ch10[1]Investment Analysis

Comparing to The Aggregate Economy
• Most firms are influenced by economic expansions and contractions in the business cycle • Analysis helps you estimate the future performance of the firm during subsequent business cycles
Major Financial Statements
• Corporate shareholder annual and quarterly reports must include
Major Financial Statements
• Corporate shareholder annual and quarterly reports must include
Major Financial Statements
• Corporate shareholder annual and quarterly reports must include
– Balance sheet – Income statement – Statement of cash flows
Alternative Measures of Cash Flow
• Cash flow from operations
– Traditional cash flow equals net income plus depreciation expense and deferred taxes – Also adjust for changes in operating assets and liabilities that use or provide cash
• Reports filed with Securities and Exchange Commission (SEC)
– 10-K and 10-Q
Generally Accepted Accounting Principles (GAAP)
• Formulated by the Financial Accounting Standards Board (FASB) • Provides some choices of accounting principles • Financial statements footnotes must disclose which accounting principles are used by the firm
Chapter 10 Analysis of Financial Statements
• What are the major categories for financial ratios and what questions are answered by the ratios in these categories? • What specific ratios help determine a firm’s internal liquidity, operating performance, risk profile, growth potential, and external liquidity? • How can the DuPont analysis help evaluate a firm’s return on equity over time?
Chapter 10 Analysis of Financial Statements
• What are some of the major differences between U.S. and non-U.S. financial statements and how do these differences affect the financial ratios? • What is a “quality” balance sheet or income statement? • Why is financial statement analysis done if markets are efficient and forward-looking?
Questions to be answered: • What are the major financial statements provided by firms and what specific information does each of them contain? • Why do we use financial ratios to examine the performance of a firm and why is it important to examine performance relative to the economy and a firm’s industry?
Comparing to A Firm’s Industry
• Most popular comparison • Industries affect the firms within them differently, but the relationship is always significant • The industry effect is strongest for industries with homogenous products • Examine the industry’s performance relative to aggregate economic activity
– Balance sheet
Major Financial Statements
• Corporate shareholder annual and quarterly reports must include
– Balance sheet – Income statement
Major Financial Statements
Chapter 10 Analysis of Financial Statements
• What major financial ratios help analysts in the following areas: stock valuation, estimating and evaluating systematic risk, predicting the credit ratings on bonds, and predicting bankruptcy?
Statement of Cash Flows
• Integrates the information on the balance sheet and income statement • Shows the effects on the firm’s cash flow of income flows and changes in various items on the balance sheet
• Ratios are more informative that raw numbers • Ratios provide meaningful relationships between individual values in the financial statements
Importance of Relative Financial Ratios
Purpose of Financial Statement Analysis
• Evaluate management performance in three areas:
– Profitability – Efficiency – Risk
Analysis of Financial Ratios
• Corporate shareholder annual and quarterly reports must include
– Balance sheet – Income statement – Statement of cash flows
Major Financial Statements
Lecture Presentation Software
to accompany
Investment Analysis and Portfolio Management
Seventh Edition by
Frank K. Reilly & Keith C. Brown
Chapter 10
Chapter 10 Analysis of Financial Statements
Statement of Cash Flows
It has three sectiห้องสมุดไป่ตู้ns:
Cash Flow from Operating Activities – the sources and uses of cash that arise from the normal operations of a firm Cash Flow from Investing activities – change in gross plant and equipment plus the change in the investment account Cash Flow from Financing activities– financing sources minus financing uses
Balance Sheet
• Shows resources (assets) of the firm and how it has financed these resources • Indicates current and fixed assets available at a point in time • Financing is indicated by its mixture of current liabilities, long-term liabilities, and owners’ equity