Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-1 Chapter 15.

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Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-1 Chapter 15

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-2 Chapter Summary  Objective: To provide an overview of financial statement analysis and to show how it relates to equity valuation analysis. Overview Type of financial ratios Comparability problems

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-3  Purpose  Tools Used Statements Ratio Analysis  Limitations Overview

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-4  Balance Sheet Common Sized Trend or Indexed  Income Statement Common Sized Trend or Indexed  Statement of Changes in Financial Position Financial Statements

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-5  Purpose of Ratio Analysis  Uses Trend analysis Comparative analysis Combination  Use by External Analysts Important information for investment community Important for credit markets Ratio Analysis

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-6 Summary Reminder  Objective: To provide an overview of financial statement analysis and to show how it relates to equity valuation analysis. Overview Type of financial ratios Comparability problems

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-7  Liquidity Ratios  Activity or Management Efficiency Ratios  Leverage Ratios  Profitability Ratios  Market Price Ratios Type of Financial Ratios

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-8 Current Ratio Liquidity Ratios Quick Ratio

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 15-9 Inventory Turnover Activity or Management Efficiency Ratios Total Asset Turnover

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Average Collection Period Activity or Management Efficiency Ratios Days to Sell Inventory

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Times Interest Earned Leverage Ratios Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Debt to Assets Leverage Ratios Debt to Equity

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Net Profit Margin Profitability Ratios Return on Assets

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Return on Equity Profitability Ratios Operating Margin After Depreciation Operating Profit Sales Operating Profit Sales

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Price to Earnings Market Price Ratios Market-to-Book-Value

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide (1) x (2) x (3) x (4) x (5) xx Margin x Turnover x Leverage Tax Burden Interest Burden Decomposition of ROE

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Summary Reminder  Objective: To provide an overview of financial statement analysis and to show how it relates to equity valuation analysis. Overview Type of financial ratios Comparability problems

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide  Accounting Differences Inventory Valuation Depreciation  Inflation  International Accounting Conventions Comparability Problems

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide Quality of Earnings  Concept refers to the extent to which one may expect reported level of earnings to be sustained  Factors influencing quality of earnings: Allowance for bad debt Nonrecurring items Stock options

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide International Accounting Differences  Reserves – many other countries allow for more flexibility in use of reserves  Depreciation – US allows separate tax and reporting presentations  Intangibles – treatment varies widely