Académique Documents
Professionnel Documents
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Financial
Analysis
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
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Key Concepts in Chapter 5
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
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Determinants of Firm Value
and Ratio Analysis
• Profitability and growth drive firm value.
• Managers can employ four levers to achieve
growth and profit targets:
– Operating management
– Investment management
– Financing strategy
– Dividend policy
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Decomposing Profitability:
Traditional Approach
• ROE = ROA * Financial leverage
= Net income * Assets
Assets Shareholders’ equity
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Decomposing Profitability:
Alternative Approach
• The traditional approach has some limitations
imposed by the composition of the denominator
and numerator
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Detail of Alternative ROE Decomposition
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
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Wal-Mart and Target: Comparison
of ROE Components
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Discussion of Results from
Profitability Analysis
Note the differences between key components of the
traditional and alternative FY 2005 ROE decompositions:
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
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Assessing Operating Management:
Income Statement Ratios
• Common-sized income statements facilitate
comparisons of key line items across time and
different firms.
• Additionally, the following ratios are also helpful:
– Gross profit margin
– EBITDA margin
– NOPAT margin
– Recurring NOPAT margin
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Gross Profit Margin
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
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A Comparison of Key Income Statement
Ratios for Wal-Mart and Target
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Decomposing Asset Turnover
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
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Working Capital Management
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
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Asset Management Ratios for
Wal-Mart and Target
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Financial Leverage Analysis
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
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Liquidity Analysis
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Liquidity Analysis
• Knowing how the liquidity ratios are calculated allows the user to
understand how to interpret them:
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Comparison of Wal-Mart and Target
Liquidity Ratios
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
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Debt and Coverage Ratios
• Beyond short-term survival, solvency measures the ability of a firm
to meet long-term obligations.
• Several useful ratios are used to analyze solvency. Three using only
shareholders’ equity as a denominator are:
Net-debt-to-equity ratio =
Short-term debt + Long-term debt – Cash and marketable securities
Shareholders’ equity
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
More Debt and Coverage Ratios
• Two ratios that use debt as a proportion of total capital
are:
Debt-to-capital ratio =
Net-debt-to-net-capital ratio =
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
More Debt and Coverage Ratios, contd.
• Two ratios that specifically address the ability to pay
interest on debts are:
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Comparison of Wal-Mart and Target
Debt and Coverage Ratios
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
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Assessing the Sustainable Growth Rate
• A comprehensive measure of a firm’s ratios is the
sustainable growth rate, which uses ROE:
ROE * (1 - Dividend payout ratio)
Where:
Dividend payout ratio = Cash dividends paid
Net income
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Sustainable Growth Rates For
Wal-Mart and Target
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
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Cash Flow Analysis
– Investing activities
• How much cash did the company invest in growth assets?
– Financing activities
• What type of external financing does the company rely on?
• Did the company use internally generated funds for investments?
• Did the company use internally generated funds to pay dividends?
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Cash Flow Analysis
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Copyright (c) 2008 Thomson South-Western, a part of the Chapter 5: Financial Analysis
Thomson Corporation. Thomson, the Star logo, and Palepu & Healy
South-Western are trademarks used herein under license.
Concluding Comments