Session 22002

Financial Analysis - Rationale ■

Who needs it? –

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Investors, Suppliers, Customers, Others

Basis for Analysis – –

Financial statements External information ■ Industry ■ Economy ■ Market

Financial Statements The Four Financial Statements ■ Statement of Earnings (Income) ■

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Profit and Loss

Balance Sheet – –

What is Owned & What is owed Assets - Liabilities - Preferred = Equity

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Statement of Changes in Equity

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Statement of Cash Flows

Statement of Cash Flows ■

Three Parts –

Operating/ Investing /Financing Activities

CFOA = Net Income + Adjustments + Changes in NWC ■ What is a good cash flow number? ■

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CFOA CFIA CFFA

Analysis of Financial Statements ■

Ratios Liquidity – Profitability – Efficiency (Asset Utilization) – Leverage – Market Value Common Size Statements Growth Rates –

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Some Terms and Ratios ■

Net Operating profit –

EBIT(1-T) ■

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Operating Income Return on Investment (OIROI) –

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EBIT/Total Assets

EBITDA/SALES Free Cash flow –

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EBIT adjusted for cash charges and taxes

Net cash flow available to investors = EBIT(1-T) - Net investment in Operating capital

Sustainable Growth Rate –

ROE (1-Payout)

MVA and EVA ■

Market Value Added –

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MVA = Market value of equity - capital supplied

EVA – –

Cost of capital included EVA = (r – k) C ■r

= OIROI ■ k = Total cost of capital ■ C = Invested capital

Comparative Analysis & Some Issues ■ Historical

Comparison ■ Industry Benchmark ■ Peer Company Comparison ■ Quality of Earnings and Balance Sheet ■ FASB, SEC, Other standards –

REG FD

Financial Planning ■ Financial – – – –

Planning

Ensure funds when needed Manage Sources of funds Part of overall planning process Analysis and feedback

■ Long-term,

term

Short-term & medium-

Short-Term Forecasting and Planning ■ Planning

Requires Forecasts ■ Main Forecasting/Planning Tools –

Cash Budget ■ Short-term

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Projected Financial Statements ■ Medium-term

Cash Budget ■ Short-term – –

Forecasting, planning and management of cash balances No business can do without it!

■ Forecast –

forecast

of cash flows, not earnings

Receipts and Disbursements

Cash Budget - (Contd.) ■ Key –

Steps

Forecasting Period ■ daily,

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Forecasting Horizon ■1

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weekly, monthly

year, 18 months

Key Forecasting assumptions ■ Sales,

Collections, Costs, Major outflows

Cash Budget Format Collection and Payments Worksheet ■ Receipts ■ Disbursements ■ Surplus/Deficit for the Period ■ Cash Balances ■

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Beginning, Ending, Target

Loan/Investment

Projected Financial statements Direct Projections ■ Forecasts from Cash Budget ■ Key assumptions ■

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Sales, Costs, Key Ratios Variability of sales, ratios

Discretionary Funds Needed (DFN) – –

Sources of financing Analysis and Feedback

DFN: Formula Approach ■

DFN = (A*/S0)∆S - (L*/S0)∆S - MS1(1 - d) – – – –

A* = Assets increasing in proportion to sales L* = Liabilities increasing in proportion to sales M = Net profit margin S0,S1 = Sales for last year, forecast year

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∆S = (S1/S0) - 1

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d = Payout ratio

Managing Growth ■ Sustainable –

growth rate

g = ROE (1-d)/(1 - ROE (1-d))

■ Financial

implications ■ Special case projections ■ Computerized planning models

Forecasting Financial Statements - Check and Evaluation ■ Historic

Comparisons ■ Key assumptions – –

Sensitivity Analysis Scenarios: Good, Bad, and Indifferent

■ Other –

Factors

Currency effect