Business Finance (MGT 232) Lecture 23

Financial Statement Analysis

Overview of the Last Lecture Financial Statements A Possible Framework for Analysis Ratio Analysis Trend Analysis Common-Size and Index Analysis

Ratio Analysis Ratio Analysis Liquidity Ratios Leverage Ratios Asset Management Ratios Profitability Ratios Market Value Ratios

Market Value Ratios These ratios compare the price of the company's stock with different variables including the Earning per share (EPS), Dividend per share (DPS) etc

For Basket Wonders December 31, 2003 Market Value Ratios EPS = Net Income to common share holders common stock outstanding For Basket Wonders December 31, 2003 Income Statement / Balance Sheet And other indicators Market Value Ratios This indicates what is the earning on each share investment and what company is paying to its shareholders

Basket Wonders’ Income Statement Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2013a Net Sales Rs. 2,211 Cost of Goods Sold b 1,599 Gross Profit Rs. 612 SG&A Expenses c 402 EBITd Rs. 210 Interest Expensee 59 EBT f Rs. 151 Income Taxes 60 EATg Rs. 91 Cash Dividends 38 Increase in RE Rs. 53

Market Value Ratio Suppose company have 1000 shareholders and company paid dividend of Rs. 5000 and market price of company’s stock is Rs. 20 per share Net Income to common shareholder is 91(1000) = 91000 Total number of outstanding shares of the company is 4500

BW has a weak earning per share Market Value Ratios Earning per share Year 2013 2012 2011 BW Industry 20.22 31.8 22.1 31.8 22.1 31.8 BW has a weak earning per share

For Basket Wonders December 31, 2003 Market Value Ratios DPS = Total Dividend common stock outstanding For Basket Wonders December 31, 2003 Income Statement / Balance Sheet And other indicators Market Value Ratios Indicates the amount of dividend being paid out on each share

For Basket Wonders December 31, 2003 Market Value Ratios P/E= Market Price per share EPS For Basket Wonders December 31, 2003 Income Statement / Balance Sheet And other indicators Market Value Ratios Indicates how the investment community sees our company. A high P/E is considered a Good Sign.

Market Value Ratios Price earning ratio Year 2013 2012 2011 BW Industry 0.98 2.2 2.1 2.2 5.8 1.8 BW has a weak P/E ratio.

For Basket Wonders December 31, 2003 Market Value Ratios Dividend Payout = DPS/EPS For Basket Wonders December 31, 2003 Income Statement / Balance Sheet And other indicators Market Value Ratios This ratio indicates how much of the earnings of the company are paid out in the form of dividends.

BW has a weak Dividend Payout ratio. Market Value Ratios Dividend Payout Ratio Year 2013 2012 2011 BW Industry 5.4% 6.5% 4.9% 6.3% 5.3% 6.3% BW has a weak Dividend Payout ratio.

For Basket Wonders December 31, 2003 Market Value Ratios Dividend Yield = DPS . Market Price per share; For Basket Wonders December 31, 2003 Income Statement / Balance Sheet And other indicators Market Value Ratios This ratio indicates dividend return to the shareholders of the company

BW has a weak Dividend yield Market Value Ratios Dividend Yield Year 2013 2012 2011 BW Industry 5% 6.8% 4.9% 6.13% 4.1% 6 % BW has a weak Dividend yield

It is also known as vertical analysis Common-size Analysis An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues. It is also known as vertical analysis

Basket Wonders’ Common Size Balance Sheets

Basket Wonders’ Common Size Balance Sheets

Basket Wonders’ Common Size Income Statements

Horizontal Analysis It shows the trend in accounts over the years It is also known as Percentage change or comparative analysis Formula:

Basket Wonders’ Common Size Balance Sheets

Basket Wonders’ Common Size Balance Sheets

Basket Wonders’ Common Size Income Statements

Index Analysis An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year.

Basket Wonders’ Indexed Balance Sheets

Basket Wonders’ Indexed Balance Sheets

Basket Wonders’ Indexed Income Statements

Summary Market Value Ratios Common Size / Vertical Analysis EPS DPS DPO P/E Common Size / Vertical Analysis Horizontal Analysis Trend/index analysis