The topics discussed in this chapter are: Portfolio risk and return, optimal risky portfolio and the capital market line (CML), return-generating models and the market model, systematic and non-systematic risk, capital asset pricing model (CAPM) and the security market line (SML), performance measures, arbitrage pricing theory (APT) and factor models. | Chapter 19 Financial Statement Analysis Purpose Tools Used Statements Ratio Analysis Limitations Overview Balance Sheet Common Sized Trend or Indexed Income Statement Common Sized Trend or Indexed Statement of Cash Flows Financial Statements Purpose of Ratio Analysis Uses Trend analysis Comparative analysis Combination Use by External Analysts Important information for investment community Important for credit markets Ratio Analysis Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios Type of Financial Ratios Current Ratio: Current Assets Current Liabilities Quick Ratio: Current Assets - Inventory Current Liabilities Liquidity Ratios Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Total Assets Activity or Management Efficiency Ratios Average Collection Period Accounts Receivable Sales Per Day Days to Sell Inventory Inventory Sales Per Day Activity or Management Efficiency Ratios Times Interest Earned Earnings Before Int. & Taxes Interest Expense Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends Leverage Ratios Debt to Assets Long Term Debt Assets Debt to Equity Long Term Debt Shareholders Equity Leverage Ratios Net Profit Margin % Net Income Sales Return on Assets Net Income Total Assets Profitability Ratios Return on Equity Net Income Common Equity Operating Margin After Depr. Operating Profit Sales Profitability Ratios Price to Earnings Market Price of Stock Earnings Market-to-Book-Value Market Price of Stock Book Value Per Share Market Price Ratios ROE = Net Profit Pretax Profit x Pretax Profit EBIT x EBIT Sales Sales Assets x x Assets Equity (1) x (2) x (3) x (4) x (5) x Margin x Turnover x Leverage Tax Burden Interest Burden Decomposition of ROE x Economic Value Added Difference between return on assets (ROA) and the opportunity cost of capital (k) EVA = above difference time the invested capital EVA can be positive or negative for firms that have positive earnings Accounting Differences Inventory Valuation Depreciation Inflation International Accounting Conventions Comparability Problems International Accounting Differences Reserves – many other countries allow more flexibility in use of reserves. Depreciation – US allows separate tax and reporting presentations. Intangibles – treatment varies widely. | Chapter 19 Financial Statement Analysis Purpose Tools Used Statements Ratio Analysis Limitations Overview Balance Sheet Common Sized Trend or Indexed Income Statement Common Sized Trend or Indexed Statement of Cash Flows Financial Statements Purpose of Ratio Analysis Uses Trend analysis Comparative analysis Combination Use by External Analysts Important information for investment community Important for credit markets Ratio Analysis Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios Type of Financial Ratios Current Ratio: Current Assets Current Liabilities Quick Ratio: Current Assets - Inventory Current Liabilities Liquidity Ratios Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Total Assets Activity or Management Efficiency Ratios Average Collection Period Accounts Receivable Sales Per Day Days to Sell Inventory Inventory Sales Per Day Activity or Management Efficiency Ratios Times Interest
