Financial
Statement
Analysis
K R Subramanyam
John J Wild
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
9-2
Prospective Analysis
9
CHAPTER
9-3
Prospective Analysis
Importance
Security Valuation - free cash flow model and
residual income model require estimates of future
financial statements.预测公司未来股价
Management Assessment - forecasts of financial
performance examine the viability of companies’
strategic plans.
Assessment of Solvency - useful to creditors to
assess a company’s ability to meet debt service
requirements, both short-term and long-term.
9-4
The Projection Process
Projected Income Statement
Sales forecasts are a function of:
1) Historical trends
2) Expected level of macroeconomic activity
(e.g. personal disposable income)
3) The competitive landscape
4) New versus old store mix (strategic
initiatives). New stores typically enjoy significantly greater
sales increases than older stores since they may tap poorly
served markets or provide a more up-to-date product mix than
existing competitors. Older stores, by comparison, typically
grow at the overall rate of growth in the local economy. Our
analysis must consider, therefore, expansion plans announced
by management.
9-5
The Projection Process
Target Corporation Income Statements
(in millions)
Sales..........................................................................................
Cost of goods sold .....................................................................
Gross profit................................................................................
Selling, general and administrative expense .............................
Depreciation and amortization expense .....................................
Interest expense.........................................................................
Income before tax ......................................................................
Income tax expense....................................................................
Income (loss) from extraordinary items
and discontinued operations.................................................
Net income.................................................................................
Outstanding shares ...................................................................
Selected Ratios (in percent)
Sales growth............................................................................
Gross profit margin..................................................................
Selling, general and administrative expense/Sales .................
Depreciation expense/Gross prior-year PP&E ...........................
Interest expense/Prior-year long-term debt ..............................
Income tax expense/Pretax income...........................................
2022
$46,839
31,445
15,394
10,534
1,259
570
3,031
1,146
2021
$42,025
28,389
13,636
9,379
1,098
556
2,603
984
2020
$37,410
25,498
11,912
8,134
967
584
2,227
851
1,313
$ 3,198
891
190
$ 1,809
912
247
$ 1,623
910
11.455%
32.866
22.49
6.333
5.173
37.809
12.336%
32.447
22.318
5.245
4.982
37.803
9-6
The Projection Process
Target Corporation Balance Sheet
(in millions)
2022
Cash ..................................................................................
$ 2,245
Receivables .......................................................................
5,069
Inventories .........................................................................
5,384
Other current assets ..........................................................
1,224
Total current assets.......................................................
13,922
Property, plant, and equipment (PP&E)..............................
22,272
Accumulated depreciation .................................................
5,412
Net property, plant, and equipment ...................................
16,860
Other assets ......................................................................
1,511
Total assets .......................................................................
$32,293
Accounts payable...............................................................
$ 5,779
Current portion of long-term debt......................................
504
Accrued expenses ..............................................................
1,633
Income taxes & other .........................................................
304
Total current liabilities ..................................................
8,220
Deferred income taxes and other liabilities........................
2,010
Long-term debt..................................................................
9,034
Total liabilities ..............................................................
19,264
Common stock ...................................................................
74
Additional paid-in capital..................................................
1,810
Retained earnings .............................................................
11,145
Shareholders’ equity......................................................
13,029
Total liabilities and net worth ............................................
$32,293
2021
$ 708
4,621
4,531
3,092
12,952
19,880
4,727
15,153
3,311
$31,416
$ 4,956
863
1,288
1,207
8,314
1,815
10,155
20,284
76
1,530
9,526
11,132
$31,416
2020
$ 758
5,565
4,760
852
11,935
20,936
5,629
15,307
1,361
$28,603
$ 4,684
975
1,545
319
7,523
1,451
10,186
19,160
76
1,256
8,111
9,443
$28,603
Selected Ratios
Accounts receivable turnover rate....................................
9.240
9.094
Inventory turnover rate.....................................................
5.840
6.266
Accounts payable turnover rate .......................................
5.441
5.728
Accrued expenses turnover rate .......................................
28.683
32.628
Taxes payable/Tax expense...............................................
26.527%
122.663%
Dividends per share .........................................................
$ 0.310
$ 0.260
Capital expenditures (CAPEX)—in millions ......................
3,012
2,671
CAPEX/Sales ....................................................................
6.431%
6.356%
6.722
5.357
5.444
24.214
37.485%
$ 0.240
3,189
8.524%
9-7
The Projection Process
Steps:
1.
2.
3.
4.
5.
6.
Projected Income Statement
Project sales
Project cost of goods sold and gross profit margins using
last-year ratio or historical averages as a percent of
sales
Project SG&A expenses using last-year ratio or historical
averages as a percent of sales
Project depreciation expense as last-year ratio or
historical average percentage of beginning-of-year
depreciable assets
Project interest expense as a percent of beginning-ofyear interest-bearing debt using existing rates if fixed
and projected rates if variable
Project tax expense as last-year ratio or average of
historical tax expense to pre-tax income
9-8
The Projection Process
Projected Balance Sheet
Steps:
1.
2.
3.
4.
5.
Project current assets other than cash, using projected sales
or cost of goods sold and appropriate turnover ratios as
described below.
Project PP&E increases with capital expenditures estimate
derived from historical trends or information obtained in the
MD&A section of the annual report.
Project current liabilities other than debt, using projected sales
or cost of goods sold and appropriate turnover ratios as
described below
Obtain current maturities of long-term debt from the long-term
debt footnote.
Assume other short-term indebtedness is unchanged from
prior year balance unless they have exhibited noticeable
trends.
(continued)
9-9
The Projection Process
Projected Balance Sheet
Steps:
6.
Assume initial long-term debt balance is equal to the prior
period long-term debt less current maturities from Step 4.
7. Assume other long-term obligations are equal to the prior
year’s balance unless they have exhibited noticeable trends.
8. Assume initial estimate of common stock is equal to the prior
year’s balance
9. Assume retained earnings are equal to the prior year’s
balance plus (minus) net profit (loss) and less expected
dividends.
10. Assume other equity accounts are equal to the prior year’s
balance unless they have exhibited noticeable trends.
9-10
The Projection Process
Sensitivity Analysis
• Vary projection assumptions to find those with
the greatest effect on projected profits and
cash flows
• Examine the influential variables closely
• Prepare expected, optimistic, and pessimistic
scenarios to develop a range of possible
outcomes
9-11
Application of Prospective Analysis in the
Residual Income Valuation Model
The residual income valuation model defines equity value
at time t as the sum of current book value and the present
value of all future expected residual income:
where BVt is book value at the end of period t, RIt + n is residual income in
period t + n, and k is cost of equity capital (see Chapter 1). Residual
income at time t is defined as comprehensive net income minus a
charge on beginning book value, that is, RIt = NIt - (k x BVt - 1).
Usually, we forecast 5+1 year financial statements.
Constant growth formula:
PV=(Residual income/(k-r))/(1+k)^5)
r=constant growth rate
9-12
9-13
Constant growth formula:
PV=(Residual income/(1+k)^5)/(k-r) Discount it back to Year 1, not Year 0.
r=constant growth rate
=$ 54038
Rounding problem