Financial%20

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Financial Accounting Analysis
Financial Analysis
Accounting Analysis
Financial Statement
Unbiased Accounting
Recasting Financial Statement firms could adopt
different classifications
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Financial Analysis
A valid instrument which the analyst uses to
understand what has happened and what will happen
to the business
Ratio Analysis
Cash Flow Analysis
It is useful for making forecasts of the firms
future performance
It is useful to examine the firms liquidity
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Financial Analysis
Cash Flow Analysis
Financial tools
Ratio Analysis
Two main comparisons
Time-series comparison
Cross-sectional comparison
Purpose Understand Better the Business
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Ratio Analysis
The value of a firm is based upon its
profitability and growth
Product market strategy
Financial market strategy
Operating Management
Investment Management
Financing strategy
Dividend policies
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Business Activities
Recasting Balance Sheet
ASSETS
CAPITAL
Capital markets
The firm
Net Operating Assets (NOA)
Net Financial Assets (NFA)
Shareholders Equity
Financial liabilities
Operating Liabilities
Financing Activities
Operating Activities
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Business Activities
Recasting Balance Sheet
Non current Intangible/Tangible Assets
Net Operating Assets (NOA)
Net Non-Current Assets
- Other non-current liabilities
Net Working Capital
Inventories
Trade Receivables
Other current assets
- Trade Payables
- Current Liabilities
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Business Activities
Recasting Income Statement
Operating Income
Gross Profit
Sales
Cost of sales
Other operating expenses
Ebitda/Ebit
NOPAT
Amortisation,
Financial Income
Profit After Interests before taxes
Interest income
Interest expense
Income taxes
Profit after taxes
Tax expense
Earning to Shareholders
Net Profit
Dividend, etc..
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Business Activities
Cash Flow Statement
Cash Flow From Operations
Balance sheet 2006
Balance sheet 2007
Assets
Liabilities
Assets
Liabilities
Cash Flow From Investments
Cash Flow From Financing Act.
CashCash Equ. (1459)
CashCash Equ. (1755)
Cash Flow to Equity
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Business Activities
Measuring Profitability
INCOME STATEMENT
NET PROFIT
ROE
SHAREHOLDERS EQUITY
RETURN ON EQUITY
BALANCE SHEET
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Business Activities
The Main Meanings of ROE
Firms Performance
Managers Behaviour
Abnormal Return
Good indicator, even if not sufficient, to
explain the general profitability of the
business
Does the business generates profit more than
its cost of equity capital ??
Are Managers good to employ financial capitals in
profitable investments??
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Business Activities
Decomposing Profitability
Net Profit
Assets
ROE
ROA
Financial Leverage
X
Assets
Shareholders equity
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Business Activities
Decomposing Profitability
Net Profit
Sales
ROA
ROS
Asset Turnover
X
Sales
Assets
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Business Activities
Decomposing Profitability
NOPAT
Net assets
Operating ROA
( Spread x Net Financial Leverage)
ROE

(Operating ROA Net Interest after tax/Net Debt)
Net debt
Equity
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Ratio Analysis
The value of a firm is based upon its
profitability and growth
Product market strategy
Financial market strategy
Operating Management
Investment Management
Financing strategy
Dividend policies
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Business Activities
Operating Management
Product market strategy
Sales Cost of sales
Gross Profit Margin
Sales
NOPAT
NOPAT Margin
Operating Management
Sales
EBITDA
EBITDA Margin
Sales
ROS
Efficiency of operating management
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Business Activities
Investment Management
Product market strategy
Working Capital Management
Investment Management
Non-current assets Management
Asset turnover
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Business Activities
Investment Management
Inventories Management
Working Capital Management
Receivables Management
Payables Management
(Operating current assets Operating current
liabilties)
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Business Activities
Investment Management
Inventories Turnover
Cost of sales
Inventories
It is expected to have a high rotation of
inventories
Inventories Management
Days Inventories
Inventories
Average cost of sale x day
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Business Activities
Investment Management
Trade Receivables Turnover
Sales
Trade receivables
It is better to give less credit to your clients

Trade receivables management
Days Receivables
Inventories
Average sales x day
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Business Activities
Investment Management
Trade Payables Turnover
Purchases
Trade payables
It is better to receive more credit from your
suppliers
Trade payables management
Days Payables
Trade payables
Average cost of materials x day
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Business Activities
Investment Management
Net non-current assets turnover
Sales
Net non-current assets
Net non-current assets Management
PPE turnover
Sales
Net property, plant equipment
It is defined as (Total non current assets
Non-interest-bearing Non-current liabilities)
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Business Activities
Product Management
Answer these questions??
How well does the company manage its inventories?
If inventories ratios are changing, what is the
underlying Management systems? Are new product
being planned? How well does the company manage
its credit policies? Is the company artificially
increasing sales by loading distribution
channels? Is the company take advantage of trade
credit? Is it relying too much on trade
credit? Are the companys investment in plant
and equipment consistent with its competitive
strategy?
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Business Activities
Financial Management
Financial market strategy
Current liabilities short-term liquidity
Financial Management
Debt long-term solvency
Financial Leverage
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Business Activities
Financial Management
Current assets
Current ratio
Current liabilities
Current assets - Inventory
Quick ratio
Current liabilities short-term liquidity
Current liabilities
Cash cash equivalents
Cash ratio
Current liabilities
Cash Flow from operations
Operating cash flow ratio
Current liabilities
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Business Activities
Financial Management
Total liabilities
Liabilities to equity ratio
Equity
(Current debt Non-current debt)
Debt to equity ratio
Debt long-term solvency
Equity
(Net Financial Position )
Net Debt to equity ratio
Equity
(C.D. Non-C.D.)
Interest Coverage Ratio
Net Debt to capital ratio
(C.D. Non-C.D. Equity)
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Business Activities
Sustainable Growth
ROE
( 1- Dividend Payout ratio)
Sustainable growth rate
-
Cash dividends paid
Dividend Policy
Net Profit
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Business Activities
Cash Flow Analysis
Balance Sheet
Ratio Analysis/ Accrual Accounting
Income Statement
Cash Flow Analysis/ Cash Accounting
Cash Flow Statement
It is a document contained in the Financial
Statement for firms which are obliged to adopt
IFRS
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Business Activities
Cash Flow Analysis
Is the cash flow from operating positive or
negative? If it is negative, what are the
reasons? How much cash did the company invest in
growth? Did the company use internal cash flow to
finance growth, or did it rely on external
financing? Did the company pay dividends from
internal free cash flow, or did it rely on
external financing? What type of external
financing does the company rely on?
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Prospective Analysis
Prospective Analysis
Forecasting
Valuation
Strategy analysis
Accounting analysis
Financial analysis
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Prospective Analysis
Performance Forecast
Earnings Forecast
Cash Flow Forecast
Balance Sheet Forecast
Forecasting growth in sales
Increases in Working Capital
Decreases in cash inflows
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Prospective Analysis
Growth in sales
Forecastes
Key drivers
Expenses follow the sales growth
Sales forecast
Profit margin forecast
Investment and Plant track sales
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Prospective Analysis
Points of departure
2008
2007
2005
2009
2010
2013
2000
Period of time in which the prospective analysis
starts
The past performances of the business are
well-known
Past, present and future information are
integrated together
Purpose Getting to a good and reasonable valuatio
n of the business
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Prospective Analysis
Points of departure
Making long-term forecasts
Time-series behavior of ratios already analysed
Assumptions for future years
Analysis of the context
Sales Prediction
Previous analysis
Consider previous years sales
Retail firm
Expansion in new stores
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Prospective Analysis
Main questions

• Firms strategy
• What lines of business is it likely to be in?
• Are new products likely? (Customer acceptance for
  new?)
• What is the product quality strategy?
• At what point in the product life cycle is the
  firm?
• What is the firms acquisition and takeover
  strategy?
• Market for the products
• How will consumer behaviour change?
• What is the elasticity of demand for products?
• Are substitute products emerging?

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Prospective Analysis
New markets
Pricing plan
Marketing Plan
Promotion Advertising
Brand management