W12_lecture_handout_completed

W12_lecture_handout_completed - Week 12 Financial Statement...

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1 Week 12: Financial Statement Analysis Text: Ch.8 (LO 6), Ch.9 (LO 5-10) Lecture Exercises: Q9.7, E9.9 Self-Study Exercises: E9.5, E9.7, E9.8, P9.5, P9.8 Announcements: The group assignment deadline is approaching fast ( 5pm Friday, Week 13 ) Make sure to read very carefully the guidelines for submission and submit both an electronic and a hard copy of the assignment Outline Recap on profitability ratio analysis Asset efficiency ratio analysis Liquidity ratio analysis Capital structure ratio analysis Market performance ratio analysis Ratio interrelationships Limitations of ratio analysis
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2 Ratio analysis on profitability (week 11) ROE = Net profit available to ordinary shareholders Average Equity ( excl . minority interests & pref . capital ) ROA = Earnings before Interest and Tax ( EBIT ) Average Assets ( excl . minority interests & pref . capital ) Gross Profit Margin = Gross Profit Sales Revenue Net Profit Margin = EBIT Sales Revenue Expense Ratio = Expense Sales Revenue CFS = Cash Flow from Operations (excl. Interest and Tax) Sales Revenue Ratio analysis on asset efficiency Entities obtain finance in order to invest in assets, which in turn are operated to generate revenue which is finally turned into profit A key question is how well assets are managed? The ROA is an important ratio of profitability but it also indicates the overall asset efficiency because it measures the return on assets irrespective on how they were financed. That is, it answers the questions: Are these assets appropriate for this business? Are the assets managed well and yield a satisfactory return? Do other businesses with the same assets manage to generate a higher return? Asset efficiency can also be evaluated using turnover ratios
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Ratio analysis on asset efficiency AT measures the entity’s overall efficiency in generating sales given the available resources AT is directly linked to ROA (more on this later) AT of 0.60 means that the firm can turn 1$ of assets into 60¢ of sales Based on the type of business, the analysts investigate the turnover on the most significant types of assets, e.g.: the most significant asset for a retailer is inventory and a/cs receivables, whereas for a telecom company it is infrastructure Asset Turnover Ratio = Sales Revenue Average Assets Ratio analysis on asset efficiency For companies that rely on inventory, it is very important to analyse how quickly they sell their inventory Old inventories usually obsolete because they go off, go out of fashion or their technology changes Also, funds spent on inventory do not earn any returns (dead cash), so it is important to convert inventory very quickly into sales and then profit If inventory takes time to sell then the company should invest elsewhere or change its inventory processes Inventory turnover should be evaluated within the context of the type of business (high or low turnover?) Times Inventory Turnover
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This note was uploaded on 09/06/2011 for the course ECON 1001 at University of Sydney.

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W12_lecture_handout_completed - Week 12 Financial Statement...

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