Chapter 2.
Financial Statements And Cash
Flow Analysis
Professor Thomson
Finance 3014
Asset, Liability, Equity
• Asset – something that has value (typically
can be sold for $). Why does it have
value? It produces a benefit such as a
cash flow. (Could be money in the bank,
a house, car, college education)
• Liability – Something you have to pay for
someone to take from you, like a loan (i.e.
debt). It has negative value (to you).
• Equity – represents your ownership in
something
2
Balance Sheet Identity
• Assets = Liabilities + Equity
• This statement indicates that assets are
financed either through borrowed money,
or through ownership.
• Say your car is worth $10,000 and you
have a 7,000 balance on your loan. You
have $3000 of equity, or ownership in that
car.
• Personal Finance Goal:
– Increase your equity
3
Balance Sheet
Current Assets
Current Liabilities
can easily be turned into cash
will be paid off within the year
are "liquid" assets
Long Term Debt
primarily bonds
often called "financial leverage"
Fixed Assets
Can be tangible (factory)
Can be intangible (goodwill)
Are "real" assets
4
Owners Equity
GAAP – Generally Accepted
Accounting Principles
• Used to fairly portray the firm's past
performance
• Accountants used an “accrual-based”
approach. Revenue recorded at the point
of sales and costs when they are incurred
• Finance professionals focus on the timing
and size of the cash flows.
5
Four Key Financial Statements
1.Balance sheet (A=L+E)
– snapshot of assets, liabilities, equity
2. Income statement
- Shows the flow of revenues and expenses
over a period
3. Statement of retained earnings
4. Statement of cash flows
6
Financial Statements
Financial Managers and analysts use financial
statements to conduct:
-Cash Flow Analysis
-Performance (Ratio) Analysis
7
Staples (SPLS) Balance Sheet
($ Thousands)
Current assets
Cash & Equivalents
ST Investments
Receivables
Inventories
Other current assets
Deferred taxes
Total current assets
Fixed assets
Property, plant and equipment
Goodwill
Intangible assets
Other assets
Total Non-Current Assets
Total assets
8
Jan 31, 2004 Feb 1, 2003
$457,465
$495,889
934,275
100,175
410,330
364,419
1,465,989
1,555,205
114,598
105,559
96,247
96,229
$3,478,904
$2,717,476
$1,505,301
1,202,007
253,768
63,066
$3,024,142
$6,503,046
$1,447,752
1,207,824
267,841
80,495
$3,003,912
$5,721,388
Staples Liabilities & Stockholders’
Equity ($ Thousands)
Current liabilities
Payables and Accrued Expenses
Short Term and Current Long Term
Total current liabilities
Long term Debt
Total long-term liabilities
Other
Total liabilities
Shareholders’ equity
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
Total liabilities & stockholders’ equity
9
Jan 31, 2004
$1,933,084
190,150
$2,123,234
567,433
$567,433
149,479
$2,840,146
Feb 1, 2003
$1,874,655
327,671
$2,175,326
732,041
$732,041
155,129
$3,062,496
$316
2,209,302
(561,099)
1,933,379
81,002
$3,662,900
$6,503,046
$299
1,719,091
(556,812)
1,484,833
11,481
$2,658,892
$5,721,388
Staples Income Statement
($ Thousands)
Jan 31, 2004 Feb 01, 2003
Total Revenue
Cost of Revenue
Gross Profit
Operating/Selling
General/Admin. Exp. (includes DEPN)
Non Recurring
Other
Operating income
Earnings Before Interest and Taxes
Interest Expense
Income Tax Expense
Net Income from Continuing
Operations
Net income
10
$13,181,222
(9,559,123)
$3,622,099
2,282,092
524,094
9,639
7,986
$798,288
$798,288
20,176
287,901
$490,211
$11,596,075
(8,652,593)
$2,943,482
1,795,428
451,501
8,746
2,135
$682,672
$682,672
20,609
215,963
$446,100
$490,211
$446,100
Sources and Uses of Corporate Cash
Sources
•
•
•
•
Decrease in any asset
Increase in any liability
Net profits after taxes
Depreciation and other
non-cash charges
• Sale of stock
11
Uses
•
•
•
•
•
Increase in any asset
Decrease in any liability
Net loss
Dividends paid
Stock repurchase or
retirement
Staples Statement Of Cash Flows
($ Thousands)
Cash Flow From Operating Activities
Jan 31,2004
Feb 1,2003
$490,211
$446,100
282,811
267,209
Adjustments to Net Income
22,709
35,993
Changes in Account Receivables
(4,218)
62,460
Changes in Liabilities
81,123
121,943
Changes in Inventories
80,721
80,721
(34)
(3,574)
$1,019,732
$914,350
($280,703)
($1,435,879)
(831,190)
(100,175)
($1,114,803)
($1,536,401)
Net income (net profit after tax)
Depreciation
Changes in Other Operating Activities
Cash Flows from Operating Activities
Cash Flow from Investment Activities
Capital Expenditures
Other Cash Flows from Investing Activities
Cash Flows From Investing Activities
12
Staples Statement Of Cash Flows
($Thousands)
Jan 31, 2004
Feb 1, 2003
Sale (Purchase) of Stock
$385,506
$78,421
Net Borrowings
(350,235)
635,662
$35,271
$714,038
21,376
9,033
Net (decrease) increase in cash
($38,424)
$101,065
Cash and Cash Equivalents, End of Period
$457,465
$495,889
Cash Flow From Financing Activities
Net Cash Provided by Financing Activities
Effect of exchange rate changes on cash
13
Key Equation for Fin 3014
• In this course we will study the cash flows
that result from fixed investments
• An important cash flow item, derived from
the Income Statement, is the Operating
Cash Flow (OCF) from an investment
• We will compute:
OCF = EBIT – taxes + depreciation
EBIT is Earnings Before Interest and Taxes
14
Types Of Financial Ratios
Liquidity Ratios
• Current ratio
• Quick ratio
Activity Ratios
• Inventory turnover ratio
• Average collection period
Debt Ratios
Profitability Ratios
Market Ratios
15
• Debt-to-equity ratio
• Times interest earned ratio
• Gross margin
• EPS
• P/E ratio
• Market-to-book ratio
Financial Ratios: Trends and
Benchmarking
Benchmarking: comparison of a company’s ratio
values to industry competitors’ ratios
Firms’ financial ratios compared at the same point
in time
Trend analysis - performance evaluation over time
Developing trends can be seen using multi-year
comparisons.
16
Liquidity Ratios (short term obligations)
note:NWC = CA - CL
currentassets
Current ratio=
currentliabilities
currentassets-inventory
Quick ratio=
currentliabilities
Staples (2004)
Office Depot
(2004)
17
Current ratio = 1.64
Quick ratio= 0.95
Current ratio = 1.57
Quick ratio= 0.98
Activity Ratios
cost of goods sold
Inventoryturnover=
inventory
sales
Fixed asset turn over =
net fixed assets
Staples (2004)
Office Depot
(2004)
18
Inventoryturnover= 6.52
Fixed asset turn over = 4.36
Inventoryturnover= 6.35
Fixed asset turn over = 4.81
Activity Ratios (Continued)
Accounts receivable
Average collection period=
Average sales per day
Annual sales
Average sales per day =
365
sales
Total asset turn over =
total assets
Averagesales per day = $36,112,936.99
19
Staples (2004)
Average collection period= 11.36 days
T otalasset turnover= 2.03
Office Depot
(2004)
Averagesales per day = $33,859,084
.93
Average collection period= 37.86 days
T otalasset turnover= 2.01
Debt Ratios
– relates to financial leverage
total liabilities
Debt ratio =
total assets
Long term debt
Debt-equity ratio=
Stockholders' equity
20
Staples (2004)
Debt ratio = 0.44
Debt-equity ratio= 0.16
Office Depot
(2004)
Debt ratio = 0.55
Debt-equity ratio= 0.30
Debt Ratios (Continued)
earnings before interest and taxes
Times interest earned =
interest
21
Staples (2004)
Times interest earned = 39.57
Office Depot
(2004)
Times interest earned = 9.12
Profitability Ratios
Gross profits
Gross profit margin =
sales
Earnings before interest & taxes
Operating profit margin =
sales
Staples (2004)
Office Depot
(2004)
22
Gross profitmargin = 27.5%
Operatingprofitmargin = 6.06%
Gross profitmargin = 31.35%
Operatingprofitmargin = 4.04%
Profitability Ratios (Continued)
Net income
Net profit margin =
sales
Net income
Earningsper share =
number of sharesof commonstockoutstanding
Staples (2004)
Office Depot
(2004)
23
Net profitmargin = 3.72%
Earningsper share = $ 0.98
Net profitmargin = 2.24%
Earningsper share = $ 0.89
Net profit margin (2004 data)
• Consider two highly profitable companies:
• Wal-Mart: NPM = 3.3%
• Microsoft: NPM = 14.3%
• Which is the best company to invest in?
24
Profitability Ratios
- what if you have no liabilities?
Net income
Return on total assets =
Total assets
Net income
Return on commonequity =
Stockholders' equity
Staples (2004)
Office Depot
(2004)
25
Return on totalassets = 7.54%
Return on commonequity = 13.4%
Return on totalassets = 4.50%
Return on commonequity = 9.89%
Market Ratios
Price/earnings (P/E)ratio=
marketprice per share of commonstock
earningsper share
commonstockequity
Book valueper share =
number of sharesof commonstockoutstanding
Staples (2004)
Price/earnings (P/E)ratio= 28.04
Book valueper share = $6.05
Office Depot
(2004)
26
Price/earnings (P/E)ratio= 17.87
Book valueper share = $5.40
Market Ratios
Market value per share of commonstock
Market/book (M/B) ratio
Book valuepershareof commonstock
27
Staples (2004)
Market/book (M/B) ratio 4.55
Office Depot
(2004)
Market/book (M/B) ratio 2.94
Corporate Taxes
Significant cash outflow
28
Ordinary
income tax
• Progressive tax rate schedule
• Average tax rate: tax divided by the
pretax income
• More relevant: marginal tax rate
Capital gains
tax
• Under existing tax laws, use ordinary
income tax rates for capital gain
taxes
Financial Statements and Financial
Ratios

Balance Statement

Income Statement
Liquidity Ratios


Activity Ratios


Debt Ratios
Profitability Ratios

Market Ratios