WORKING WITH FINANCIAL STATEMENTS

FINANCIAL STATEMENT ANALYSIS History lesson

Purpose

The “Financial Dimensions” approach

FINANCIAL STATEMENT ANALYSIS

Firm Financial ‘Dimensions’

Liquidity/Short-Term Solvency

Asset Management/Mg’l Effectiveness

Debt Mgmt./Long-Term Solvency

Profitability/Expense Control

Market Value/Value Creation

FINANCIAL STATEMENT ANALYSIS

Liquidity/Short-Term Solvency

Current ratio

Quick ratio

Cash ratio

FINANCIAL STATEMENT ANALYSIS

Asset Mgmt./Managerial EffectivenessInventory turnover

Days’ sales in inventory

Days’ sales in receivables

Fixed asset turnover

Total asset turnover

FINANCIAL STATEMENT ANALYSIS

Debt Management/Long-Term SolvencyTotal debt ratio

Debt-to-equity ratio

Times interest earned

Cash coverage

FINANCIAL STATEMENT ANALYSIS

Profitability/Expense Control

Profit margin

ROA (ROI)

ROE

The DuPont identity

FINANCIAL STATEMENT ANALYSIS

Market Value/Value Creation

Market capitalization (“market cap”)

Price/Earnings ratio (P/E)

Market-to-book ratio (M/B)

Q&D ANALYSIS EXERCISE: YAHOO!

Yahoo.com

What is Yahoo’s market cap?

How liquid is the firm?

How indebted is the firm?

How profitable is the firm?

How well has management utilized the firm’s assets?

What is the market’s assessment of the firm?

Q&D ANALYSIS EXERCISE: YAHOO!

What is Yahoo’s market cap?

How liquid is the firm?

How indebted is the firm?

How profitable is the firm?

How well has management utilized assets?

What is the market’s assessment of the firm?