FINANCIAL ANALYSIS
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Financial Statement Analysis
Common Size Statement Analysis
Ratio Analysis
Sources/ Uses of Funds
Statement of Cash Flow
Free Cash Flow, MVA, EVA
1
Table 3-1 Allied Food Products: December 31 Balance Sheets ($ Millions)
ASSETS
Cash & equivalents
2005 2004 LIABILITIES & EQUITY 2005
$ 10 $ 80 Accounts payable
$ 60
Notes payable
110
Accounts receivable
375 315 Accruals
140
Inventories
615 415 Total current liabilities
$ 310
Total current assets $1,000 810 Long-term bonds
750
Net plant &
Total debt
$1,060
equipment
1,000 870
Total assets
2
2004
$ 30
60
130
$ 220
580
$ 800
Common stock
(50,000,000 shares)
130
130
Retained earnings
810
750
Total common equity$ 940 $ 880
$2,000 $1,680 Total liabilities & equity
$2,000 $1,680
Table 3-2 Allied Food Products: Income Statements for Years Ending December 31
3
($ Millions, except for per-share data)
Net sales
Operating costs except depreciation
Earnings before interest, taxes, and depreciation
(EBITDA)
Depreciation
Earnings before interest & taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net income
Common dividends
Addition to retained earnings
Per-share data:
Common stock price
Earnings per share (EPS)a
Dividends per share (DPS)a
Book value per share (BVPS)a
Cash flow per share (CFPS)a
2005
$ 3,000.0
2,616.2
2004
$ 2,850.0
2,497.0
$ 383.8
100.0
$ 283.8
88.0
$ 195.8
78.3
$ 117.5
$ 57.5
$ 60.0
$ 353.0
90.0
$ 263.0
60.0
$ 203.0
81.2
$ 121.8
$ 53.0
$ 68.8
$ 23.00
$ 2.35
$ 1.15
$ 18.80
$ 4.35
$ 26.00
$ 2.44
$ 1.06
$ 17.60
$ 4.24
Table 3-2 Allied Food Products: Income Statements for years ending December 31
4
($ Millions, except for per-share data)
a
There are 50,000,000 shares of common stock outstanding. Note that EPS is based on
earnings after preferred dividends - that is, on net income available to common
stockholders. Calculations of EPS, DPS, and BVPS for 2004 are as follows:
Net income
EPS =
DPS =
Common shares outstanding
=
$117,500,000
50,000,000
Dividends paid to common stockholders
BVPS =
CFPS =
Common shares outstanding
Total common equity
Common shares outstanding
=
=
$57,500,000
= $1.15
50,000,000
$940,000,000
50,000,000
Net income + Depreciation + Amortization
Common shares outstanding
= $2.35
=
= $18.80
$217,500,000
50,000,000
= $4.35
Table 3-4 Allied Food Products: Statement of Retained
Earnings for year ending December 31, 2005($ Millions)
Balance of retained earnings, Dec 31, 2004
Add: Net income, 2005
Less: Dividends to common stockholders
Balance of retained earnings, Dec 31, 2005
a
5
$ 750.0
117.5
(57.5)a
$ 810.0
Here, and throughout the book, parentheses are used to
denote negative numbers.
Income Statement Common Size Analysis
6
% of Sales Ind. ave
Net sales
$ 3,000
Costs excluding depreciation
2,616. 2
Depreciation
100
Total operating costs
2,716. 2
Net Operating Income, or Earnings
before interest and taxes (EBIT)
$ 283. 8
Less interest expense
88
Earnings before taxes (EBT)
$ 195. 8
Taxes ( 40% )
78. 3
Net Income available to C. S.
117. 5
Common Dividends
57. 5
Add. to Retained Earnings
60
100 %
87. 2
62 %
3. 3
8
90. 5 % 70 %
9. 5 %
2. 9
6. 5
2. 6
3. 9
1. 9
2. 0
30 %
5
22
4
18
8
9
Balance Sheet Common Size Analysis
Cash / Securities
Accounts Receivable
Inventories
Total Current Assets
Net Plant & Equip.
Total Assets
Accounts payable
Notes payable
Accruals
Total Current Lia.
Long-term Bonds
Total Debt
Common stock
Retained earnings
Total Common Equity
Total Lia. & Equity
$10
375
615
$1,000
1,000
$2,000
$ 60
110
140
$310
750
1,060
130
810
$940
$2,000
% of Total Assets
0. 50 %
18. 75
30. 75
50 %
50
100 %
3 %
5. 5
7
15. 5 %
37. 5
53%
6. 5
40. 5
47%
100%
Ind. Ave. Comment
10%
very low
15
OK
40
low
65 % low, risky
45
OK
7
OK
4 slightly high
10 slightly low
21
low
22
high
43
high
15
low
40
OK
65
low
7
Allied Food Products: Summary of Financial Ratios ($ Millions)
Ratio
Liquidity
Current
Quick, or
acid test
Formula
8
Ind.
Calculations Ratio Avg Comment
Current assets
Current liabilities
Current assets - Inventories
Current liabilities
$1,000
$310
= 3.2x 4.2x
$385 = 1.2x
$310
Poor
2.2x Poor
Allied Food Products: Summary of Financial Ratios ($ Millions)
9
Ind.
Calculations Ratio Avg Comment
Ratio
Asset Management
Inventory
turnover
Formula
Days sales
outstanding (DSO)
Receivables
$375 = 46 days 36 days Poor
Annual sales/365 $8.22
Fixed assets
turnover
Sales
Net fixed assets
Total assets
turnover
Sales
Inventories
Sales
Total assets
$3,000 = 4.9x
$615
$3,000
$1,000
= 3.0x
10.9x Poor
2.8x
O.K.
$3,000 = 1.5x 1.8x Somewhat
$2,000
low
Allied Food Products: Summary of Financial Ratios ($ Millions)
10
Ind.
Calculations Ratio Avg Comment
Ratio
Formula
Debt Management
Total debt to
Total debts
total assets
Total assets
Times-interest
earned (TIE)
EBITDA
coverage
$1,060 = 53%
$2,000
Earnings before interest & taxes (EBIT)
Interest charges
EBITDA
+ Lease payments
I nterest +
Principal
charges
payments
+
Lease
40.0% High
(risky)
$283.8 = 3.2x 6.0x Low
$88
(risky)
$383.8 + $28
$88 + $20 + $28
payments
$411.8 = 3.0 x 4.3x Low
$136
(risky)
Allied Food Products: Summary of Financial Ratios ($ Millions)
Ratio
Profitability
Profit margin
on sales
Ind.
Calculations Ratio Avg Comment
Formula
Net income available to common stockholders
Basic earning
power (BEP)
Return on total
assets (ROA)
11
Sales
Earnings before interest & taxes (EBIT)
Total assets
$117.5 = 3.9% 5.0% Poor
$3,000
$283.8 = 14.2% 18% Poor
$2,000
Net income available to common stockholders
Total assets
$117.5 = 5.9% 9.0% Poor
$2,000
Return on
Net income available to common stockholders $117.5 = 12.5% 15% Poor
common equity
Common equity
$940
(ROE)
Allied Food Products: Summary of Financial Ratios ($ Millions)
12
Ratio
Formula
Market Value
Price/earnings Price per share
(P/E)
Earnings per share
Price/cash flow
Market/book
(M/B)
Price per share
Cash flow per share
Ind.
Calculations Ratio Avg Comment
$23.00
$2.35
= 9.8x 11.3x Low
$23.00 = 5.3x 5.4x
$4.35
Market price per share $23.00 = 1.2x
Book value per share $18.80
Low
1.7x Low
Allied Food Products: Summary of Financial Ratios ($ Millions)
13
Ratio
Formula
Other Ratios
Dividend payout ratio : Div.
NI
Retention ratio:
=
$57.5 = 48.9%
$117.5
1 - payout ratio
=
1 – 48.9% = 51.1%
Retained earnings
NI
=
$60 = 51.1%
$117.5
or
Du Pont Analysis (Allied Food Products)
ROE =
NI
Equity
=
Profit
Total
assets
x
x
margin
turnover
NI
Sales
x
Sales
TA
14
Equity
multiplier
x
TA
Equity
Firm:
12.5% = 3.9% x 1.5 x 2.13
Industry: 15.0% = 5.0% x 1.8 x 1.67
Allied Food Products: Changes in Balance Sheet Accounts During 2005 ($
Millions)
12/31/05
Cash & marketable securities
$ 10
Accounts receivable
375
Inventories
615
Gross plant & equipment
1,500
Less Accum. Depreciation
(500)
Net plant & equipment
1,000
Accounts payable
60
Notes payable
110
Accruals
140
Long-term bonds
750
Common stock
130
Retained earnings
810
Totals
CHANGE
12/31/04 Sources Uses
$ 80 $ 70
315
$ 60
415
200
1,270
230
(400)
100
870
30
30
60
50
130
10
580
170
130
750
60
$490
$490
15
Allied Food Products: Statement of Cash Flows for 2005 ($ Millions)
OPERATING ACTIVITIES
Net income
$117.5
Additions (Sources of Cash)
Depreciationa
100.0
Increase in accounts payable
30.0
Increase in accruals
10.0
Subtractions (Uses of Cash)
Increase in accounts receivable
(60.0)
Increase in inventories
(200.0)
Net cash provided by operating activities
($ 2.5)
LONG-TERM INVESTING ACTIVITIES
Cash used to acquire fixed assetsb
($230.0)
FINANCING ACTIVITIES
Increase in notes payable
$ 50.0
Increase in bonds
170.0
Payment of common dividends
(57.5)
Net cash provided by financing activities
$ 162.5
Net decrease in cash & marketable securities
($ 70.0)
Cash & securities at beginning of year
80.0
Cash & securities at end of year
$ 10.0
16
Allied Food Products: Statement of Cash Flows for 2005 ($ Millions)
17
a
Depreciation is a non-cash expense that was deducted when calculating net
income. It must be added back to show the correct cash flow from operations.
b
The net increase in fixed assets is $130 million; however, this net amount is after
a deduction for the year’s depreciation expense. Depreciation expense should
be added back to show the increase in gross fixed assets. From the company’s
income statement, we see that 2004 depreciation expense is $100 million; thus,
the acquisition of fixed assets equals $230 million.
18
I. Stock markets
Stock Markets and Stock Reporting
A. New York stock exchange (NYSE)
B. American stock exchange (AMEX)
C. Over-the-counter (OTC) markets
D. Smaller regional markets
Ii. Stock market reporting
52 weeks
Yld. P-E sales
net
High low stock div. % Ratio 100s high low close chg.
1757/8 102 IBM 4.40 3.8 16 27989 1181/4 1151/4 1171/4 +13/4
Dividend yield = D/P
= $4.40 / $117.25 = 3.8%
19
Free Cash Flow, MVA, EVA,
and Stock Valuation
FREE CASH FLOW
20
2004
CA (Current Asset)
AP (Account Payable)
Accruals
Total Operating Working Capital (TOWC)
Net Fixed Asset
Total Operating Capital (TOC)
810
-30
-130
650
870
1,520
Net Investment in Oper. Cap (NIOC) 
Depreciation (2002)
Gross Investment in Operating Cap (GIOC)
2005
1,000
-60
-140
800
1,000
1,800
280
100
380
FREE CASH FLOW
NET OPERATING PROFIT AFTER TAX (NOPAT):
NOPAT = EBIT ( 1 – TAX )
283.8 (1- 0.4) = 170.3
FREE CASH FLOW CALCULATION:
FCF = NOPAT – NIOC
= 170.3 - 280 = - 109.7
FCF = NOPAT + Depreciation – GIOC
= 170.3 +
100
– 380 = - 109.7
(NOPAT + Depreciation = Operating Cash Flow)
21
STOCK VALUATION
Total Corporation Value =
PV (FCF1)+PV (FCF2)+....+ PV ( FCFn) + PV (Terminal Value)
Where i = WACC
Terminal Value =
FCF n +1
WACC - g
Value of Common Stock Equity =
Total Corp. Value – Market Value of Debt – Market Value of Preferred
Stock
22
MARKET VALUE ADDED (MVA)
23
MVA measure the effects of managerial actions
since the inception of a company
MVA = Market Value – Book Value
MVA = (Stock Price * No of shares) – Common Stock Equity
MVA = ( 23 * 50 mil shares) – 940
MVA = $ 210
24
ECONOMIC VALUE ADDED (EVA)
EVA measures the managerial effectiveness in a given
year
EVA = Net Oper. Profit After Tax- After Tax Dollar Cost of
Operating Capital
EVA = NOPAT – (Total Operating Capital * WACC)
EVA = EBIT (1–T) – (TOC * WACC)
EVA = 283.8 (1-0.4) – (1800 * 10%)
EVA = 170.3 – 180
EVA = $ - 9.7