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Unformatted text preview: (c) Mikhail Pevzner and George Mason University Chapter 14 Analyzing financial statements (c) Mikhail Pevzner and George Mason University Basic question How do external users of financial information evaluate information contained in the financial statements? (c) Mikhail Pevzner and George Mason University Users Main Objective Financial statements should help us predict firms future cash flows. On that basis, we can assess whether firms stock is correctly priced, or alternatively, over- or -under-priced. (c) Mikhail Pevzner and George Mason University Some factors affecting analysts assessment of a company Macro- and industry-wide factors; Influence of macro-shocks (such as business cycle); Industry life-cycle; Firm life cycle; Competitive position of a firm vs. other firms in the same industry; Industry structure (highly concentrated vs. highly competitive) Firms competitive strategy (e.g. product differentiation vs. cost leadership) Evaluating firms competitive environment: Porters Five Forces From Wikipedia.com (c) Mikhail Pevzner and George Mason University Dupont Analysis Key indicator of firms profitability: Return on Equity (ROE)=Net Income t /Average Shareholders Equity t-1 (NI/SE) We can further expand: NI/SE=NI/Sales*Sales/Average Assets*Average Assets/SE= =Profit Margin*Assets Turnover*Financial Leverage Case in Point: Walmart...
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