Fundamentals of Financial Accounting & Analysis
Essay by Wang Chuck • October 25, 2017 • Essay • 1,078 Words (5 Pages) • 940 Views
Notes[pic 1]
Class Notes
for
Chapter Four
of
Fundamentals of Financial Accounting & Analysis
[pic 2]
Notes
Contents
Financial Statement Analysis 1
Basic and Diluted EPS 7
Analysts’ Consensus EPS 8
Pro forma EPS 9
Financial Statement Analysis
Below are 5 general steps for analyzing a firm:
- Choose a purpose for the analysis and relevant decision criteria.
Loan money to? Invest in? Sell to? Buy from? Work for? Compete against? Etc.
- Gather data.
Sources include 10-K, 10-Q, press releases, news articles, spying(!?), etc.
- Perform quantitative and qualitative assessments of data.
Ratios, “SWOT,” “5 Forces,” etc.
- Predict the relevant future, based upon the above steps.
For instance, build a pro forma financial model that goes out 1, 2, 3, 5, 10 years.
- Conduct a sensitivity test on the model in 4 and make a decision.
For instance, change assumptions, e.g. sales growth, margins, etc., and then decide whether to invest in, lend to, sell to, buy from, work for the firm.
All purposes (identified in Step 1) require quantitative and qualitative assessments of data (Step 3).
Quantitative analysis involves ratio analysis.
Ratios are simply divisions of numbers.
When we blindly calculate them without thinking, we run into trouble.
Name some of the warnings about ratios identified in FFAA Chapter 4:
Give the formulas for the following ratios or amounts:
Gross Profit (Gross Margin) (absolute measure) | |
Gross Margin Ratio (relative measure) | |
EBIT (absolute measure) | |
EBIT Margin Ratio (relative measure) | |
Current Ratio | |
Days sales in inventory | |
Days sales outstanding | |
Days payables outstanding | |
Debt to capital |
Give the formula of the ratio that would be appropriate to answer each of the following questions:
How long does it take a firm to pay its bills (on average)? | |
How long does it take a firm to sell its inventory (on average)? | |
How long does it take a firm to collect cash from its receivables (on average)? | |
What is the firm's capital structure? | |
How well did the firm's assets perform in generating net income? | |
How much of the firm's net income was paid as dividends to the owners? | |
What does the stock market estimate the value of the firm to be? | |
What is the approximate cost of the firm's debt on a pretax basis? | |
What is the approximate cost of the firm's equity? | |
What is the firm's effective tax rate? |
Below are data for calculating the ratios shown in FFAA, Chapter 4.
Income Statement Data Items | Year 4 |
Sales | 800 |
COGS | 500 |
SG&A Expense | 120 |
Depreciation Expense | 80 |
Operating Income (EBIT) | 100 |
Interest Expense | 14 |
Pre Tax Income | 86 |
Tax Expense | 30 |
Net Income | 56 |
Dividends per Share | 0.06 |
Balance Sheet Data Items | Year 4 |
Cash and Cash Equivalents | 20 |
Short term Investments | 10 |
Accounts Receivable | 70 |
Inventory | 180 |
Total Current Assets | 280 |
Total Assets | 900 |
Accounts Payable | 80 |
Total Current Liabilities | 80 |
Interest Bearing Debt | 300 |
Owners' Equity | 520 |
Number of Shares Outstanding (#) | 100 |
Cash Flow Data Items |
|
Operating Cash Flow | 40 |
Capital Expenditures | -15 |
Net Change in Interest Bearing Debt | 8 |
Dividends paid | -6 |
Share repurchases (in $) | -20 |
Other Items |
|
Beta | 1 |
Year End Stock Price (FYE Year 4) | $15.00 |
Year End Stock Price (FYE Year 3) | $12.00 |
Calculate the below ratios and show the calculations in the space provided.
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