Lecture 2 - Analysing Profitability S2012

8/2/2019 Lecture 2 - Analysing Profitability S2012

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Lecture 2: Analysing

profitability

ASB 3208: Financial Statement Analysis2011/12 Semester 2


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Session contents

The cash flows of a business

Reformulating the financial statements

Analysing profitability


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Business Activities: All Cash Flows

NetFinancial

NetFinancial

Assets(NFA)

Assets(NFA)

Debth

olde

rs

Debth

olde

rs

ordeb

t

ordeb

t

issu

ers

issu

ers

Shar

eholde

rs

Shar

eholde

rs

The firmThe firm Capital marketsCapital markets

FinancingFinancing

ActivitiesActivities

F

d

NetOperating

NetOperating

Assets(NOA)

Assets(NOA)

C

I

OperatingOperating

ActivitiesActivities

7-


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A fundamental accounting identity:C = Net cash from operationsI = Net cash outflow for investing

C - I = Free cash flowd = Net dividends (common dividends + sharerepurchases share issues)

F = Net cash outflow to debtholders and debtissuers

= Net borrowing principal payments + net

The Cash ConservationEquation


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The treasurers rule

If : lend or buy downown debt

If : borrow or reducelending


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Reformulating the financialstatements

Statement of Cash Flows

Statement of Financial Position Statement of Comprehensive

Income


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Statement of Cash Flows: Typical Layout m

Cash flows from operating activities

Cash generated from operations x

Interest paid (x)

Corporation tax paid (x)

Net cash from operating activities x

Cash flows from investing activities

Purchase of property, plant and equipment and other assets (x)

Purchase of intangible assets (x)

Proceeds from disposal of property, plant and equipment and other assets x

Investment in financial assets (x)

Interest/Dividends received x

Net cash from investing activities x

Cash flows from financing activities

Proceeds from issuance of ordinar shares x


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Morrisons: Consolidated cash flow statement

52 weeks ended 31 January 20102010 2009

m mCash flows from operating activitiesCash generated from operations 1,004 964Interest paid (60) (70)

Taxation paid (209) (104)Net cash inflow from operating activities 735 790Cash flows from investing activitiesInterest received 8 29Proceeds from sale of property, plant and equipment 7 22Purchase of property, plant and equipment and investment property (906)(678)Net cash outflow from investing activities (891) (627)Cash flows from financing activities

Proceeds from issue of ordinary shares 34 3Shares repurchased for cancellation (146)Finance lease principal payments (2)New borrowings 200 250Repayment of borrowings (1) (2)Decrease in long term cash on deposit 74Dividends paid to equity shareholders (159) (131)Net cash inflow from financing activities 74 46

Net (decrease)/increase in cash and cash equivalents (82) 209Cash and cash equivalents at start of period 327 118


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Reformulated Statement of CashFlows

7-


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Morrisons: Reformulated consolidated cash flow statement - 52 weeks ended 31

January 20102010

Cash flows from operations mCash generated from operations 1,004

Taxation paid (209)Net (decrease)/increase in cash and cash equivalents 82Net cash flow from operations 877Cash investment in operationsProceeds from sale of property, plant and equipment 7Purchase of property, plant and equipment and investment property (906)Net cash investment in operations (899)Free Cash Flow (22)

Equity financing flowsDividends paid to equity shareholders 159

Proceeds from issue of ordinary shares (34)Net equity financing cash flow 125Debt financing flowsNew borrowings (200)Interest received (8)Interest paid 60Repayment of borrowings 1Net debt financing cash flow (147)

Total financing flows (22)


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Applying the Treasurers Rule 2010 m

m

Net cash flow from operations 877

Net cash investment in operations (899)

Free Cash Flow (22)

Net interest cash flow

Interest received 8

Interest paid (60) (52)

Cash available for shareholders (74)

Net dividend

Dividends paid to equity shareholders (159)

Proceeds from issue of ordinary shares 34 (125)

Sale of financial assets (199)


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Statement of Financial Position:typical layout

Non-current assets: X

Current assets: X

Current liabilities: (X)

Non-current liabilities: (X)

Net Assets X

Equity

Capital and reserves X


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Morrisons: Consolidated balance sheet - 31 January 2010

2010 2009

m m m m

Non-current assets

Property, plant and equipment 7,180 6,587

Lease prepayments 257 250

Investment property 229 242

Other financial assets 7,666 81 7,160

Current assets

Stocks 577 494

Debtors 201 245

Other financial assets 71

Cash and cash equivalents 245 1,094 327 1,066

Current liabilities

Creditors (1,845) (1,915)


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Morrisons: Consolidated balance sheet - 31 January 2010

2010 2009

m m

Net assets 4,949 4,520

Shareholders equity

Called-up share capital 265 263

Share premium 92 60

Capital redemption reserve 6 6

Merger reserve 2,578 2,578

Retained earnings and hedging reserve 2,008 1,613

Total equity attributable to the owners of the Company 4,949 4,520


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The Reformulated Balance Sheet

7-


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Balance Sheet Restated

7-


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Reformulated Balance Sheet:Morrisons 2010

Assets m

Operating assets 8,432Financial assets 328 (257 + 71)

8,760

Liabilities and E uit m 7-


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Balance Sheet Restated: Morrisons2010

Operating assets m

Operating assets 8,432Operating liabilities (2,571)

Net operating assets 5,861

Financial obli ations & owners 7-


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Morrisons - Consolidatedstatement of comprehensiveincome

52 weeks ended 31 January 2010

2010 2009

m m

Turnover 15,410 14,5

Cost of sales (14,348)

(13,615)


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Reformulated Income Statement

7-


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Reformulated Income Statement:Morrisons 2010

m m

Operating income

Operating revenue 15,479

Operating expense (14,572)Operating income before tax

907

Tax on operating income (Av rate = 7-

B i A ti iti d th Fi i l


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Business Activities and the FinancialStatements

Cash Flow StatementCash Flow Statement

Income StatementIncome Statement

NIt = OIt - NFEt

(Ct It) = dt + Ft

NOAt= NOA

t-1+ OI

t(C

t- I

t) NFOt = NFOt-1 + NFEt - (Ct - It) + dt

CSEt= CSE

t-1+ OI

tNFE

t- d

t

Net Financial ObligationsNet Financial ObligationsNet Operating AssetsNet Operating Assets

Balance SheetBalance Sheet


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Analyzing Financial Statements

Ratio analysis

The process of examining various financial statement itemswith the objective of assessing the success of past and currentperformance and, perhaps more importantly, of projectingfuture performance and financial condition.

Analysis Approach:

Inter-firm comparison cross-sectional analysis

Intra-firm Comparison - Trend and time-series analysis

Industry Averages


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The Analysis of Profitability

The objective of profitability relates to a companys ability to earn asatisfactory profit so that the investors and shareholders will

continue to provide capital to it.

Measure the return to common shareholders

Assess a firms operating performance


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ROCE

Comprehensive earnings

Average common shareholdersequity (CSE)

OI NFE

NOA NFO

Reminder key:- OI = Operating income

NOA = Net operating assets

NFE = Net financial expense

NFO = Net financial obligations

ROCE=

ROCE=

Stocks & Flo s Ratios B siness


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Stocks & Flows Ratios: BusinessProfitability

Separating operating and financingactivities in the income statementidentifies profit flows

Comparison of these flows withtheir balance sheet base yields thecorresponding rates of return:

Return on Net Operating Assets

Return on Net Financial Assets 7-

Ana yz ng ROCE: T e


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Ana yz ng ROCE: T eScheme

11-

Fi L l B kd A l i f


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First-Level Breakdown: Analysis ofEffects of Financial Leverage (FLEV)

So, ROCE is a weighted return to

operating activities andfinancing activities:

or, Spread

11-

S d L l B kd f ROCE


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Second-Level Breakdown of ROCE:Drivers of Operating Profitability

1. Operating profit margin:

1. Asset turnover: The ability to generatesales for a given asset base

11-

Thi d L l B kd f ROCE P fit


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Third-Level Breakdown of ROCE: ProfitMargin Drivers

PM = Sales PM + Other operatingincome PM

by productor line of business

GM = Sales Cost of Sales

11-

benefitorexpense??

Third Level Breakdown of ROCE Asset


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Third-Level Breakdown of ROCE: AssetTurnover Drivers

Some times other measures are used:

Days in Acc. Receivable = Acc. Receivable/ Avg.Sales per day

Inventory Turnover = Cost of Sales / Avg.Inventories

Acc. Payable Turnover = Purchases / Avg. Acc. 11-


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Solutions

Lecture 2 - Analysing Profitability S2012

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Transcript of Lecture 2 - Analysing Profitability S2012