Copyright 2004 McGraw-Hill Australia 3.2 Financial Statements of Publicly Listed Firms 3.3 The Du Pont Identity 3.4 Using Financial Statement Information 3.5 Summary and Conclusions Ch
Trang 1Copyright 2004 McGraw-Hill Australia
Trang 2Copyright 2004 McGraw-Hill Australia
3.2 Financial Statements of Publicly Listed Firms
3.3 The Du Pont Identity
3.4 Using Financial Statement Information
3.5 Summary and Conclusions
Chapter Organisation
Trang 3Copyright 2004 McGraw-Hill Australia
• Calculate and interpret key financial ratios
• Discuss the Du Pont identity as a method of
Trang 4Copyright 2004 McGraw-Hill Australia
• Recall:
Cash flow from assets = Cash flow to debtholders + Cash flow to shareholders
Trang 5Copyright 2004 McGraw-Hill Australia
• The firm’s statement of cash flows is the firm’s
financial statement that summarises its sources
and uses of cash over a specified period
Trang 6Copyright 2004 McGraw-Hill Australia
$ 625
985
$1 610
$ 50 310 385 $ 745
1 100
$1 845
Trang 7Copyright 2004 McGraw-Hill Australia
$ 320 $ 205
290 795
$1 085
$1 610
$ 260 175
$ 435
$ 225
290 895
$1 185
$1 845
Trang 8Copyright 2004 McGraw-Hill Australia
Trang 9Copyright 2004 McGraw-Hill Australia
Statement of Cash Flows
• A statement that summarises the sources and uses
of cash
• Changes are divided into three main categories:
– Operating activities—includes net profit and changes in most current accounts
– Investment activities—includes changes in fixed assets
– Financing activities—includes changes in notes payable, long-term debt and equity accounts as well as dividends.
Trang 10Copyright 2004 McGraw-Hill Australia
+ Any decrease in current assets (except cash)
+ Increase in accounts payable
– Any increase in current assets (except cash)
– Decrease in accounts payable
• Investment activities
+ Ending fixed assets
– Beginning fixed assets
+ Depreciation
Trang 11Copyright 2004 McGraw-Hill Australia
– Decrease in notes payable
+ Increase in notes payable
– Decrease in long-term debt
+ Increase in long-term debt
+ Increase in ordinary shares
– Dividends paid
Trang 12Copyright 2004 McGraw-Hill Australia
+ Ending fixed assets +$1 100.00
– Beginning fixed assets – 985.00
+ Depreciation + 30.00
( $ 145.00)
Trang 13Copyright 2004 McGraw-Hill Australia
– + Increase in notes payable + $ 65.00
– + Increase in long-term debt + 20.00
Trang 14Copyright 2004 McGraw-Hill Australia
Trang 15Copyright 2004 McGraw-Hill Australia
• Financial ratios are relationships determined from
a firm’s financial information
• Used to compare and investigate relationships
between different pieces of financial information, either over time or between companies
• Ratios eliminate the size problem
Trang 16Copyright 2004 McGraw-Hill Australia
Categories of Financial Ratios
• Liquidity—measures the firm’s short-term solvency
• Capital structure—measures the firm’s ability to
meet long-run obligations (financial leverage)
• Asset management (turnover)—measures the
efficiency of asset usage to generate sales
• Profitability—measures the firm’s ability to control expenses
• Market value—per-share ratios
Trang 17Copyright 2004 McGraw-Hill Australia
s liabilitie Current
Inventory assets
Current ratio
Quick
s liabilitie Current
assets
Current ratio
Trang 18Copyright 2004 McGraw-Hill Australia
on depreciati after tax
profit Net
debt bearing
Interest
flow cash
gross
Debt to
charges finance
Interest
EBIT
cover interest
Net
equity Total
assets Total
multiplier
Equity
equity Total
debt Total
ratio
y Debt/equit
s Intangible equity
Total
Cash debt
financial Total
ratio
y debt/equit
Net
+ +
Trang 19Copyright 2004 McGraw-Hill Australia
Sales turnover
s Receivable
turnover Inventory
days
365 inventory
in sales
Days'
Inventory
sold goods
of
Cost turnover
Inventory
=
=
=
Trang 20Copyright 2004 McGraw-Hill Australia
Sales over
asset turn Total
assets current
Non
-Sales over
asset turn Fixed
turnover s
Receivable
days
365 s
receivable
in sales
Days'
=
=
=
Trang 21Copyright 2004 McGraw-Hill Australia
Total
profit Net
(ROE) equity
on
Return
%
100 assets
Total
EBIT investment
on
Return
100%
assets
Total
profit Net
(ROA) assets
on Return
Sales
profit Net
Trang 22Copyright 2004 McGraw-Hill Australia
Book value
share per
ue
Market val ratio
book -
to - Market
share per
Earnings
share per
Price ratio
ing Price/earn
=
=
Trang 23Copyright 2004 McGraw-Hill Australia
The Du Pont Identity
• Breaks ROE into three parts:
– operating efficiency
– asset use efficiency
– financial leverage
multiplier Equity
ROA
multiplier Equity
over asset turn
Total margin
Profit
Equity
Assets Assets
Sales Sales
profit
Net ROE
Trang 24Copyright 2004 McGraw-Hill Australia
– evaluation by outside parties
– evaluation of main competitors
– identifying potential takeover targets
Trang 25Copyright 2004 McGraw-Hill Australia
Benchmarks for Comparison
• Ratios are most useful when compared to a
benchmark
• Time-trend analysis—examine how a particular
ratio(s) has performed historically
• Peer group analysis—using similar firms
(competitors) for comparison of results
• Global Industry Classification Standard (GICS)
used by ASX is a useful way to find a peer
company
Trang 26Copyright 2004 McGraw-Hill Australia
Problems with Ratio Analysis
• No underlying theory to identify correct ratios to
use or appropriate benchmarks
• Benchmarking is difficult for diversified firms
• Firms may use different accounting procedures
• Firms may have different recording periods
• One-off events can severely affect financial
performance