1. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 14 Financial Statement Analysis

2. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 2 Overview Purpose Tools Used –Statements –Ratio Analysis Limitations

3. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 3 Financial Statements Balance Sheet –Common Sized –Trend or Indexed Income Statement –Common Sized –Trend or Indexed Statement of Cash Flows

4. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 4 Ratio Analysis Purpose of Ratio Analysis Uses –Trend analysis –Comparative analysis –Combination Use by External Analysts –Important information for investment community –Important for credit markets

5. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 5 Type of Financial Ratios Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios

6. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 6 Liquidity Ratios Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets - Inventory Current Liabilities

7. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 7 Activity or Management Efficiency Ratios Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Total Assets

8. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 8 Activity or Management Efficiency Ratios Average Collection Period Accounts Receivable Sales Per Day Days to Sell Inventory Inventory Sales Per Day

9. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 9 Leverage Ratios Times Interest Earned Earnings Before Int. & Taxes Interest Expense Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends

10. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 10 Leverage Ratios Debt to Assets Long Term Debt Assets Debt to Equity Long Term Debt Shareholders Equity

11. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 11 Profitability Ratios Net Profit Margin % Net Income Sales Return on Assets Net Income Total Assets

12. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 12 Profitability Ratios Return on Equity Net Income Common Equity Operating Margin After Depreciation Operating Profit Sales

13. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 13 Market Price Ratios Price to Earnings Market Price of Stock Earnings Market-to-Book-Value Market Price of Stock Book Value Per Share

14. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 14 Decomposition of ROE ROE = Net Profit Net Profit Pretax Profit x EBIT EBIT x EBITSalesSalesAssets xx AssetsEquity (1) x (2) x (3) x (4) x (5) x Margin x Turnover x Leverage Tax TaxBurdenInterestBurden

15. Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 15 Comparability Problems Accounting Differences –Inventory Valuation –Depreciation Inflation International Accounting Conventions