成果讲稿3404之家week7-financialnon financial analysis

1、1Lecture 7Assessment of lending propositions: Financial & Non financial analysisReading:Sathye Chapter 2 & additional readingLearning Objectives / es Discuss the need for comparative analysis and identify the tools of financial statement analysisExplain and apply horizontal analysisDescribe and appl

2、y vertical analysisIdentify and calculate ratios and describe their purpose and use in analysing the liquidity, solvency and profitability of a businessDiscuss the limitations of financial statement analysis2IntroductionThe analysis of financial statements plays a key role in assessing potential bus

3、iness loansGenerally consist of:Statement of Financial Performance ( e statement)Statement of Financial Position (Balance sheet)Statement of CashflowsWhy lenders analyse financial statementsFinancial statements are analysed to help determine whether:The business has adequate liquidity so it can hono

4、ur short-term obligationsThe business is run efficientlyThe business is run profitablyThe proprietors stake in the business is high versus the business carrying excessive debt4Analysis helps provide answers to three key questions:Should the bank give the requested loan?If the loan is given, will it

5、be repaid together with interest? (Some real estate loans are interest only-regular interest repayment reduces risk)What is the banks remedy if the assumptions of the loan turn out to be wrong?5Analysis of Financial StatementsThe analysis of financial statements falls into three broad categories:Cro

6、ss-sectional techniques, such as ratio analysis and common-size statementsTime series techniques, such as identifying trends in ratios or other measuresA combination of the two. 1. COMPARATIVE ANALYSISEvery item in financial reports represents something importantIt existed and was material at some t

7、ime and in some quantityIts significance can be determined only in relation to something else:Single numbers on their own do not provide useful information7COMPARATIVE ANALYSIS continuedTypes of useful comparative information:Intra-entity basis Comparisons within a single entity (detects changes in

8、financial relationships and trends)Industry averages Between entities in same industry (determines position relative to others)Inter-entity basisBetween other entities (indicates competitive position)8Basic tools used in financial statement analysisBasic comparative analysis techniques: Horizontal a

9、nalysis Evaluates a series of financial data over time (Listed entities show the previous year next to this year)Vertical analysisEvaluates financial items in relation to a base amountRatio analysis Evaluates a comprehensive range of financial relationships representing different aspects of an entit

10、ys activities9 2. HORIZONTAL ANALYSISUsed to evaluate a series of financial statement data over a period of timeAnalyses increases or decreases that have occurred from a particular base yearFigures are stated as both dollar amounts and as percentages10Horizontal analysis continuedPercentages removes

11、 the effect of size, so the relative magnitude of change is revealedOne year is selected as the base year and then increases or decreases are based on the formula:11 Change since = Current year amount Base-year amountbase period Base-year amountHorizontal analysis net sales12Horizontal analysis e st

12、atementNick Scali Limited for the year ended 30 June 201013 3. VERTICAL ANALYSISEvaluates financial statement data by expressing each item as a percentage of a base amount to indicate relative magnitudeUseful for comparing companies of different sizesCalculated percentages can also be tracked over t

13、ime to determine patterns of change14Vertical analysis e satement15 4. RATIO ANALYSISRatio analysis can be used to make both: pany comparisonsInter-entity comparisons3 types of ratios:LiquiditySolvencyProfitability16Liquidity ratiosLiquidity ratios measure the short-term ability of an entity to pay

14、its debts and meet unexpected needs for cashImportant to bankers, suppliers and other short-term creditorsCurrent ratio17Liquidity ratios continued2. Quick ratioExcludes inventory and prepaid assets which are the least liquid current assets 18Liquidity ratios continued3. Current cash debt coverageRe

15、flects the whole period not just a single point in timeDoes not just use year end balancesCombines cash and accrual figures19Liquidity ratios continued4. Receivables turnoverIndicates the effectiveness of credit collection policiesMeasures the number of times trade receivables are converted into cas

16、h during the period20Liquidity ratios continued5. Average collection periodConverts receivables turnover figure into a measure of days for receivables collection21Liquidity ratios continued6. Inventory turnoverReflects the effectiveness of inventory management22Liquidity ratios continued7. Average d

17、ays in inventoryConverts inventory turnover into a measure of days for inventory to be sold.23Solvency ratiosSolvency ratios measure the ability of an entity to survive over a long period of timeImportant to long-term creditors and shareholders8. Debt to total assets ratioIndicates degree of leverag

18、e (percent of total assets funded through debt)24Solvency ratios continued9. Times interest earnedIndicates entitys ability to sustain debt by measuring its ability meet interest payments from operating profitNote Nick Scali Has no debt in 2010 and very little in 2009 which is unusual 25Solvency rat

19、ios continued10. Cash debt coverageIndicates entitys ability to repay liabilities from cash generated from operating activities, without having to liquidate assets used in operationsReflects the whole period, not just a single point in time 26Solvency ratios continued11. Free cash flowIndicates enti

20、tys ability to pay dividends or expand operationsProvides an estimation of discretionary cashCombines cash and accrual figures 27Profitability ratiosProfitability ratios measure the profit or operating success of an entity for a given period of timeSize of entitys profit affects its:Ability to obtai

21、n debt and equity financingLiquidity positionAbility to growProfitability is often regarded as the ultimate test of managements operating effectiveness28Profitability ratios continuedRelationships among profitability measures29Profitability ratios continued12.Return on ordinary shareholders equity r

22、atioIndicates earnings per dollar invested by the ownersAffected by:Return on assets ratio (ratio 13)Degree of leverage 30Profitability ratios continued13. Return on assetsMeasures overall profitability with respect to investment in assetsAffected by:Degree of leverage (interest expense)Profit margi

23、nsAsset base31Profitability ratios continued14. Profit margin Measures percentage of each dollar of sales that results in profitHigh volume firms (e.g. supermarkets) generally experience low profit marginsLow volume firms (e.g. white goods) have high profit margins32Profitability Ratios (contd)15. A

24、sset turnoverAsset turnovers vary considerably between industries33Profitability Ratios (contd)Relationship between profitability ratios:Return on assets=profit margin x asset turnover= net profit x net sales . net sales average total assets34Profitability ratios continued16. Gross profit rateIndica

25、tes entitys ability to maintain an adequate selling price above its costsRatio declines as industry es more competitive35Profitability ratios continued17. Operating expenses to sales ratioMeasures costs incurred to support each dollar of sales36Profitability ratios continued18. Cash return on sales

26、ratioSimilar to net profit ratioUses cash numerator instead of accrual profit 37Profitability ratios continued19. Earnings per share (EPS)Measures profit earned on each ordinary shareReporting of EPS is regulated by AASB 133 38Profitability ratios continued20. Price-earnings ratioMeasures ratio of m

27、arket price of each ordinary share to earnings per shareReflects investors assessments of an entitys future earnings39Profitability ratios continued21. Cash dividend payout rateMeasures the percentage of profit distributed in the form of cash dividendsEntities with high growth rates generally have l

28、ow payout ratios because they reinvest most of their profit in the firm40Step-by-step approach to financial statements analysisStep 1: Obtain relevant financial statementsObtain Statement of Financial Performance, Statement of Financial Position and Cashflow statements for generally three yearsStep

29、2: Check for consistencyVerify names on financial statements, signatures of partners, corporate seals etc.41Step 3: Undertake preliminary scrutiny of financial statementsStatement of Financial PerformanceStatement of Financial PositionCashflow StatementStep 4: Collect data about industry and general

30、 economic trendsStrength of economy and relevant industry42Step 5: Comparison with industry averagesHow does firms financial ratios compare with competitors in same industryStep 6: Do supplementary analysisBreak-even and Sensitivity AnalysisStep 7: Summarise main featuresProvide an analytical overvi

31、ew from all relevant data obtained43Detecting window dressing, frauds and errorsOverwhelming accounting complexities lead to potential abuses of the notion of true and fair via manipulation of:Valuation of receivables inventory, property, marketable securities and other assetsLiabilities including o

32、ff-balance sheet itemsChanges to accounting methods44Use of financial ratios by loan officersTop ten ratios of importance in loan assessment451Debt/Equity6Net Interest Earned2Current Ratio7Net Profit Before Tax3Cash Flow/LT Debt8Financial Leverage4Fixed Charge Cover9Inv T/O in Days5Net Profit After Tax10A/c Rec T/O in Days 5. LIMITATIONS OF FINANCIAL STATEMENT ANALYSIS1. EstimatesFinancial stateme