Financial Statement Analysis (Contoh Perhitungan)

Interpreting Financial Statements*

Markus Neuhaus I Corporate Finance I [email protected]

Winter Term 2009*


Winter Term 2009*Liquidity ratios Inventories are a firms least liquid current asset and therefore most likely to suffer losses if they have to be sold in liquidation. A company should be able to pay current liabilities with current assets less inventories.If a company is getting into financial difficulties, it will pay its bills more slowly, borrowing money from banks and from suppliers. This leads to increased current liabilities which causes the current ratio to decrease. If current liabilities grow faster than current assets, this is a an indication of financial difficulties.


Winter Term 2009*Markus Neuhaus I Corporate Finance I [email protected] sheet and income statementSource: Brigham, Houston (2009), 58.Source: Brigham, Houston (2009), 61.


Winter Term 2009*Markus Neuhaus I Corporate Finance I [email protected] ratios Inventories are a firms least liquid current asset and therefore most likely to suffer losses if they have to be sold in liquidation. A company should be able to pay current liabilities with current assets less inventories.If a company is getting into financial difficulties, it will pay its bills more slowly, borrowing money from banks and from suppliers. This leads to increased current liabilities which causes the current ratio to decrease. If current liabilities grow faster than current assets, this is a an indication of financial difficulties.Source: Brigham, Houston (2009), 87f.


*Balance sheet and income statement


Asset management ratios DSO shows the average collection period or how long customers usually take to pay their bills. The higher the DSO, the more money is lost, because the company has to finance the gap with expensive loans etc.Inventory turnover indicates whether a company (compared with peer companies) holds too much inventory, which is very unproductive and represents an investment with a low returnThe fixed assets turnover ratio indicates how effectively the company is using its fixed assets compared with peer companies.


Balance sheet and income statementSource: Brigham, Houston (2009), 61.


Winter Term 2009*Asset management ratios DSO shows the average collection period or how long customers usually take to pay their bills. The higher the DSO, the more money is lost, because the company has to finance the gap with expensive loans etc.Inventory turnover indicates whether a company (compared with peer companies) holds too much inventory, which is very unproductive and represents an investment with a low returnThe fixed assets turnover ratio indicates how effectively the company is using its fixed assets compared with peer companies.


Balance sheet and income statementSource: Brigham, Houston (2009), 61.Source: Brigham, Houston (2009), 58.


Asset management ratios DSO shows the average collection period or how long customers usually take to pay their bills. The higher the DSO, the more money is lost, because the company has to finance the gap with expensive loans etc.Inventory turnover indicates whether a company (compared with peer companies) holds too much inventory, which is very unproductive and represents an investment with a low returnThe fixed assets turnover ratio indicates how effectively the company is using its fixed assets compared with peer companies.


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Debt or financing ratios Creditors prefer a low debt to equity ratio whereas stockholders may want more leverage as it can magnify expected earnings ( pecking order theory). The optimal ratio between debt and assets is highly dependent on the firms business and industry.The TIE ratio measures the extent to which operating costs can decline before the firm is unable to meet its interest costs. Not being able to pay interest costs will bring legal troubles and can result in bankruptcy.Source: Brigham, Houston (2009), 91ff.


Winter Term 2009*Markus Neuhaus I Corporate Finance I [email protected] or financing ratios Creditors prefer a low debt to equity ratio whereas stockholders may want more leverage as it can magnify expected earnings ( pecking order theory). The optimal ratio between debt and assets is highly dependent on the firms business and industry.The TIE ratio measures the extent to which operating costs can decline before the firm is unable to meet its interest costs. Not being able to pay interest costs will bring legal troubles and can result in bankruptcy.Source: Brigham, Houston (2009), 91ff.


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Profitability ratios The profit margin on sales shows the profit per unit of salesStockholders want to earn a return on their money invested. This ratio indicates the profitability of a stockholders invested money from an accounting perspective This ratio shows the raw earning power of the firms assets excluding potential influence from interest payments or leverage effects.Source: Brigham, Houston (2009), 95ff.


Winter Term 2009*Markus Neuhaus I Corporate Finance I [email protected] ratios The profit margin on sales shows the profit per unit of salesStockholders want to earn a return on their money invested. This ratio indicates the profitability of a stockholders invested money from an accounting perspective This ratio shows the raw earning power of the firms assets excluding potential influence from interest payments or leverage effects.Source: Brigham, Houston (2009), 95ff.


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Market value ratios This ratio shows how much an investor is willing to pay per unit of reported earnings. Thus, the P/E ratio indicates, by comparison with its peers, whether a company is regarded as being risky or expected to have poor growth.The market to book ratio typically exceeds 1.0 as the balance sheet does not reflect inflation or goodwill. In addition, this ratio provides an indication whether a company is able to earn high returns. Depending on the industry, a firms stock price is tied more closely to cash flow than net income. Remember: Net income + D&A = cash flowNumbers of shares: 50mShare price: 23Cash flow = net income + D&ASource: Brigham, Houston (2009), 98ff.


Winter Term 2009*Markus Neuhaus I Corporate Finance I [email protected] value ratios This ratio shows how much an investor is willing to pay per unit of reported earnings. Thus, the P/E ratio indicates, by comparison with its peers, whether a company is regarded as being risky or expected to have poor growth.The market to book ratio typically exceeds 1.0 as the balance sheet does not reflect inflation or goodwill. In addition, this ratio provides an indication whether a company is able to earn high returns. Depending on the industry, a firms stock price is tied more closely to cash flow than net income. Remember: Net income + D&A = cash flowNumbers of shares: 50mShare price: 23Cash flow = net income + D&ASource: Brigham, Houston (2009), 98ff.


Winter Term 2009Agenda: Case studyBeans Incorporation vs. Garlic Incorporation


Winter Term 2009Case study: Interpretation of financial statements Your client tells you he is interested in investing in a company from the food industry as he sees great growth potential in this industry

He has already selected two potential targets and now wants your professional advice on which company is more likely to report good results in the future

Please try to give your client your opinion based on what you have learned in this courseRead the financial statements and calculate the ratios based on 2008 figuresCompare these ratios with those of the other company and with those of the industry average


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Case study: Beans Incorporation I Beans Inc.


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Case study: Beans Incorporation II Beans Inc.By analyzing its financial statements, what are the strengths and weaknesses of this company?

Where do you see risks or opportunities?


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Case study: Garlic Incorporation IGarlic Inc.


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Case study: Garlic Incorporation IIGarlic Inc.By analyzing its financial statements, what are the strengths and weaknesses of this company?

Where do you see risks or opportunities?


Winter Term 2009*Case study: Solution guideline Liquidity ratiosAsset management ratiosDebt ratiosProfitability ratiosMarket value ratiosTry to assess whether the given company shows a healthy relation between profitability, liquidity and riskIf a company shows high exposure to risky investments, one expects the profitability to be accordinglyTry to come to a conclusion on which company is more likely to pursue an expansive strategy and strengthen its position within the marketIn terms of ability to generate cash flows, capital structure and working capital management


Winter Term 2009Markus Neuhaus I Corporate Finance I [email protected]*Case study: Solution guideline II Try to compare the companies with each other and put the results into perspective using the industry average values on the rightIndustry average figures can be seen as a guideWhy is the company less profitable than average peer companies?Why does one company have such a high P/E multiple and what does that mean for the operating business?

Financial statements can never fully answer such questions. However, they can raise the right questions

Source: Brigham, Houston (2009), 103.


Financial Statement Analysis (Contoh Perhitungan)

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