tailieunhanh - Lecture note Essentials of corporate finance – Chater 3: Working with financial statements

In this chapter, you will know how to standardise financial statements for comparison purposes, know how to compute and interpret important financial ratios, know the determinants of a firm’s profitability and growth, understand the problems and pitfalls in financial statement analysis. | 3- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 3- Key Concepts and Skills Know: How to standardize financial statements for comparison purposes How to compute and interpret important financial ratios The determinants of a firm’s profitability and growth Understand the problems and pitfalls in financial statement analysis 3- Chapter Outline Standardized Financial Statements Ratio Analysis The Du Pont Identity Internal and Sustainable Growth Using Financial Statement Information 3- Standardized Financial Statements Common-Size Balance Sheets All accounts = percent of total assets (%TA) Common-Size Income Statements All line items = percent of sales or revenue (%SLS) Standardized statements are useful for: Comparing financial information year-to-year Comparing companies of different sizes, particularly within the same industry Return to Quiz 3- Prufrock Corporation Balance Sheets - Table . | 3- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 3- Key Concepts and Skills Know: How to standardize financial statements for comparison purposes How to compute and interpret important financial ratios The determinants of a firm’s profitability and growth Understand the problems and pitfalls in financial statement analysis 3- Chapter Outline Standardized Financial Statements Ratio Analysis The Du Pont Identity Internal and Sustainable Growth Using Financial Statement Information 3- Standardized Financial Statements Common-Size Balance Sheets All accounts = percent of total assets (%TA) Common-Size Income Statements All line items = percent of sales or revenue (%SLS) Standardized statements are useful for: Comparing financial information year-to-year Comparing companies of different sizes, particularly within the same industry Return to Quiz 3- Prufrock Corporation Balance Sheets - Table 3- Prufrock Corporation Common-Size Balance Sheets Table 3- Prufrock Corporation Income Statement Table 3- Prufrock Corporation Common-Size Income Statement Table Tells us what happened to each dollar of sales 3- Ratio Analysis Allow for better comparison through time or between companies Used both internally and externally For each ratio, ask yourself: What the ratio is trying to measure Why that information is important 3- Categories of Financial Ratios Liquidity ratios or Short-term solvency Financial leverage ratios or Long-term solvency ratios Asset management or Turnover ratios Profitability ratios Market value ratios 3- Table Return to Quiz 3- Liquidity Ratios Current Ratio = CA / CL 708 / 540 = times Quick Ratio = (CA – Inventory) / CL “Acid Test” (708-422) / 540 = times Cash Ratio = Cash / CL 98/ 540 = .18 times 3- Financial Leverage Ratios Total Debt Ratio = (TA – TE) / TA (3588-2,591)