Annual Report

Annual report
Report issued annually by the corporation to its stockholders. It contains basic nancial statements as
well as the management’s analysis of the rm”s past operations and future prospects
Contains
• Balance sheet
• Income statement
• Statement of retained earnings
• Statement of cash ows
1.Balance sheet
Assets= Liabilities + Equity
• Book values
◦Historical costs (costs in which the asset is acquired by the company) —accumulated
depreciation
• Market values
◦Determined by current trading values in the market
◦Market value of shareholder’s equity
= Markey capitalisation
ofsharesheldbyshareholderslmk1value
value
= Share price * No of outstanding shares sharesthathavebeenauthorisedissuedandpurchased

byinvestorsandareheld them
by
2.Income statement and statement of retained earnings
Income statement foracertainfinancialperiod

• Revenues typically amonth a quarter or
• Expenses
• Taxes associated with those revenues a
year
Statement of retained earnings
• Change in retain earnings:

◦Add net income
◦Less dividends
• Dividend payout ratio: dividend/ net income
3.Cash Flows
Cash ow:
• Add depreciation as depreciation is considered a non cash expense
• Add cash expenditure on new xed assets
• Record income and expense at the time of sales
• Considers changes in working capital
Importance of cash ows

• Cash is king: rms generate cash and they spend it
• Sources of cash
◦decreases assets
◦Increases liability and equity
• Used of cash
◦Increases assets
◦Decrease in liability and equity
Statement of cash ow
3 categories:
• Operating activities : changes in net income and changes in most current accounts
• Investment activities: changes in xed assets
• Financing activities: changes in nots payable , long-term debt and equity accounts as well as
dividends
fundsto
thatcompanyhasenough
Understanding statement of cash ow µif
positivemeans
meetcurrentfinancialneeds
• Net working capital = Current assets - current liabilities
• Net working capital + net xed assets = long term debt + common stock + retained earnings
• Current liabilities = non-interest bearing CL ( A result of operating activities, aka A/P ) + interest
bearing CL ( From nancing activities, aka short term loans [ <1 year maturity ], Notes payable)
Standardised Financial statement
Financial statements and Market Value
• While accounting gures are pale re ections of the economic reality, they are often the best
available. Hence, we have to rely on these gures as a starting point to strict information we need
• Cash is one of the most impt pieces of info we can derive from nancial statements
◦how cash is generated fro assets and paid to nance the assets
◦Only cash generated from operations over the life of an asset or investment is of concern in
Finance.
◦Operating working capital
‣ Stemming fro operating policies
• A/R
• Inventory
• A/P etc
• Cash Flows:
◦Cash Flow from Assets (CFFA)/ Free cash ows : All cash ows related to assets of a business.
‣ CFFA= Operating Cash Flow — Net capital spending — Changes in Net Operating Working
Capital amountofcashgeneratedfromRevenue
• OCF : Ebit * ( 1- tax rate ) + Depreciation
• NCS : Ending net xed asset - Beg net xed asset + Depreciation
• Changes in NOWC : Ending NOWC — Beg NOWC ( Current assets - A/P )
◦CFFA+ Interest tax shield = Cash ow to creditors + cash ow to stockholders
‣ interest tax shield: Interest* Tax rate
‣ Cash ow to creditors : interest paid - net new borrowing ( LT debt and notes payable)
‣ Cash ow to stockholders: Dividends paid - net new equity raised
• Enterprise Value
◦Assess the underlying business asset value while excluding the value of any non- operating
assets
◦EV= Market value of equity + Debt - Excess cash (Amt of cash rm has and not needed for
operations)
• Stocks
◦issued stocks
‣ outstanding capital stocks
‣ Treasury stocks : Shares bought back and held by company
◦Unissued capital stocks
Ratio Analysis
Ratio need to be compared to be understood better

• Time-Trend analysis : See how the rm’s performance is changing through time
• Peer Group analysis : Compare to similar companies or within industries
• Used internally and externally
5 categories of Ratios
1. Liquidity ratios ( short term solvency )
A. measure the rm’s ability to pay bills in the short run
2. Long term solvency ratio
A. how heavily the company is in debt
B. Mix of debt and equity
3. Asset management
A. how productively is company using assets
B. Right amount of assets for level of sales?
4. Pro tability ratio
A. Firm’s return on its investment
5. Market Value ratio
A. rm’s prospects and how market values the rm
Liquidity Ratio
• Liquidity is the ability to convert assets into cash quickly without signi cant losses in value
• Indicates rm’s ability to meet maturing short term obligations
• Current Ratio : Whether rm has enough resources to meet short term obligation
◦current assets/ current liabilities
• Quick ratio : Companies’ abilities to meet short term obligations with most liquid assets
◦(CA - Inventory) / CL
• Cash ratio
◦cash / CL
• NWC to total assets : short term liquidity
◦NWC/ TA
• interval measure ( How many days can the company operate with the funds on hand)
◦CA/ avg daily operating costs
Long-term solvency/ Financial leverage

• Related to the extend that a rm relies on debt nancing rather than equity
• The more debt the company has, the more likely that it will be unable to ful ll its obligations
• Total debt ratio: Total Debt / Total Assets
• Variations
◦debt/ equity ratio
◦Equity multiplier : Total assets/ total equity = 1 + debt/equity ratio
‣ portion of the company’s assets that is nanced by the equity rather than debt
◦Long-term Debt ratio: long-term debt / (long term debt + equity )
• Coverage ratios
◦times interest earned ratio : EBIT/ interest
‣ measure of company’s ability to meet debt obligations based on current income
◦Cash coverage ratio: (Ebit+depreciation) / interest
‣ cash available to pay for a borrower’s interest expense
Asset Management Ratios/ activity ratios
• Inventory Ratios: How quickly is inventory produced and sold

◦Inventory turnover : Costs of goods sold/ inventory
◦Days’ sales in inventory: 365/ inventory turnover
• Receivable ratio: provide information on the managing of collection from credit customers
◦rec turnover : sales / receivables
◦Days sales outstanding/ Account receivable Days : Average number of days after making a sale
before receiving cash
‣ Account Reveivable/ Average daily sales
‣ 365/ Receivables turnover
• Fixed asset and total asset turnover ratio: how e ective is the rm in using its assets to generate
sales
◦FA turnover = Sales / net xed assets
◦TA turnover = Sales/ Total assets
Pro tability
Shows the combined e ect of liquidity, asset management and debts on the operating results
• Pro t margin: Net income/ sales
• BEP ( Basic earning power) = Ebit/ Total assets
◦removes the e ects of traces and nancial leverage
• Return on assets = Net income/ Total assets
• Return on equity = Net income/ Total common equity
◦does not consider risk
◦Does not consider amt of capital invested
◦Might encourage managers to make investment decisions that do not bene t shareholders
◦It only focuses on return.
Market value ratios
• P/ E = Price/ Earnings per share

◦how much investors are willing to pay for 1 dollar earnings
• M/B = Mkt price per share/ Book value per share
◦how much investors willing to pay for 1 dollar book value equity
• Du Pont : ROE = Pro t margin * Total asset turnover * Equity multiplier
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Annual Report

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Annual report

= Share price * No of outstanding shares sharesthathavebeenauthorisedissuedandpurchased

2.Income statement and statement of retained earnings

Income statement foracertainfinancialperiod

Statement of retained earnings

• Change in retain earnings:

Importance of cash ows

Standardised Financial statement

Financial statements and Market Value

Ratio need to be compared to be understood better

Long-term solvency/ Financial leverage

Asset Management Ratios/ activity ratios

• Inventory Ratios: How quickly is inventory produced and sold

Market value ratios

• P/ E = Price/ Earnings per share

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