FS ANALYSIS

• Firm's assessment and evaluation

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• Free Cash Flow (FCF)


  Cash generated after accounting for cash outflows to support operations and maintain assets
• Calculating FCF


  1. Operating Activities to FCF

  2. EBIT to FCF

  3. NI to FCF
• FCF reasons include revenue growth, efficiency improvement, and cost reductions
• Financial Statement Analysis


  Assesses profitability, ability to meet obligations, safety of investment, management effectiveness, and overall company marketability
• Vertical Analysis


  Converts financial statements to common-size statements
• Horizontal Analysis


  Enables investors and analysts to see what has been driving a company's financial performance over time, as well as identify trends and growth patterns
• Cash Flow Analysis


  Summarizes the amount of cash and cash equivalents entering and leaving a company
• Main components of Cash Flow Analysis

  • Study of percentage changes in comparative statements
  • Financial statement technique where each line item is listed as a percentage of a base figure
  • Compares statements of 2 or more companies
• Free Cash Flow (FCF)

  A measure of profitability that excludes non-cash expenses from the statement and includes spending on equipment and assets as well as balance-sheet changes in working capital
• Calculating FCF


  1. CF from operating activities

  2. Add: Interest expenses

  3. Less: Tax shield on interest expenses, capital expenditures, changes in working capital
• Liquidity Ratios


  Measure a company's ability to pay off its short-term debts as they become due
• Liquidity Ratios


  • Current Ratio
  • Acid Test Ratio
  • Cash Ratio
• Receivables Turnover


  Measures the number of times that receivables are collected during the period
• Average Age of Receivables

  Indicates the average number of days during which the company must wait before receivables are collected
• Inventory Turnover


  Measures the number of times that inventory is replaced during the period
• Average Age of Inventory

  Indicates the average number of days during which the company must wait before inventories are sold
• Trade Payables Turnover


  Indicates the length of time during which payables remain unpaid
• Current Assets Turnover


  Measures the movement and utilization of current assets to meet operating requirements
• Working Capital Turnover


  Indicates adequacy and activity of working capital
• Solvency Ratios


  • Times Interest Earned
  • Debt-Equity Ratio
  • Debt Ratio
  • Equity Ratio
  • Fixed Assets to Long-term Liabilities
  • Fixed Assets to Total Equity
  • Fixed Assets to Total Assets
  • Sales to Fixed Assets (Plant Turnover)
  • Book Value per Share on Common Stock
  • Times Preferred Dividend
  • Times Fixed Charges Earned
  • Sinking Fund Payments Before Tax
• Profitability Ratios


  • Return on Sales
  • Return on Total Assets (ROA)
  • Return on Owners' Equity
  • Earnings Per Share
  • Rate of Return on Current Assets
  • Rate of Return per Turnover of Current Assets
• Market Tests


  Price/Earnings Ratio (P/E)<|>Dividend Yield<|>Dividend Payout<|>Plow-back Ratio<|>Earnings Yield
• Du Pont Equation


  Decomposes the different drivers of return on equity (ROE)
• Calculating Additional Funds Needed (AFN)

  1. Assets tied directly to sales

  2. Spontaneous liabilities affected by sales

  3. Projected increase in assets - spontaneous increase in liabilities - any increase in retained earnings
• Financial Statement Analysis


  Involves the evaluation of an entity's past performance, present condition and business potentials by way of analyzing the financial statements
• Users of financial statements

  • ABC Co.
  • Decision making
• Comparative analysis


  • Intracompany basis
  • Industry averages
  • Intercompany basis
• Horizontal Analysis


  Also called trend analysis, evaluates financial statement items over a period of time
• Horizontal Analysis


  • 2025 Sales 1M
  • 2026 Sales 1.4M
  • Y2 - Y1 = 40% increase
• Vertical (common size) Analysis


  Evaluates items within the financial statements as a percentage of a base amount, used when comparing companies
• Ratio Analysis


  Evaluates relationships among financial statement items
• Characteristics of Ratio Analysis

  • Liquidity - ability to pay short-term obligations
  • Solvency - ability to pay long-term obligations
  • Profitability - analyze performance of a company
• Patterns in Ratio Analysis

  • Return (numerator)
  • Turnover (numerator)
  • Margin (denominator)
• Operating Cycle


  Days in Accounts Receivable + Days in Inventory
• Cash Conversion Cycle


  Operating Cycle - Days in Accounts Payable
• Current Ratio


  Measure of adequacy of working capital, primary test of liquidity to meet current obligations from current assets, measures the number of times current liabilities could be paid with available cash and near-cash assets
• Quick Ratio (Acid Test Ratio)


  Measures the number of times that the current liabilities could be paid with the available cash, current receivables and marketable securities
• Receivables Turnover


  Measures the number of times receivables are recorded and collected during the period
• Average Age of Receivables (Average Collection Period, Days' in Receivables)


  Indicates the average number of days during which the company must wait before receivables are collected