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Financial Statement Analysis - Accounting for Profit.ppt

Leeds University Business School

Financial Statement Analysis:
Accounting for Profit

LUBS 3670

Financial Analysis

Lecture 9/10

Revised IAS 1 (from periods after 1 Jan 2009)

It replaced the income statement previously required with a statement of comprehensive income.

The statement of comprehensive income includes all recognised gains and losses in the period including those that were previously recognised in equity.

It is acceptable under IAS 1 to present the comprehensive income statement as one statement or alternatively, as two statements which separate the income statement from the comprehensive income.

Notice that only a minimal amount of information is required on the face of the income statement.
Detail of income and expenses must be presented either on the face of the income statement or in the notes to the accounts.
Certain items (known as unusual or ‘exceptional’ items) must be disclosed separately either in the income instatement or in the notes, if material.

(See Maynard, p 163-174)

Analysis of expenses

IAS1 permits companies to analyse expenses by:
Function - e.g., cost of sales, distribution costs, administrative expenses, other expenses.
Or
Nature – e.g., raw materials, staffing costs, depreciation.
The great majority of companies analyse by function (Format 1).

Unusual or ‘exceptional’ items

(see Maynard p 277 – 281)

IAS 1 defines unusual items as

items within the ordinary activities of the enterprise which are of such size, nature or incidence that their separate disclosure is required in the financial statements in order for the financial statements to show a true and fair view

Unusual or ‘exceptional’ items

Examples include:
write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinuing operations
litigation settlements
other reversals of provisions
No items may be presented in the income statement, or in the notes as 'extraordinary items'.

Discontinued operations

(see Maynard pp 281 – 292)
Profits or losses on disposals of assets and liabilities of a discontinued operation must be shown on the face of the income statement.
If a company acquires or discontinues operations this is going to affect its profit flows in future years.
Therefore if the financial statements are to be useful to investors in their decision making they need to know the amount of profits or losses which relate to operations that have been closed or sold during the year.

IFRS 5, Definition of Discontinued Items

A discontinued operation is one that
either has been disposed of, OR
is classified as held for sale
represents a separate major line of business or geographical area of operations as reported in accordance with IFRS 8
is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale.

Definition of held for sale

IFRS 5 defines assets as held for sale

if the carrying amount will be recovered principally through a sale transaction rather than through continuing use; and
it must be available for immediate sale in its present condition and its sale must be highly probable.

Highly probable – criteria

management must be committed to a plan to sell
an active programme started to locate a buyer
actively marketed for sale at a price that is reasonable in relation to current fair value
sale should be expected to be completed within a year
it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Disclosure for discontinued operations in the year of disposal

Total on the face of the income statement of:
the post-tax profit or loss and
the post-tax gain or loss recognised on the measurement to fair value less cost to sell
an analysis of the total profit/loss into:
revenue, expenses, pre-tax profit/loss and tax
the net cash flows attributable to the operating, investing and financing activities

What about Acquisitions?

In order to make valid comparisons with the previous year it is helpful to know the amount of profits or losses that relate to newly acquired operations.

Unfortunately, IFRS 5 does not require any disclosures relating to acquired activities.

They will be narrative

Earnings per share (EPS)

(see Maynard, chapter 8)

Widely used by investors as a measure of a company’s performance.

It is of particular importance in

Comparing the results of a company over a period of time and estimating future growth;
Comparing the growth in earnings between companies
Calculating the price/earnings (PE) ratio which is widely used in making judgements about the share value.

Earnings per share (EPS)

Profit or loss attributable to ordinary shareholders

weighted averaged number of ordinary shares

The profit or loss attributable to ordinary shareholders is the profit or loss after tax, minority earnings and dividends on non-equity shares
Basic EPS – based on ordinary shares currently in issue.
Diluted稀释EPS based on ordinary shares currently in issue plus potential ordinary shares.

EPS based on overall profit or loss

Prevents creative calculations of EPS but does cause potential problems to the analyst.
EPS is used to calculate the price earnings (PE) ratio .
P/E ratio(share price/EPS) assumes that past earnings are a reasonable guide to a company's future earning power.
The analyst wants to identify the maintainable post-tax earnings that arise in the ordinary course of the business
Important to exclude genuinely unusual one-off items if a true earnings record is to be charted and the company's performance assessed and different companies are to be compared.
Companies and the stock market do not like fluctuating EPS’s.

Limitations of EPS as performance measure

Based on historical earnings

No account of inflation
Real growth differing from apparent growth

Inter-company comparison adversely affected
Management choice over accounting policies
Changes in capital structure.
Do NOT compare absolute EPS between two or more companies.
The rate of growth of EPS can be compared between different companies.

IAS 33, Earnings per Share

Requires all companies are who have publicly traded shares to disclose basic and diluted EPS on the face of the income statement.
They may also show alternative calculations and indeed many companies do so.
There must be a reconciliation between the basic EPS and the alternative figure.

IIMR ‘headline’ earnings per share

Includes:

all the trading profits and losses for the year.

Excludes:

profits or losses from the sale or termination of discontinued operations
profits or losses from the sale of fixed assets or businesses
profits or losses arising on the revaluation of assets

Beware

Companies use different definitions of ‘headline’ earnings
Some focus on EBITDA – Earnings before interest, tax, depreciation and amortisation.
Some focus on ‘underlying’ profit.

Dividends

(see Maynard pp 558 – 559)

Proposed and declared dividends after the year end do not meet the definition of a liability;
Not included on BS or IS
Obligation to pay dividends only arises when it has been declared;
Declared or proposed dividends should be shown in a note to the accounts (non-adjusting event IAS 10)

Treatment of borrowing costs for self constructed assets

Before periods beginning January 2009

IAS 23 Benchmark treatment
Recognise in income statement as an expense in the period in which they were incurred.
IAS 23 alternative treatment
Capitalisation of borrowing costs directly attributable to the acquisition, construction or production of assets that take a substantial time to get ready for their intended use.
Funds borrowed specifically – use actual rate
Funds borrowed generally – use weighted average
Capitalisation ceases when asset substantially prepared for its intended use or sale

Treatment of borrowing costs for self constructed assets

After January 2009
Borrowing costs that are directly attributable to the acquisition, construction or production of a ‘qualifying asset’ should be included as a directly attributable cost of construction.
A ‘qualifying asset’ is one that necessarily takes a substantial period of time to get ready for its intended use or sale.

Capitalisation v Income – Why does it matter?

Capitalisation means that instead of being taken to the income statement as incurred interest charges are added to the cost of the relevant asset in the balance sheet and written off as the asset is depreciated.
Hence, the hit to the income statement is later and over a number of years.
Choice is a problem for those who would look for greater consistency in financial reporting and capitalisation of interest charges may have a significant impact upon reported figures.

Segmental Analysis

(see Maynard pp 293 – 303)

Companies are required to report segmental information for:
Business - a single product or service of the group or group of related products & services with different risks & returns; and
Geographic segments- provision of products & services within particular economic environment with different risks & returns

Found in the notes to the accounts.

Segmental Analysis

The chairman’s/chief executives officer’s report and/or operating review
often contain comment on the reasons for the changes in profitability of the business segments /geographical areas and may indicate trends.
Analyses over a number of years to reveal trends in profitability and changes in the structure of the businesses of the company

Financial Statement Analysis - Accounting for the Balance Sheet.ppt

Leeds University Business School

Financial Statement Analysis:
Accounting for the Balance Sheet

LUBS 3670

Financial Analysis

Lecture 11

Leeds University Business School

Format of the Balance Sheet
(Statement of Financial Position)

Assets

Non-current Assets
Current Assets

Liabilities

Non-current Liabilities
Current Liabilities

+ Equity

Ordinary share capital
Reserves

(See Maynard, Part 4)

Uk terminology instead of international standards

Fixed assets, not non-current assets

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Warnings about presentation

Some companies use the pre-IFRS format (UK GAAP)
Assets – Liabilities = Equity
There is flexibility in IAS 1 so this is permitted

Some companies use UK terminology not international
Fixed assets not non-current assets
Stock not inventories
Debtors not receivables
Creditors not payables
Again, this is permitted

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Non-Current Assets

Property, plant and equipment

Goodwill and other intangible assets

Investments

Receivables

Deferred tax, etc.

Working capital

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Relevant IFRS standards

Accounting for Tangible Assets
IAS 16 Property, plant and equipment (PPE)
IFRS 5 Non-current assets held for sale

Accounting for Intangible Assets
IAS 38 Intangible assets
IFRS 3 Business combinations

Both
IAS 23 Borrowing costs
IAS 36 Impairment of assets

Chapter 10 textbook

Impairment

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Property, plant and equipment
(IAS 16)

Valuation issues:
Historic Cost or
Fair Value or
Deemed Cost
Some rules with revalue option:
Have to value everything in an asset class
If start this must continue
Keep up to date
Formal valuation every 5 years
Interim valuation by directors every 3 years
Must continue to depreciate over remaining useful economic life
Cannot revert back to HC

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Goodwill and intangible assets

The main requirements of IFRS 3 Business Combinations and IAS 38 Intangible Assets are:

purchased goodwill and intangible assets should be capitalised as assets
internally generated goodwill should not be capitalised; and
internally developed intangible assets should be capitalised only where it is probable that future economic benefits attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably
capitalised assets are subject to amortisation and/or impairment review.

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Impairment of Assets (IAS 36)

Where there is evidence of impairment of assets a review should be carried out.
Impairment: an asset is impaired when its carrying amount exceeds its recoverable amount
Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated depreciation and accumulated impairment losses (i.e. the NBV)
Recoverable amount: the higher of an asset's fair value less costs to sell (sometimes called net selling price) and its value in use

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IAS 36 – Impairment of Assets

Fair value: the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties
Value in use: the discounted present value of the future cash flows expected to arise from:
the continuing use of an asset, and from
its disposal at the end of its useful life
If the review indicates a fall in value below carrying value in the balance sheet then the asset needs to be written down to the recoverable amount
The recoverable amount is the higher of net realisable value and value in use

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Leasing

Some assets being utilised in a business may not appear on the Balance Sheet.

‘Lease’ describes two types of lease (IAS 17)
Finance lease – on BS
Operating lease – not on BS

Prior to periods beginning 1 January 2019 – IAS 17
After periods beginning 1 January 2019 - IFRS 16

June 2020, first year to leasing standard to apply IFRS16

No restate

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Definitions (IAS 17)

“A LEASE is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.”

“A FINANCE LEASE is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.”

“An OPERATING LEASE is a lease other than a finance lease.”

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Accounting Treatment
- Operating Lease (IAS 17)

Treat as an annual expense (rent) in the profit and loss account

Disclose the amount included in the profit and loss account in respect of operating lease rentals

Disclose commitment to make payments in future years, analysed between the commitment in the next year, in the second to the fifth year inclusive, and over five years.

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Accounting Treatment
- Finance Leases (IAS 17)

The leased asset is capitalised in NCA / fixed assets account at the lower of present value of the lease payments and its fair value (arm’s length price)

Annual depreciation charged on this value over the shorter of the estimated useful life or the lease period

The annual depreciation charge reduces the net book value of the leased asset.

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The finance lease obligation is a liability, recorded in the borrowings element of trade payables/creditors.
The finance charge for the lease is calculated as the difference between the total minimum payments and the fair value of the asset (or the present value of the total minimum payments if lower).
The finance charge is allocated to the accounting periods over the term of the lease and recorded in the profit and loss account.
Each accounting period the finance lease obligation should be reduced by the capital element of the repayment made (i.e., difference between the lease payment and the finance charge).

Prefer operating leases

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IFRS 16: Leases

Effective for periods beginning on or after 1 January 2019
Nearly all leased assets will now be recorded on BS with corresponding liability
BS: Big impact for some industries:
Airlines, shipping, property companies most affected
IS: Minimal overall impact:
Operating rental expense replaced with:
Depreciation on asset, and interest expense on debt
HOWEVER, could have significant effect on some measure (eg: EBITDA)

Raise in debts

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Current Assets

Inventories
Trade and other receivables
Short-term investments
Cash and cash equivalents

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Non-current Liabilities

Trade and other payables
Financial Liabilities (look here for borrowings)
Provisions
Post-employment/retirement benefit obligations (pensions)
Deferred tax liabilities

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Current Liabilities

Trade and other payables

Financial liabilities (look here for borrowings)

Provisions

Current tax liabilities

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Debt structure analysis

Look at gearing ratios
Borrowings as a percentage of capital employed
Consider debt/sales
Look at how the amount of debt changes over time

Look at how the nature of debt changes (short versus long-term)

Net debt = cash+financial assets-financial liabilities (may be defined differently by different companies) – will be notes giving more detail about this

Small equity part

Financial Statement Analysis - The cash flow statement.pptx

Financial Statement Analysis - The Cash Flow Statement

LUBS 3670

Financial Analysis

Lecture 12

Leeds University Business School

Smaller than income statement and balance sheet

Standard layout of the cash flow statement

equals

plus or minus

Net increase (or decrease) in cash and cash equivalents over the period

Cash flow from operating activities

Cash flow from investing activities

Cash flow from financing activities

plus or minus

The definition of cash and cash equivalents

Cash is defined as notes and coins in hand, deposits in banks or similar institutions that are accessible on demand and bank overdrafts.

Cash equivalents are short-term, highly liquid assets that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Short-term is considered to be a period of three months or less.

Cash flows from operating activities

This is the net inflow or outflow from trading operations, after tax and financing costs (i.e. interest and dividends).

There are two methods

the direct method

the indirect method.

Indirect method

Cash flows from investing activities

This section of the cash flow statement includes cash payments made to acquire additional non-current asset and cash receipts from the disposal of non-current assets.

It also includes receipts from investments (loans and equity investments) in the form of interest on loans made by the business and dividends from shares in other business that are owned by the business.

Cash flows from financing activities

This section of the cash flow statement include cash flows relating to the long-term financing activities of the business.

Cash flows include the increase and repayment of borrowings and the receipts from share issues and payments made to purchase the business’ own shares.

Dividend payments made by the firm can also be included under this heading, as an alternative to including them as part of ‘Cash flows from operating activities’.

Analysing the cash flow statement

The cash flow statement allows consideration of:

Whether the company is a cash generator or a cash sink

Whether cash is being produced/absorbed from operating or non-operating activities

How the company is financing any cash shortfall or using surplus cash

The ‘quality’ of the company’s profits

Cash generator or cash sink

Generator Cash > Needs

Sink Cash < Needs

Neutral Cash = Needs

Need to view the situation over a number of years.

Cash produced/absorbed from operating or non-operating activities

Cash generated by operating activities is of vital importance

Cash position of operating activities may be improved or made worse by non-operating activities.

Financing a Cash Shortfall or Absorbing a Cash Surplus

Cash generator – How is the case spent.

Borrowing repaid

Shares repurchased

Cash reserves increased

Cash Sink – How is the cash found?

Additional funds borrowed

New shares issued

Cash reserves ran down.

Quality of Company’s Profits

Healthy Profits + Net Cash Inflow

Tends to indicate a favourable state of affairs

Healthy Profit + Net Cash Outflow

May suggest ‘Creative Accounting’

Operating activities:

Is the company generating a net cash inflow from its operating activities?

Is the company managing to increase the net cash inflow from its operating activities?

Seek explanations for any change - is it result of changes in operating profit, depreciation or change in control of company’s working capital requirements?

Look for significant increases/decreases in inventories, receivables and payables and seek explanations for such increases/decreases. Working capital tends, in an inflationary period and/or when the business expands, to rise roughly in line with turnover.

Returns on investment and servicing of finance:

How much cash is being used to service borrowings? Particular attention should be paid to the difference between interest paid in cash and interest shown in the income statement.

Capital expenditure and financial investment:

Is the company maintaining/expanding its non-current asset base?

How important has the disposal of non-current assets and/or businesses been in terms of generating funds?

Acquisitions and disposals:

Is the company making acquisitions and what effect have acquisitions had on the cash flow position?

What is the nature of any businesses purchased and how will they fit in with the organisations existing activities?

Will any newly acquired businesses generate or use cash for the foreseeable future?

Is the company disposing of businesses and what effect have such disposals had on the cash flow position?

Equity dividends paid:

Is the company able to fund comfortably its level of dividend payment?

Market prefers stable growth in dividends, does not like reductions, therefore companies are under pressure to maintain dividends - may lead to companies paying dividends from reserves.

Financing:

How is the company financing a cash deficit or absorbing a cash surplus?

- effect on borrowing levels?

- effect of cash position ?

Net profit, after interest, before taxation

+ depreciation/amortisation

+ interest expense

-/+ profit or loss on the disposal of non -current assets

+/- decrease/increase in inventories

+/- decrease/increase in trade receivables and prepayments

+/- increase/decrease in trade payables and accruals

= Cash generated from operations

- interest paid

- taxation paid

- dividend paid (* note, can be shown as part of financing)

= net cash from operating ac tivities

Net profit, after interest, before taxation

+ depreciation/amortisation

+ interest expense

-/+ profit or loss on the disposal of non-current assets

+/- decrease/increase in inventories

+/- decrease/increase in trade receivables and prepayments

+/- increase/decrease in trade payables and accruals

= Cash generated from operations

- interest paid

- taxation paid

- dividend paid (* note, can be shown as part of financing)

= net cash from operating activities

Financial Statement Analysis Part 1.pptx

Techniques of Financial Statement Analysis - Part 1

LUBS 3670

Financial Analysis

Lecture 8

Leeds University Business School

Strategic Analysis

Broad environment

PEST or PESTEL analysis (table in Appendix, summary in main text)

Industry

Background to the industry – regulatory background, size, structure, major companies, etc.

Porter’s Five (or Six) Forces (table in Appendix, summary in main text)

Company

Analyse company strategy and compare with at least one competitor

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Financial Statement Analysis

Suggested structure of this section:

Income Statement

Revenue

Cost of Sales

Exceptional Items

Profits and Profitability

Balance Sheet

Non-Current Assets

Working Capital

Debt Structure

Equity

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Financial Statement Analysis

Suggested structure of this section:

Cash Flow Statement

Cash from Operating Activities

Cash from Investing Activities

Cash from Financing Activities

Change in Cash over the year

Cash Balance

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Financial Statement Analysis

The structure of the analysis is up to you, but try to structure the analysis by theme (e.g. revenue, costs, profits, NCA, debt structure, etc. as suggested in the last two slides) rather than by technique (trend, common size, ratios, etc.)

Illustrate your analysis with tables and graphs placed in the main text.

You need to analyse the key financial statements (income statement, balance sheet and cash flow statement) and to show evidence of this.

5 years of financial statement data is required.

Try to relate financial performance with the strategies discussed in the Strategic Analysis section.

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General overview

Two broad techniques of analysis:

Horizontal and vertical analysis

Horizontal Analysis:

Trends examined over a number of accounting periods

Useful where comparisons are for periods greater than two years

Vertical Analysis:

Equating total to 100 and producing ‘common size’ statements

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Horizontal (trend) analysis

calculation of percentage changes in the main components of the accounts from one year to another

measurement of growth in key items (such as growth in revenue, profits, assets etc)

comparison with competitors

reasons for large changes - examination of inconsistencies (read notes thoroughly)

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Example: horizontal analysis between two periods

	2018	2017	Amount of change	% of change
Net sales	28,500	25,000	3,500	14%
Costs and expenses
Cost of Sales	14,700	12,000	2,700	23%
Selling, general, and administrative expenses	10,500	10,200	400	4%
Interest expense	745	570	175	31%
Interest income	50	90	-40	-44%
Income before tax	2,605	2,420	185	8%
Income tax expense	1,042	847	195	23%
Net income	1,563	1,573	-10	-1%
	A	B	A-B	(A-B)/B

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Interest numbers are small

Indices

a useful technique for analysing trends is to convert certain key items (such as sales and profits) into index numbers to ease comparison of the trends over time.

calculated by taking the earliest year’s figures as a base of 100 and scaling缩放subsequent years accordingly

use of indices allows you to rebase key items and compare their growth directly

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Indices example

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1187/1187*100%=1

1444.2/1187*100%

2036.1/1187*100%

Divide Very first year

Indices example

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Effects of inflation

In order to assess the true underlying performance of a company the reported figures should be converted to real or constant £ figures to eliminate the effects of inflation.

One way of adjusting for inflation is to deflate the reported figures by an inflation index which reflects changes in the prices of the goods and services for the industry to which the firm belongs.

Alternatively, as a (very) rough measure, the retail price index (RPI) or consumer price index (CPI) can be used,

Note that for certain industries and products, the RPI fails to provide a realistic measure of specific inflation.

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Inflation example

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Getting an inflation rate

Trend analysis - complications

Effect of inflation

Effect of structural change

changes in market/competition (new products, new firms)

developments in technology that substantially change cost-volume-profit relationships

acquisitions and disposals

Effect of accounting method changes

Effect of earnings smoothing via the use of provisions

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Changes in year end

Accounts are normally constructed for periods of 12 months.

However, when a company changes its accounting year end, an accounting period of more or less than 12 months will result.

Cannot directly compare, for example, sales for 12 months with sales for 15 months – need to adjust.

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Company X changes its accounting year end from 31 December 2005 to 31 March in 2007

YEAR ENDING 31/12/04 12 months

YEAR ENDING 31/12/05 12 months

PERIOD ENDING 31/3/07 15 months

YEAR ENDING 31/3/08 12 months

Example -

Changes in year end

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Changes in year end

Does not affect balance sheet – do not adjust

Affects cash flow statement – but be very careful

Affects all of income statement – adjust

Need to adjust ratios involving both IS and balance sheet data, e.g. ROCE

Be very careful using ratios from databases – they often don’t adjust for changes in year end.

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Vertical Analysis (Common Size Statements)

Concentrate on one year’s financial statements

Express all items in each financial statement as a percentage of a selected figure

For example:

sales in the income statement

total assets or total net assets in balance sheet

Allow comparisons between companies of different sizes

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Common size income statement

In millions of UK£	2017
Net sales	38,125
Cost of products sold	21,206
Marketing, research, and administrative expenses	10,666
Operating income	6,253
Interest expense	650
Other income, net	235
Earnings before income taxes	5,838
Income taxes	2,075
Net earnings	3,763
In percentage of sales	2017
Net sales	100.0%
Cost of products sold	55.6%
Marketing, research, and administrative expenses	28.0%
Operating income	16.4%
Interest expense	1.7%
Other income, net	0.6%
Earnings before income taxes	15.3%
Income taxes	5.4%
Net earnings	9.9%

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Combine horizontal with common size statements

In millions of UK£	2017	2016	2015	2014	2013
Net sales	38,125	37,154	35,764	35,284	33,482
Cost of products sold	21,206	21,064	20,316	20,762	19,561
Marketing, research, and administrative expenses	10,666	10,035	9,960	9,707	9,677
Operating income	6,253	6,055	6,488	4,815	4,244
Interest expense	650	548	457	484	488
Other income, net	235	201	218	338	244
Earnings before income taxes	5,838	5,708	5,249	4,669	4,000
Income taxes	2,075	1,928	1,834	1,623	1,355
Net earnings	3,763	3,780	3,415	3,046	2,645
In percentage of sales	2017	2016	2015	2014	2013
Net sales	100.0%	100.0%	100.0%	100.0%	100.0%
Cost of products sold	55.6%	56.7%	56.8%	58.8%	58.4%
Marketing, research, and administrative expenses	28.0%	27.0%	27.8%	27.5%	28.9%
Operating income	16.4%	16.3%	15.3%	13.6%	12.7%
Interest expense	1.7%	1.5%	1.3%	1.4%	1.5%
Other income, net	0.6%	0.5%	0.6%	1.0%	0.7%
Earnings before income taxes	15.3%	15.4%	14.7%	13.2%	11.9%
Income taxes	5.4%	5.2%	5.1%	4.6%	4.0%
Net earnings	9.9%	10.2%	9.5%	8.6%	7.9%

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Compare with competitors

Common size Balance Sheet

Assets	2017	2016	2015	2014	2017	2016	2015	2014
Current Assets
Cash and cash equivalents	2,294	1,549	2,350	2,074	7.1%	5.0%	8,5%	7,5%
Investment securities	506	857	760	446	1.6%	2.8%	2,8%	1,6%
Accounts receivable	2,940	2,781	2,738	2,841	9.2%	9.0%	9,9%	10,2%
Inventories	3,338	3,284	3,087	3,130	10.4%	10.6%	11,2%	11,3%
Deferred income taxes	621	595	661	598	1.9%	1.9%	2,4%	2,2%
Prepaid expenses and other currents assets	1,659	1,511	1,190	1,718	5.2%	4.9%	4,3%	6,2%
Total currents assets	11,358	10,577	10,786	10,807	35.4%	34.2%	39.2%	39,0%
Property, plant, and equipment (net)	12,626	12,180	11,376	11,118	39.3%	39.3%	41.3%	40,1%
Goodwill and other intangible assets (net)	6,822	7,011	3,949	4,281	21.2%	22.6%	14.3%	15.4%
Other non-current assets	1,307	1,198	1,433	1,524	4.1%	3.9%	5.2%	5.5%
Total assets	32,113	30,966	27,544	27,730	100.0%	100.0%	100.0%	100.0%

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Common size Balance Sheet

Liabilities and shareholders’ equity	2017	2016	2015	2014	2017	2016	2015	2014
Current Liabilities
Accounts payable	2,300	2,051	2,203	2,236	7,2%	6,6%	8.0%	8.1%
Accrued and other liabilities	4,083	3,942	3,802	3,981	12.7%	12.7%	13.8%	14.4%
Taxes payable	1,228	976	944	492	3.8%	3.2%	3.4%	1,8%
Debt due within one year	3,150	2,281	849	1,116	9.8%	7.4%	3.1%	4,0%
Total current liabilities	10,761	9,250	7.798	7,825	33.5%	29.9%	28.3%	28,2%
Long-term debt	6,231	5,765	4,143	4,670	19.4%	18.6%	15.0%	16,8%
Deferred income taxes	362	428	559	638	1.1%	1.4%	2.0%	2,3%
Other non-current liabilities	2,701	3,287	2,998	2,875	8.4%	10.6%	10.9%	10.4%
Total liabilities	20,055	18,730	15,498	16,008	62,5%	60,5%	56.3%	57,7%
Shareholders’ equity	12,058	12,236	12,046	11,722	37,5%	39.5%	43,7%	42,3%
Total liabilities and shareholders’ equity	32,113	30,966	27,544	27,730	100.0%	100.0%	100.0%	100.0%

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Mar-31 Mar-31 Mar-31 Mar-31 Mar-31

xxx1 xxx2 xxx3 xxx4 xxx5

£ m £ m £ m £ m £ m

TURNOVER 1,187.0 1,444.2 2,026.1 2,048.6 1,971.3

Index 100 121.67 170.69 172.59 166.07

TRADING PROFIT 111.6 137.5 179.7 177.8 135.4

Index 100 123.21 161.02 159.32 121.33

	Mar-31	Mar-31	Mar-31	Mar-31	Mar-31
	xxx1	xxx2	xxx3	xxx4	xxx5
	£ m	£ m	£ m	£ m	£ m

TURNOVER	1,187.0	1,444.2	2,026.1	2,048.6	1,971.3
Index	100	121.67	170.69	172.59	166.07

TRADING PROFIT	111.6	137.5	179.7	177.8	135.4
Index	100	123.21	161.02	159.32	121.33

Turnover v Profit

100

120

140

160

180

'xxx1

'xxx2

'xxx3

'xxx4

'xxx5

Turnove

Profit

Turnover v Profit

100

120

140

160

180

'xxx1

'xxx2

'xxx3

'xxx4

'xxx5

Turnover

Profit

Mar-31 Mar-31 Mar-31 Mar-31 Mar-31

xxx1 xxx2 xxx3 xxx4 xxx5

£ m £ m £ m £ m £ m

TURNOVER 1,187.0 1,444.2 2,026.1 2,048.6 1,971.3

RPI (xxx1 = 100) 100 104.0 106.0 108.4 112.2

RPI adjusted turnover 1187.0 1388.7 1911.4 1889.9 1757.0

% change 17.0 37.6 -1.1 -7.0

	Mar-31	Mar-31	Mar-31	Mar-31	Mar-31
	xxx1	xxx2	xxx3	xxx4	xxx5
	£ m	£ m	£ m	£ m	£ m

TURNOVER	1,187.0	1,444.2	2,026.1	2,048.6	1,971.3
RPI (xxx1 = 100)	100	104.0	106.0	108.4	112.2
RPI adjusted turnover	1187.0	1388.7	1911.4	1889.9	1757.0
% change		17.0	37.6	-1.1	-7.0

3670 Financial Statement Analysis Part 2.pptx

Techniques of Financial Statement Analysis - Part 2

LUBS 3670

Financial Analysis

Lecture 13

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Ratio Analysis

Describe the relationship between different accounting numbers in the financial statements

Ratios need to be compared with:

Same ratios in the preceding period

Budgeted ratios for the same period

Ratios for other companies in the same sector

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Ratio Analysis

In order to interpret the meaning of a ratio it is necessary to have some basis of comparison

Comparisons should be made using either times-series analysis, or by using cross-sectional analysis

The use of a single ratio on its own is virtually meaningless

Often numerous ways of calculating a particular ratio.

The key to ratio analysis is consistency

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Ratio definitions

The accounting ratios most often used can be grouped as follows:

Liquidity

Gearing

Activity

Profitability

Shareholder (or Investment Ratios)

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Liquidity ratios

Current/ working capital ratio		Indicates the extent to which a firm can meet its short term liabilities from its current assets without having to raise finance by borrowing, issuing more shares or selling fixed assets.
Acid test/ quick / liquidity ratio		Measures the firm’s ability to meet its short term liabilities from its current assets without having to rely on the sale of its stock.

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Gearing ratios

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Capital employed - Issues

How do you measure capital employed?

Total assets – current liabilities

Shareholders’ funds + non- current liabilities

But

How to deal with borrowings which appear in current liabilities

Bank overdraft

Long term borrowings that are in their last year before repayment

Short term loans

Alternative (preferred) measurement

Shareholders’ funds + non- current liabilities + short-term borrowings

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Activity ratios


Inventories (stock) turnover period	Inventories x 365	Indicates how many days it
	Cost of sales	would take to sell the inventory


Collection period for Receivables	Trade receivables x 365	Average collection period for
(Debtor Days)	Sales Revenue	receivables expressed in days


Payment period for payables	Trade payables x 365	Average payment period to
(Creditor Days)	Credit Purchases or Cost of Sales	payables expressed in days

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Profitability

Return on capital employed		Measures the performance of the firm regardless of the method of financing.
Return on shareholders’ funds		Measures the profitability of the shareholders’ investment in the firm.
Net profit margin		Shows how much £1 of sales earns as net profit.

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Profitability

Asset turnover	Turnover Capital employed	Measures how efficient the firm is at generating sales from its capital
Gross profit margin	Gross profit x 100% Sales	Shows how much £1 of sales earns as gross profit.
ROCE = Net profit margin X Asset turnover

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Financial Statement Analysis

Suggested structure of this section:

Income Statement

Revenue

Cost of Sales

Exceptional Items

Profits and Profitability

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Financial Statement Analysis

Suggested structure of this section:

Balance Sheet

Non-Current Assets

Working Capital

Debt Structure

Equity

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Financial Statement Analysis

Suggested structure of this section:

Cash Flow Statement

Cash from Operating Activities

Cash from Investing Activities

Cash from Financing Activities

Change in Cash over the year

Cash Balance

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Current assets

Current liabilities

Current assets

stocks

Current liabilities

Debt /Capital Gearing

Total borrowings Shows the extent of borrowings

ratio

Capital employed in relation to capital employed

x 100%

Debt / Equity Ratio

Total borrowings Shows the extent of borrowings

Shareholders’ funds in relation to shareholders funds

x 100%

How many times profit covers

Interest cover

Profit before interest and tax interest payments - a measure

Interest payable of ability to service debt



Debt /Capital Gearing	Total borrowings	Shows the extent of borrowings
ratio	Capital employed	in relation to capital employed

	x 100%


Debt / Equity Ratio	Total borrowings	Shows the extent of borrowings
	Shareholders’ funds	in relation to shareholders funds

	x 100%

		How many times profit covers
Interest cover	Profit before interest and tax	interest payments - a measure
	Interest payable	of ability to service debt

Profit before Interest and Tax

Capital employed

100%

Profit after tax

Shareholders

funds

100%

Profit before interest and tax

Sales

100%

Financial Analysis Assessment Overview - 2020(1).pptx

Financial Analysis: Assessment Overview

LUBS 3670

Financial Analysis

Leeds University Business School

Assessment

Report format – this is not an essay

The following structure outline is for guidance only – it is not a ‘required’ structure.

8000 word maximum limit on the main body of the report.

Rules on what can be included in appendices – see later.

Deadline 26th March 2020

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Structure

Title page

Contents page

Introduction

Strategic Analysis

Financial Statement Analysis

Stock Market Analysis

Summary and Conclusion

Bibliography

Appendices

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Title and contents page

Title page

Module name and number

Name of company (can use company logo)

Student number

Do not put your name anywhere on the report

Contents page

Should list sections and subsections with page numbers

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Introduction

Name and status of company

What sector/market is it in?

Industry sector

Segmental analysis - both sector and geographical

Strategic business units (SBUs, Divisions)

Company history

When did it start-up?

What has it done since start-up?

What major acquisitions/mergers/spin-offs have occurred?

Is it under a major strategic change? If so, why?

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Strategic Analysis

Broad environment

PEST or PESTEL analysis

Industry

Background to the industry – regulatory background, size, structure, major companies, etc.

Porter’s Five Forces

Company

Analyse company strategy and compare with at least one competitor.

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Financial Statement Analysis

You need to analyse the key financial statements (income statement, balance sheet and cash flow statement) and to show evidence of this.

The structure of the analysis is up to you, but try to analyse by theme (e.g. revenue, costs, profits, NCA, debt structure, etc.) rather than by technique (trend, common size, ratios, etc.)

Use graphs, charts and extracts of data to illustrate your analysis. Include these in the main text section of the report.

5 years of financial statement data is required.

Try to relate financial performance with the strategies discussed in the Strategic Analysis section.

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Financial Statement Analysis

Suggested structure of this section:

Income Statement

Revenue

Cost of Sales

Exceptional Items

Profits and Profitability

Balance Sheet

Non-Current Assets

Working Capital

Debt Structure

Equity

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Financial Statement Analysis

Suggested structure of this section:

Cash Flow Statement

Cash from Operating Activities

Cash from Investing Activities

Cash from Financing Activities

Change in Cash over the year

Cash Balance

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Stock Market Analysis

Share price performance

Compare with stock market, industry and competitors (not necessarily in that order)

Graphs are essential and make sure I can read them

I mark your handed-in copy, so a black and white version of comparisons is usually unreadable.

Stock market indicators

Discussion of EPS and P/E

Discussion of dividend policy and D/Y

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Conclusion

Short summary of your findings overall

Can include a SWOT analysis

How do you think the company is performing and what are its future prospects?

Would you recommend an investor to invest in this company?

There is no right or wrong answer in this section, unless you completely go against your own analysis without justification!!

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Bibliography and referencing

Different referencing styles are allowed – the important thing is to reference.

You need to reference within the main text and/or table.

If you take something directly from the company report, website, etc., make it clear that you have done so.

Do NOT plagiarise from market research reports, the web , etc.

Do NOT copy from each other – you will not be graduating this year once you are caught.

Do NOT give your report to anyone else regardless of however nicely they ask and how friendly you are with them. If they copy parts of your report, you are considered just as guilty of plagiarism as they are.

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Appendices

Allowable contents

Company history table

PEST or PESTEL table

Porter’s 5 (or 6) Forces table

Company strategy tables.

Directors/shareholder tables

Income statement, balance sheet and cash flow statements plus associated analysis.

Ratios, with definitions

SWOT analysis in a table format

Paragraphs of text are not allowed.

I only mark the appendices if you direct me to them via a reference in the main text.

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Word limit

The word limit does not include:

Title page

Contents page

Bibliography

Appendices

Graphs, charts and extracts of data tables (e.g. revenue trend, ratios, etc.) in the main body/text.

Tables in the main text

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