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Topic 2 Analysising performance with financial ratios.pptx

Topic 2 Analysising performance with financial ratios.pptx...

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Analysing Performance with Ratios Topic 2
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Lecture Outline Introduce Value Drivers and Performance Analysis Computational Issues in Ratio Analysis Profitability System – Understanding the Links – this is critical & often missed in Test 1! Market Based Ratios WHERE to obtain financial information
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CURRENT AND PAST FINANCIAL STATEMENTS (analysis of information, trends, comparisons, etc.) FORECASTING Valuation Framework Based on Financial Statement Data RISK ASSESSMENT (and Book Values) FORECAST OF CASH FLOWS DISCOUNTED CASH FLOWS VALUE OF FIRM DISCOUNTED RESIDUAL EARNINGS FORECASTS OF EARNINGS (and Book Values) CAPITALIZED PERMANENT EARNINGS Each of these steps constitute one of your workshops Adjusting for Accounting Methods
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Objectives To provide framework for analysis of firm performance, structure, & stability via profitability analysis Assume that you can compute the commonly used ratios To provide an understanding of the links between the core ratios WHERE to obtain financial information
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Value Drivers and FSA Cost of Capital = r Asset Structure Capital Structure r ROExSHF r E P Assets EBIT ROA Assets Debt Leverage Taxes 1 1 Sales Sales Growth Sales t t Sales t GrossProfi Margin Profit Gross Sales Expenses centage ExpensePer Sales EBIT OPM Assets Sales ATO Debtors Sales DaysRec Inv COGS InvTO s FixedAsset Sales FATO
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Core Profitability Ratios Return on Equity (ROE) Operating Profit Margin Net Profit Total Equity EBIT Sales = = Return on Assets (ROA) EBIT Total Assets = Total Asset Turnover Sales Total Assets = Debt-to-Equity Total Liabilities Total Equity =
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What Affects Financial Performance? Ability to generate sales from an asset base Ability to turn sales into profitable sales Ability to manage the distribution between equity, debt, and government Ability to grow at a rate commensurate with capital and to finance assets effectively Ability to expand through profitable investment in assets and acquisitions Ability to avoid being taken over
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Accounting Analysis: Profitability System 5 MAIN CATEGORIES OF RATIOS Profitability ratios : evaluate degree to which activities result in profits to owners. Activity ratios : evaluate level of asset commitment and efficiency of asset usage. Leverage ratios : evaluate the use of debt financing. Liquidity ratios : measures ability to meet future maturing obligations.
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