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

CHAPTER 11Financial Statement Analysis1Learning ObjectivesExplain how liquidity measures can be influenced by the inventory cost-flow assumption used.Demonstrate the influence of alternative inventory cost-flow assumptions and depreciation on turnover ratios.Calculate days sales in accounts receivable and inventory.Explain the significance of the price/earnings ratio in the evaluation of share market price.Calculate the dividend yield and dividend payout ratios.Explain financial leverage.Prepare common size financial statements.Use of other operating statistics.2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOverviewThe process of interpreting an entity’s financial statements can be facilitated by certain ratio calculations.The focus of this topic is to expand the ability to read and interpret financial statements to help make decisions and informed judgements about an entity’s financial condition and results.3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinancial Statement RatiosRatios can be used to facilitate the interpretation of an entity’s financial position and results. The results of operations of an entity can be grouped into the following four categories:Liquidity*ActivityProfitability*Debt, or financial leverage*Market based .4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiquidity MeasuresThe liquidity measures of working capital, current ratios and quick ratios were discussed in Chapter 10.Important:The choice of an inventory cost-flow assumption will affect the balance sheet carrying values of inventories and will also affect the calculations:FIFOSpecific identificationWeighted averagecurrent ratiosandworking capital5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynLiquidity MeasuresSuppliers and creditorsWhat is the firms current and recent payment experience?Is the firm paying its bills promptly?May be indicated by extent that cash discounts are being taken or by contacting credit agencies.6Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynActivity MeasuresFocus primarily on relationships between asset levels and net sales. The general model for calculating turnover is:Turnover = Sales / Average AssetsAverage assets use balance sheet amounts reported at the beginning and end of a period.7Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynActivity MeasuresAccounts receivableInventoriesPlant and equipmentTotal operating assetsTotal assets.Turnover is often used in the calculation for assessing activity of:8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynActivity MeasuresTurnover ratios will be affected by inventory cost-flow assumptions and depreciation methods:Higher asset turnoverLower asset turnover$ inventory $ depreciable assetsFIFO and accelerated depreciation.Weighted-average and straight line depreciation.$ inventory $ depreciable assets9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynActivity MeasuresThese amounts will be used to demonstrate how some of the ratios can be calculated.10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynAccounts Receivable Turnover SalesAverage Accounts ReceivableAccounts ReceivableTurnover=A measure of how many times a company converts its receivables into cash each year. Higher the number the better.= 7.1 times= $126,800 ($19,800 + $16,000) ÷ 2Or average collection period of 51.4 days.11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynInventory Turnover Cost of Goods Sold Average InventoryInventoryTurnover=A measure of the number of times merchandise inventory is sold and replaced during the year.= 6.9 times $19,618 ($2,836 + $2,808) ÷ 2=12Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynInventory TurnoverLower inventory compared to sales means less needs to be financed by debt or equity.BUTRisk of not having enough inventory to meet demand. Risk of out of stock situation due to an unanticipated increase in demand could result in lost sales.13Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynInventory TurnoverInventory Management SystemJIT - Just in time:Keep the investment in inventories at a minimum by forecasting needs.Suppliers deliver inventories only when needed.14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynActivity MeasuresIn evaluating the firm’s operating efficiency, it is the trend of these calculations over time that is important.15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynProfitability MeasuresDiscussed in Chapters 3 and 10: Return on assets (ROA) Return on equity (ROE).Points to remember:ROA is based on EBIT (earnings before interest and tax)better measure of management activities asinterest is a function of capital structure tax is a function of the tax laws.16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynProfitability MeasuresNeed to maintain healthy scepticism about:True rate of returnROA and ROERelationship?Based on:Real economic profit related to fair market values(No agreement on how to determine these).17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynProfitability MeasuresEvaluations more valid when based on the trend of one company’s ROA and ROE relative to: Trends in industry Trends of competitors18Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynPrice/Earnings RatioPrice earningsratio Market price per ordinary share Earnings per share=A measure often used by investors to evaluate the market price of a company’s ordinary shares relative to that of other companies. Price earningsratio$4.10$0.1255== 32.7 times19Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynPrice/Earnings RatioMarket price of a share.Investors’ expectations about the firm’s future earnings.Relating market price and earnings per share in a ratio (price earnings ratio) is a way to express investors’ expectations.The greater the probability of increased earnings, the more investors are willing to pay.20Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynPrice/Earnings RatioAt first glance, company B shares look more expensive,but company A shares are more expensive as investors are willing to pay 25 times earnings for the shares, compared with 18 times for company B.21Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDividend YieldDividendyield Dividends per share Market price per share=Identifies the return, in terms of cash dividends, on the current market price of the shares. This is then compared to the yield available on alternative investments to help determine the extent to which investment objectives are met. $1.45 $60.00== 2.4%DividendYield22Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynDividend Payout RatioDividendpayout ratio Annual dividend per share Earnings per share=Reflects the dividend policy of the company. Investors are able to project future dividends based on a company’s earnings prospects.DividendPayout Ratio== 25.7% $1.45 $5.6423Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinancial Leverage Financial leverage or gearing refers to the use of debt to finance the assets of the entity.Leverage adds risk - if there is not enough cash to pay principal and interest, entity may be forced into insolvency. BUT, as the cost of debt is fixed, leverage also magnifies the return to owners (ROE) relative to the return on assets (ROA).24Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinancial LeverageBorrowing at an interest rate that is less than the rate of return that can be earned on that money, multiplies the return on owners’ equity.Debt and preference shares provide leverage opportunities as the interest cost or dividend rate is fixed.25Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNon-current LiabilitiesLong-term borrowings – for many non-financial firms, this accounts for up to half of the firm’s capital structure.Capital structure or leverage– mix of borrowings and owners’ equity that is used to finance the acquisition of the firm’s assets.26Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynNon-current LiabilitiesAdvantage of borrowings – interest expense is deductible for tax purposes whereas dividends (distributions of profits to shareholders) are not.Financial leverage – relates to the use of borrowed money to enhance returns to owners. Difference between rate of return on assets (ROA) and rate of return earned on owners’ equity (ROE).27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBondsDebenture bonds/mortgage bondsDebenture bonds are bonds that are secured only by the general credit of the issuer.Mortgage bonds are secured against real estate owned by the issuer (borrower).The term bond is a debt financing arrangement that like all loans has to be repaid.28Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinancial Leverage - Debt Ratio Total liabilities Total liabilities + Owners’ equityDebt ratio=Measures the proportion of assets being financed by outsiders to the firm.Debt ratio== 40% $40000 $10000029Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinancial Leverage - Debt/Equity RatioDebt/Equity ratio= Total liabilities Total owners’ equityDebt/Equity ratio== 67.0% $40000 $60000Measures the relative proportion of contribution from owner’s and outsider’s.30Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynFinancial Leverage - Times Interest Earned A common measure of the ability of a firm to cover interest and provide protection to the long-term creditors.Times interest earned== 1.95 times$65873378Times interest earnedEarnings before interest and taxesinterest expense=31Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynBook Value Per Share of Ordinary SharesThis ratio is frequently cited in the financial press. The book value per ordinary share has no correlation to the market value per share.Book value per ordinary share == $1.84$186,287101,214Book value per ordinary shareOrdinary shareholders’ equityNumber of ordinary shares issued=32Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCommon Size Financial StatementsEach asset expressed as a % of total assets.Each liability and equity account expressed as a % of total assets.33Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynCommon Size Financial StatementsEach item on the Income Statement expressed as a % of total sales.This type of percentage analysis makes spotting trends easier.34Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOther Operating StatisticsStatistics other than financial ratios may be used to evaluate a firm. For example various physical measures of activity. Sales in units Total number of employees Sales dollar per employee Operating income per employee Plant operating expenses per square metre of plant.35Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van RhynOther Operating StatisticsThere is no one ratio or measure that is the “one best way”. As a result, many analysts and managers use a combination of physical and financial measures. The challenge is to understand the firm’s objectives and procedures and then to develop measurement and reporting techniques to help management accomplish its goals.36Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e by Marshall, McCartney & Van Rhyn