lec8 - Financial Statement Analysis 15.511 Corporate...

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1 Financial Statement Analysis 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 18, 2004
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2 Financial Statement Analysis: Ratio Analysis ± What is financial statement analysis? ± What is ratio analysis? ± The mechanics of and inferences from: ± Profitability ratios ± Risk ratios
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3 What is Financial Statement Analysis? ± A comprehensive analysis of: ± Strategy ± Competition, regulation, and taxes ± Past, current, and projected financial performance ± Fundamental valuation in relation to stock price ± Planning for the future ± Operations ± Investments ± Financing ± Our objective in this course is somewhat limited and will focus on financial performance.
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4 Analyzing Financial Statements: Different Approaches ± Ratio analysis ± The process of examining various financial statement items with the objective of assessing the success of past and current performance and, perhaps more importantly, of projecting future performance and financial condition. ± Analysis Approach ± Comparisons across time ± Trend and time-series analysis ± Cross-Sectional Analysis ± Within industry ± Across sectors
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5 Analyzing Financial Statements: Analysis Techniques ± Common-size financial statements ± Common-size income statement – as a percentage of revenue ± Common-size balance sheet – as a percentage of total assets ± Year-to-year growth analysis ± Ratio analysis ± Enables inter-temporal and cross-sectional comparisons ± Our primary focus
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6 Why perform financial analysis? ± As a business owner, what performance indicators would you like to have? ± How fast are the revenues growing (Demand Analysis)? – Growth ± What is the operating margin? – Profitability ± What is the efficiency of asset usage? – Turnover ± Do I have an optimal mixture of debt and equity financing? – Financial Leverage
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7 Why perform financial analysis? ± Historical, present, and future (expectations) ratios: ± Pro forma financial analysis captures expectations ± Expectations based on historical and current performance and market conditions ± Useful for evaluation, planning, and valuation ± 15.535 – Financial Statement Analysis course
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8 Financial Ratio Analysis: Gateway and Dell Computers ± Profitability Ratios ± Risk Ratios ± Short-Term Liquidity Risk ± Long-Term Solvency Risk
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9 Profitability Ratios ± Objective ± Assess a firm’s operating performance ± Return on Assets ± Measures a firm’s success in using assets to generate earnings, independent of the financing of those assets (i.e., debt v. equity). ± The numerator is operating income after income taxes, excluding any financing costs.
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10 Profitability Ratios: Return on Assets (ROA) ± ROA = (NI + (1 – T) I + MIE)/ATA ± NI… Net Income ± T… Tax Rate ± I… Interest Expense ± MIE… Minority Interest in Earnings ± ATA… Average Total Assets
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Profitability Ratios: Return on Assets (ROA) ± Gateway (NYSE:GTW) ROA
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6003 taught by Professor Marshall,ingridm during the Spring '09 term at NYU Poly.

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lec8 - Financial Statement Analysis 15.511 Corporate...

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