Tài chính doanh nghiệp - Chapter 7: Financial analysis techniques

Chapter 7Financial Analysis TechniquesPresenter’s namePresenter’s titledd Month yyyyFinancial analysis tools:descriptionGraphicsRegressionCommon-Size AnalysisFinancial Ratio AnalysisCopyright © 2013 CFA Institute2Graphics: exampleCopyright © 2013 CFA Institute3Graphics: exampleCopyright © 2013 CFA Institute4$ millionsGraphics: exampleCopyright © 2013 CFA Institute5Regression: exampleCopyright © 2013 CFA Institute6Common-size AnalysisCommon-size analysis: Express financial data, including entire financial statements, in relation to a single financial statement item or base.Vertical common-size Balance sheet: Each item as a percent of total assets. Income statement: Each item as a percent of total net revenues.Cash flow: Each line as a percent of sales, assets, or total in and out.Highlights composition and identifies what’s important.Horizontal common-sizePercentage increase or decrease of each item from the prior year or showing each year relative to a base year.Highlights items that have changed unexpectedly or have unexpectedly remained unchanged.Copyright © 2013 CFA Institute7Common-size Balance Sheet Example: Single company, Two periodsCopyright © 2013 CFA InstitutePartial common-size balance sheet8Common-size Balance Sheet Example:Cross-sectional, Two companies, same timeAssetsCompany 1% of Total AssetsCompany 2% of Total AssetsCash3812Receivables3355Inventory2724Fixed assets net of depreciation12Investments17Total Assets100100Copyright © 2013 CFA InstitutePartial common-size balance sheet9Use of Comparative Growth Information: exampleSunbeam, Inc. 1997 vs.1996Revenue +19%Receivables +38%Inventory +58%Why are receivables growing so much faster than revenue?Why is inventory growing so much faster than revenue?Copyright © 2013 CFA Institute10Financial ratiosRatios Express one number in relation to another.Standardize financial data in terms of mathematical relationships expressed as percentages, times, or days.Facilitate comparisons—trends and across companies.Ratios are interrelatedCopyright © 2013 CFA Institute11ratio analysisCopyright © 2013 CFA Institute1215.26%A ratio is NOT the answer (except sometimes on an exam). A ratio is an indicator—for example, an indicator of relative activity, profitability, liquidity, solvency.How profitable was Company X?ratio analysisCopyright © 2013 CFA Institute13Company x’s profitability has improved. Its net profit margin was 15.3%, up from 14.9% last year.A ratio is NOT the answer (except sometimes on an exam). A ratio is an indicator—for example, an indicator of relative activity, profitability, liquidity, solvency.Interpretation generally involves comparison. Furthermore, analysis will address the question of why.How profitable was company X?ratio analysisCopyright © 2013 CFA Institute14Company x was more profitable than company y as evidenced by its net profit margin. Company x’s margin of 15.3% was higher than company Y’s margin of 12.0%.A ratio is NOT the answer (except sometimes on an exam). A ratio is an indicator—for example, an indicator of relative activity, profitability, liquidity, solvency.Interpretation generally involves comparison. Furthermore, analysis will address the question of why.How profitable was Company X?Using Financial analysis toolsComputation ≠ AnalysisAnalysis goes beyond collecting data and computing numbers.Analysis encompasses computations and interpretations.Where practical, directly experience the company’s business.Analysis of past performance:What aspects of performance are critical to successfully competing in the industry?How well did the company perform (relative to own history and relative to competitors)?Why? What caused the performance?Does the performance reflect the company’s strategy?Copyright © 2013 CFA Institute15Using Financial analysis toolsNot every ratio is relevant in every situation.Some ratios are irrelevant for certain companies.Some ratios are redundant.Industry-specific ratios can be as important as general financial ratios.Different users and questions (e.g., creditors, investors) focus on different ratios. Different sources categorize some ratios differently and include different ratios.Differences in accounting standards can limit comparability.Copyright © 2013 CFA Institute16Categories of Financial RatiosCategoryDescriptionActivityActivity ratios. How efficient are the firm’s operations and the firm’s management of assets?LiquidityLiquidity ratios. How well is the firm positioned to meet short-term obligations?SolvencySolvency ratios. How well is the firm positioned to meet long-term obligations? ProfitabilityProfitability ratios. How and how much is the firm achieving returns on its investments? ValuationValuation ratios. How does the firm’s performance or financial position relate to its market value?Copyright © 2013 CFA Institute17profitability and overviewCopyright © 2013 CFA Institute18CategoryDescriptionActivityActivity ratios. How efficient are the firm’s operations and the firm’s management of assets?LiquidityLiquidity ratios. How well is the firm positioned to meet short-term obligations?SolvencySolvency ratios. How well is the firm positioned to meet long-term obligations? ProfitabilityProfitability ratios. How much and how is the firm achieving returns on its investments? ValuationValuation ratios. How does the firm’s performance or financial position relate to its market value?Measure of profitability:Return on Equity (ROE)What rate of return has the firm earned on the shareholders’ equity it had available during the year?The general form of the rate of return computation: Applied to shareholders’ equity:Rate of return =Amount of returnAmount investedROE =Net incomeAverage equityCopyright © 2013 CFA Institute19Decompose ROE=Net income×Average assetsAverage assetsAverage equity ROE =Net incomeAverage equity=ROA ×LeverageCopyright © 2013 CFA Institute20Decompose ROEA company can increase its ROEWith a business strategy, by increasing its ROAand/orWith a financial strategy, by increasing its use of leverage as long as returns on the incremental investment exceed the cost of borrowing.ROE =ROA ×LeverageCopyright © 2013 CFA Institute21Return on AssetsWhat rate of return has the firm earned on the assets it had available to use during the year?The general form of this computation is the same:Two variants of ROA computation: Rate of Return =Amount of returnAmount invested(1)ROA =Net incomeAverage assets(2)ROA =Net income adjusted for interest Average assets=Net income + [Interest expense × (1 – Tax rate)]Average assetsCopyright © 2013 CFA Institute22Profitability, Competition, and Business Strategy In other words, ROA can be thought of as:ROA =Net incomeAverage assetsROA =Net income×RevenueRevenueAverage assetsCopyright © 2013 CFA Institute23Profit margin × Turnover (efficiency)DecomposingReturn on EquityROE =Net income×Revenue×Average assetsRevenueAverage assetsAverage equityROE =Profit margin×Turnover×LeverageCopyright © 2013 CFA Institute24DecomposingReturn on EquityWhat was the source of the firm’s return on equity? To what extent. . . was it derived from selling a high margin product or keeping expenses low—deriving more profits from each $1 of sales? (return on sales, net profit margin). . . was it derived from generating higher sales from a lower investment in assets? (efficient use of assets, also known as turnover or efficiency). . . was it derived from investing a lower amount of equity—by using more debt in its capital structure? (financial leverage)Du Pont AnalysisCopyright © 2013 CFA Institute25Decomposing Return on Equity:Stylized comparative analysis Mini-case Co. A Co. B Co. C AverageSales ($)2,0004,0006,6754,225Net income (NI) ($)200200200200Average assets ($)1,0002,0001,5001,500Average equity ($)1,0001,0001,0001,000Average liabilities ($)01,000500500ROE (NI/Equity)Net profit margin (NI/Sales)Turnover(Sales/Assets)Leverage (Assets/Equity)Copyright © 2013 CFA Institute26Decomposing Return on Equity:Stylized comparative analysis Mini-case Co. A Co. B Co. C AverageSales ($)2,0004,0006,6754,225NI ($)200200200200Average assets ($)1,0002,0001,5001,500Average equity ($)1,0001,0001,0001,000Average liabilities ($)01,000500500ROE (NI/Equity)20.0%20.0%20.0%20.0%Net profit margin (NI/Sales)10.0%5.0%3.0%4.7%Turnover (Sales/Assets)224.452.82Leverage (Assets/Equity)121.51.5027Copyright © 2013 CFA InstituteDecomposing Return on Equity:comparativeAAPLHPQDELLROE 27.19%21.50%61.19%Net income/SalesNet profit margin14.88%7.04%4.06%Sales/Average assetsAsset turnover1.001.172.26Average assets/ Average equityFinancial leverage1.832.616.67Copyright © 2013 CFA Institute28DuPont Analysis :Further DecompositionROE = Net income/Average equityDecompose ROE into five factorsROE =Net income×EBT×EBITEBTEBITRevenue×Revenue×Average assetsAverage assetsAverage equity29Copyright © 2013 CFA InstituteProfitability: Return on Sales (from the common-size income statement)Gross profit margin = Gross profit/RevenueMeasures the ability to translate sales into profit after consideration of cost of products sold.Operating profit margin = Operating profit/RevenueMeasures the ability to translate sales into profit after consideration of operating expenses.Net profit margin = Net profit/RevenueMeasures the ability to translate sales into profit after consideration of all expenses and revenues, including interest, taxes, and nonoperating items.Copyright © 2013 CFA Institute30Discussion by categoryCategoryDescriptionActivityActivity ratios. How efficient are the firm’s operations and the firm’s management of assets?LiquidityLiquidity ratios. How well is the firm positioned to meet short-term obligations?SolvencySolvency ratios. How well is the firm positioned to meet long-term obligations? ProfitabilityProfitability ratios. How much and how is the firm achieving returns on its investments? ValuationValuation ratios. How does the firm’s performance or financial position relate to its market value?Copyright © 2013 CFA Institute31Activity ratiosAlso known as asset utilization or operating efficiency ratios.How efficiently is the firm using its assets? How many dollars of sales was the firm able to generate from each dollar of assets? BroadlyAsset turnover = Revenue/Average total assetsLow or declining ratios could meanSales are sluggish, A heavy investment in assets (inefficient? plant modernization to help in future? strategy shift?), and/orAsset mix changed. Specifically, for fixed assets:Fixed asset turnover = Revenue/Average net fixed assetsCan compute for any category of assets.Copyright © 2013 CFA Institute32Activity ratiosNumeratorDenominatorWorking capital turnoverRevenueAverage working capitalFixed asset turnoverRevenueAverage net fixed assetsTotal asset turnoverRevenueAverage total assetsCopyright © 2013 CFA Institute33Also known as asset utilization or operating efficiency ratiosOther Common Activity RatiosNumeratorDenominatorInventory turnoverCost of salesAverage inventoryDays of inventory on hand (DOH)Number of days in periodInventory turnoverReceivables turnoverRevenueAverage receivablesDays of sales outstanding (DSO)Number of days in periodReceivables turnoverPayables turnover PurchasesAverage trade payablesNumber of days of payablesNumber of days in periodPayables turnover Copyright © 2013 CFA Institute34Activity ratios AND the cash cycle (cash conversion cycle, a liquidity ratio)Cash cycle: How long does it take for the firm to go from cash to cash?Service company: sell service → receive cash.Merchandising company: buy inventory → sell inventory → receive cash and pay for inventory.Manufacturing company: buy raw materials → make product → sell product → receive cash and pay for materials and labor.Cash conversion cycle (net operating cycle) = Days sales outstanding + Days inventory held – Number of days of payablesClose link to liquidityWorking capital (current assets minus current liabilities) reflects the investment required to support this cycle.Copyright © 2013 CFA Institute35LiquidityHow well positioned is the firm to meet its near-term obligations?Current ratio = Current assets/Current liabilitiesQuick ratio = (Cash + Short-term marketable investments + Account receivables)/Current liabilitiesCash ratio = (Cash + Short-term marketable investments)/ Current liabilitiesCopyright © 2013 CFA Institute36Discussion by categoryCategoryDescriptionActivityActivity ratios. How efficient are the firm’s operations and the firm’s management of assets?LiquidityLiquidity ratios. How well is the firm positioned to meet short-term obligations?SolvencySolvency ratios. How well is the firm positioned to meet long-term obligations? ProfitabilityProfitability ratios. How much and how is the firm achieving returns on its investments? ValuationValuation ratios. How does the firm’s performance or financial position relate to its market value?Copyright © 2013 CFA Institute37Solvency: How well positioned is the firm to meet its longer-term liabilities?Debt ratios: How has the company financed itself?Debt to total assetsDebt to equityDebt to total capitalCoverage ratios: Degree to which earnings or cash flow can decline without affecting firm’s ability to pay interest.EBIT interest coverage = (EBT + Interest payments)/Interest paymentsFixed charge coverage = (EBIT + Lease payments)/(Interest payments + Lease payments)}Lower ratio –> safer.Higher cushion against potential creditor lossesCopyright © 2013 CFA Institute38Common solvency ratiosSolvency ratiosNumeratorDenominatorDebt ratios  Debt-to-assets ratioTotal debtTotal assetsDebt-to-capital ratioTotal debtTotal debt + Total shareholders’ equityDebt-to-equity ratioTotal debtTotal shareholders’ equityFinancial leverage ratioAverage total assetsAverage total equityCoverage ratios  Interest coverageEBIT Interest paymentsFixed charge coverageEBIT + Lease paymentsInterest payments + Lease paymentsCopyright © 2013 CFA Institute39Discussion by categoryCategoryDescriptionActivityActivity ratios. How efficient are the firm’s operations and the firm’s management of assets?LiquidityLiquidity ratios. How well is the firm positioned to meet short-term obligations?SolvencySolvency ratios. How well is the firm positioned to meet long-term obligations? ProfitabilityProfitability ratios. How much and how is the firm achieving returns on its investments? ValuationValuation ratios. How does the firm’s performance or financial position relate to its market value?Copyright © 2013 CFA InstituteCopyright © 2013 CFA Institute40Valuation ratios: Price-to-Earnings ratioP/E relates earnings per common share to the market price at which the stock trades, expressing the “multiple” that the stock market places on a firm’s earnings.High P/E indicates Firm is valued highly by market, possibly because of growth expectations, orThat a firm may have very low earnings per share.P/E=PriceEarnings per shareCopyright © 2013 CFA Institute41Valuation ratiosNumeratorDenominatorValuation ratiosP/EPrice per shareEarnings per shareP/CFPrice per shareCash flow per shareP/SPrice per shareSales per shareP/BVPrice per shareBook value per shareCopyright © 2013 CFA Institute42Dividend-related quantities Dividend payout ratio=Dividends per shareEarnings per shareDividend yield=Dividends per sharePrice Copyright © 2013 CFA Institute43Selected credit ratios used by standard & Poor’s as part of credit analysisRatioNumeratorDenominatorEBIT and EBITDA interest coverageEBIT or EBITDA Gross interest (prior to deductions for capitalized interest or interest income)FFO interest coverageFFO plus interest paid minus operating lease adjustments Gross interest (prior to deductions for capitalized interest or interest income)FFO to debtFFO Total debtFree operating cash flow to debtCFO (adjusted) minus capital expendituresTotal debtDiscretionary cash flow to debtCFO minus capital expenditures minus dividends paidTotal debtCopyright © 2013 CFA Institute44Selected credit ratios used by standard & Poor’s as part of credit analysisCredit RatioNumeratorDenominatorReturn on capitalEBITAverage capital, where capital is equity plus noncurrent deferred taxes plus debtNet cash flow to capital expendituresFFO minus dividendsCapital expendituresDebt to EBITDATotal debtEBITDATotal debt to total debt plus equityTotal debtTotal debt plus equityCopyright © 2013 CFA Institute45Segment analysis example:L’ORÉALCopyright © 2013 CFA Institute46model building:examples of possible uses of ratiosCopyright © 2013 CFA Institute47Sales forecast (percent change from horizontal common-size income statement)Expenses (from common-size income statement)Gross profit (gross profit margin)Operating profit (operating profit margin)Assets (days receivable, days payable, PP&E turnover)Liabilities (leverage ratios)Cash flowRatios in model buildingCopyright © 2013 CFA Institute48Forecast DebtForecast Interest ExpenseForecast Income and TaxesForecast Cash FlowSales forecastExpensesGross ProfitOperating ProfitAssets LiabilitiesCash FlowSummary: financial analysis toolsGraphics facilitate comparisons, and regressions quantify statistical relationships.Common-size analysis expresses financial data, including entire financial statements, in relation to a single financial statement item or base.Ratios, which express one number in relation to another, facilitate comparisons—trends and cross-sectional.A ratio is an indicator of Activity ProfitabilityLiquiditySolvencyCopyright © 2013 CFA Institute49