Chapter3RatioAnalysis(1)

Chapter3RatioAnalysis(1) - Chapter3 Our main coverage for...

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Cash Flows and Financial Analysis Chapter 3 Our main coverage for this chapter is financial ratios
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2 Financial Information—Where Does It  Come From,  etc . Financial information is the responsibility of  management Created by within-firm accountants Creates a conflict of interest because  management wants to portray firm in a positive  light Published to a variety of audiences
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3 Users of Financial Information Investors and Financial Analysts Financial analysts interpret information about  companies and make recommendations to investors Major part of analyst’s job is to make a careful study of  recent financial statements Vendors/Creditors Use financial info to determine if the firm is expected to  make good on loans Management Use financial info to pinpoint strengths and weaknesses  in operations
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4 Sources of Financial Information Annual Report Required of all publicly traded firms Tend to portray firm in a positive light Also publish a less glossy, more businesslike  document called a 10K with the SEC Brokerage firms and investment advisory  services
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5 Data sources for term project See the course links page for link to MEL page http://www.lib.purdue.edu/mel/inst/agec_424.htm
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6 The Orientation of Financial Analysis Accounting is concerned with  creating   financial statements Finance is concerned with  using  the data  contained within financial statements to  make decisions The orientation of financial analysis is critical  and investigative
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7 Ratio Analysis Used to highlight different areas of  performance Generate hypotheses regarding things  going well and things to improve Involves taking sets of numbers from the  financial statement and forming ratios with  them
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8 Comparisons  A ratio when examined alone doesn’t  convey much information – but. . History—examine trends (how the value has  changed over time) Competition—compare with other firms in the  same industry Budget—compare actual values with expected  or desired values
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9 Common Size Statements First step in a financial analysis is usually  the calculation of a common size statement Common size income statement Presents each line as a percent of revenue Common size balance sheet Presents each line as a percent of total assets
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10 Common Size Statements $ % $ % Sales 2,187,460 $ 100.0% 150,845 $ 100.0% COGS 1,203,103 $ 55.0% 72,406 $ 48.0% Gross margin 984,357 $ 45.0% 78,439 $ 52.0% Expenses 505,303 $ 23.1% 39,974 $ 26.5% EBIT 479,054 $ 21.9% 38,465 $ 25.5% Interest 131,248 $ 6.0% 15,386 $ 10.2% EBT 347,806 $ 15.9% 23,079 $ 15.3% Tax 118,254 $ 5.4% 3,462 $ 2.3% Net Income 229,552 $ 10.5% 19,617 $ 13.0% Alpha Beta
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Chapter3RatioAnalysis(1) - Chapter3 Our main coverage for...

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