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BFIN620_PPT_CH17_sp09-3 - 17 1 Business Finance 620...

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17- 1 Financial Statement Analysis Financial Statement Analysis Chapter 17 Brealey-Myers-Marcus 5 th Edition Business Finance 620
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17- 2 Topics Covered Calculating and interpreting financial ratios Interpreting ratios across firms in an industry Interpreting ratios for a firm over time Using the Du Pont System to investigate the forces shaping a firm’s return on assets (ROA) and return on equity (ROE). Appreciating the problems often faced by financial analysts and other users of financial ratio analysis
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17- 3 Long-Term Leverage (Debt) Ratios To what extent does the firm use debt to finance its assets? How able is the firm to service its debt? Short-Term Liquidity Ratios How effectively can the firm meet its cash obligations as they come due? Asset Efficiency Ratios How efficiently does the firm manage its operating assets? Profitability Ratios How effectively does the firm manage expenses, returns to investors and distributions from earnings? Groups of Financial Ratios
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17- 4 Leverage Ratios (related to the amount of debt outstanding) assets Total s liabilitie Total = ratio debt Total Equity + debt term - Long debt term - Long = ratio debt term - Long Equity debt term - Long = ratio equity to debt term - Long To what extent does a firm use debt to finance assets?
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17- 5 Leverage Ratios (related to cash flows associated with debt) payments Interest EBIT = earned interest Times payments Interest on Depreciati + EBIT = ratio coverage Cash How able is the firm to service its debt? Net interest payments may be used in the times interest earned (TIE) ratio.
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17- 6 Leverage Ratios PepsiCo 2004 Ratio PepsiCo Total debt ratio 0.52 = 14,415 / 27,987 Long-term debt-equity ratio 0.18 = 2,397 / 13,572 Long-term debt ratio 0.15 = 2,397/ (2,397+13,572) Times interest earned 34.2 = 5,713 / 167 Cash coverage ratio 41.8 = (5,713+1264) / 167 See text table 17-3 for balance sheet statement numbers. See text table 17-1 for income statement numbers.
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17- 7 Interpreting Leverage Ratios Can the firm meet its long-term obligations?
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