow are the number of days’ sales in accounts receivable and inventory used to evaluate the effectiveness of the management of receivables and inventory?What is the significance of the price/earnings ratio in the evaluation of the market price of a company’s stock?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow are dividend yield and the dividend payout ratio used by investors to evaluate a company’s common stock?What is financial leverage, and why is it significant to management, creditors, and owners?What is book value per share of common stock, how is it calculated, and why is it not a very meaningful amount for most companies?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow can common size financial statements be used to evaluate a firm’s financial position and results of operations over a number of years?How can operating statistics using physical, or non-financial data, be used to help management evaluate the results of the firm’s activities?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1How can liquidity measures be influenced by the inventory cost-flow assumption used?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial Statement Analysis RatiosUsed to facilitate the interpretation of an entity’ financial position and results of operationsCan be classified into four groups:LiquidityActivityProfitabilityDebt, or financial leverageMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Liquidity MeasuresThe balance sheet carrying values of inventory will depend on the cost-flow assumption usedCannot compare firms using different inventory cost-flow assumptionsFirms often report the LIFO reserve – the difference between LIFO an FIFO inventory valuesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Liquidity RatiosWorking capital = Current assets – Current liabilitiesCurrent ratio = Current assets Current liabilitiesAcid-test ratio =  Cash + Accounts receivable Current liabilitiesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2How do suppliers and creditors use a customer’s payment practices to judge liquidity?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Customer’s Payment PracticesSuppliers and creditors want to know if a firm is paying its bills promptlyThis information may be obtained from other suppliers, credit bureaus, and Dun & Bradstreet reportsCredit bureaus and credit rating agencies provide a graded rating for firmsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What are the influences of alternative inventory cost-flow assumptions and depreciation methods on turnover ratios?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Activity MeasuresFocus primarily on the relationshipbetween assets and salesIn computing activity measures, average assets is usedAverage asset amounts include inventory and fixed assetsThe values of inventory (based on cost-flow assumptions) and fixed assets (based on book cost less accumulated depreciation) depend on the cost-flow assumptions and depreciation methods usedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Activity RatiosTotal asset turnover = Sales Average total assetsInventory turnover = Cost of goods sold Average inventoriesNumber of days’ sales in accounts receivable = Accounts receivable Average days’ salesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More Activity RatiosAverage days’ sales = Annual sales 365Number of days’ sales in inventory = Inventory Average days’ cost of goods soldAverage days’ cost of goods sold = Average cost of goods sold 365McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4How are the number of days’ sales in accounts receivable and inventory used to evaluate the effectiveness of the management of receivables and inventory?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Number of Days’ Sales in Accounts ReceivableAssesses the efficiency of managing accounts receivableThe sooner accounts receivable are collected, the sooner cash is available for use in the businessGenerally, the higher the turnover and lower the number in days’ sales, the betterAn increase in the age of accounts receivable is a warning that profitability and liquidity may be weakeningMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Number of Days’ Sales in InventoryAssesses the efficiency of managing inventoryThe lower that inventories can be maintained relative to sales,the less inventory that needs to be financed with debt and the greater the return on investmentTrend in the efficiency of managing inventory is the important factorMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Profitability MeasuresOperating income is frequently used in ROI calculations because it is a more direct measure of management’s activitiesAverage ROI based on net income for most American firms is between 7% and 10%Again, trends are importantMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Profitability RatiosROI = Return (Net income) Investment (Average total assets)DuPont model = Margin x Turnover  Net income x Sales Sales Average total assetsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002More Profitability RatiosROE = Net income Average total owners’ equityDividend yield = Annual dividend per share Market price per share of stockDividend payout ratio = Annual dividend per share Earnings per shareMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What is the significance of the price/earnings ratio in the evaluation of the market price of a company’s stock? McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Price/Earning RatioP/E ratio = Market price of a share of common stock Earnings per share of common stockUsed extensively to evaluate the market price of a firm’s common stock relative to that of other firms and the market as a wholeAlso called earnings multipleMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Importance of P/E RatioInvestors can earn a return on stock two ways:Through dividendsThrough increases in the market value of the stockMarket price reflects expectations of future dividends – which depend on earningsTypically, manufacturing firms’ P/E ratio ranges from 12 to 18McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6How are dividend yield and the dividend payout ratio used by investors to evaluate a company’s common stock?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Dividend YieldDividend yield = Annual dividend per share Market price per share of stockShould be compared to the yield available on other investmentsOn common stock, historically this has ranged from 3% to 6%On preferred stock, the range is 5% to 8%McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Dividend Payout RatioDividend payout ratio = Annual dividend per share Earnings per shareReflects the dividend policy of the firmMost firms pay a relatively constant portion of earnings and avoid fluctuationsGenerally, ranges from 30% to 50% for manufacturing and merchandising firmsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Preferred Dividend Coverage RatioPreferred dividend coverage ratio = Net income Preferred dividend requirementIndicates the margin of safety of the preferred stock dividendMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7What is financial leverage, and why is it significant to management, creditors, and owners?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial Leverage MeasuresRefers to the use of debt to finance the assets of the entityAdds risk to the operation of the firmAlso magnifies the return to owners relative to the return on assetsFirms want to borrow at a rate less than the rate of return on financed assetsInterest is a deductible expense; dividends are not deductibleMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Debt RatioIndicates the extent to which a firm is using financial leverageDebt ratio = Total liabilities Total liabilities and owners’ equityIndicates the percentage of financing that is done with debtMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Debt/Equity RatioAnother indicator of the extent to which a firm is using financial leverageDebt/Equity ratio = Total liabilities Total owners’ equityIndicates the percentage of financing that is done with debtSince deferred taxes and current liabilities are not interest bearing, these items are often excluded from the computationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Times Interest Earned RatioA measure that shows the relationship of earnings before interest and taxes to interest expenseThe greater the ratio, the more confident the debt holders are about the firm continuing to earn enough to cover interest paymentsTimes interest earned = Earnings before interest and taxes Interest expenseMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8What is book value per share of common stock, how is it calculated, and why is it not a very meaningful amount for most companies?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Book Value per Share of Common StockEasily misunderstoodCannot be compared to market value due to book value reflects the application of generally accepted accounting principles and the specific accounting policies that the firm has selected Book value per share of common stock = Common shareholders’ equity Number of shares of common stock outstandingMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 9How can common size financial statements be used to evaluate a firm’s financial position and results of operations over a number of years?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Common Size Financial StatementsUsed when evaluating the operating results of a firm over a number of yearsEach asset, liability, and owners’ equity account is expressed as a percentage of total assetsOn the income statement, sales is set at 100%, and each item is expressed as a percentage of salesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Use of Common Size Financial StatementsUsing percentages makes spotting trends easierCan compare firms of different sizesIn horizontal analysis, several years’ financial data are stated in terms of a base yearEach item in the base year is 100%; the items in subsequent years are a percentage of the item in the base yearMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 10How can operating statistics using physical, or non-financial data, be used to help management evaluate the results of the firm’s activities?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Other Operating StatisticsPhysical measures also are usefulSales in units removes hidden price changesTotal employees may be more useful than payroll costsUsually analysts combine financial and physical measures to show trends and to make comparisonsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002