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Chapter 2:Financial Statement and
Cash Flow Analysis
Corporate Finance, 3eGraham, Smart, and Megginson
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Financial Statements Company managers, investors, and outside
analysts use financial statements to conduct… Cash flow analysis Performance (ratio) analysis
The SEC requires U.S. companies to produce financial statements conforming to Generally Accepted Accounting Principles (GAAP), developed by the Financial Accounting Standards Board (FASB).
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Four Key Financial Statements
1. Balance sheet
2. Income statement
3. Statement of retained earnings
4. Statement of cash flows
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Key Measures of Cash Flow
Net operating profit after taxes (NOPAT)
= EBIT (1 – T)
Operating cash flow
(OCF)= NOPAT + Depreciation = EBIT (1 – T) + Depreciation
Free cash flow (FCF) = OCF – FA – (CA – AP – Accruals)
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Table 2.4 The Inflows and Outflows of Corporate Cash
Decrease in any asset Increase in any liability Net profits after taxes Depreciation and other
non-cash charges Sale of stock
Increase in any asset Decrease in any
liability Net loss Dividends paid Repurchase or
retirement of stock
Inflows Outflows
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Liquidity Ratios
Current ratio =
Current assetsCurrent
liabilities
Quick ratio
= Current assets
InventoryCurrent liabilities
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Activity Ratios
Inventory turnover =
Cost of goods sold
InventoryAverage collection
period=
Accounts receivable
Average daily salesAverage
payment period
= Accounts payable
Average daily purchases
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Activity Ratios
Fixed asset turnover =
SalesNet fixed
assetsTotal asset
turnover = SalesTotal
assets
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Debt Ratios
Debt ratio =Total
liabilitiesTotal assets
Equity multiplier =
Total assetsCommon stock
equityDebt-to-equity
ratio = Long-term debtStockholders’
equity
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Debt Ratios
Times interest earned
= EBIT
Interest expense
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Profitability Ratios
Gross profit margin =
Gross profitSales
Operating profit
margin=
Operating profitSales
Net profit margin =
Earnings available for common shareholders
Sales
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Profitability Ratios
Earnings per share (EPS) =
Earnings available for common stockholders
Number of common shares outstanding
Return on total assets
(ROA)=
Earnings available for common stockholdersTotal assets
Return on common
equity (ROE)=
Earnings available for common stockholders
Common stock equity
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DuPont System of Analysis
ROA = Net profit margin
Total asset turnover
ROE = ROA A/E
ROE = Net profit margin
Total asset turnover
A/E
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Market Ratios
Price/earnings (P/E) ratio =
Market price per share of common stock
Earnings per share (EPS)
Book value per share =
Common stock equityNumber of common shares
outstanding
Market/book (M/B) ratio =
Market price per share of common stock
Book value per share of common stock