16-0

Financial Statement Analysis

Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-1

Main groups of financial ratios

Liquidity ratios
Leverage ratios
Efficiency ratios
Profitability ratios
Market value ratios

Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

1
16-2

Liquidity Ratios
Current ratio (Rc)
Current Assets
Rc 
Current Liabilities

Case of ABT (2006)

Rc = 1.94
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-3

Liquidity Ratios
Quick ratio (Rq)
Current Assets - Inventory
Rq 
Current Liabilities

Case of ABT (2006)

Rq = 1.47
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

2
16-4

Liquidity Ratios
Cash ratio (Rq)
Cash  Marketable Securities
CR 
Current Liabilities

Case of ABT (2006)

CR = 0.11
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-5

Leverage Ratios
Total Debt Ratio
Total Debt
TDR 
Total Assets

Case of ABT (2006)

TDR = 0.39
MeanVN: 0.54
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

3
16-6

Leverage Ratios
Long-term Debt Ratio
Long-term Debt
LDR 
Total Assets

Case of ABT (2006)

LDR = 0.008
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-7

Leverage Ratios
Long-term Debt/Equity Ratio
Long-term Debt
LD/E R 
Equity

Case of ABT (2006)

LD/E R = 0.013
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

4
16-8

Efficiency Ratios
Total Asset Turnover
Sales
TAT 
Total Assets

Case of ABT (2006)

TAT = 2.81
MeanVN: 1.77
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-9

Efficiency Ratios
Fixed Asset Turnover
Sales
FAT 
Net Fixed Assets

Case of ABT (2006)

FAT = 14.37
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

5
16-10

Efficiency Ratios
Average Collection Period
Accounts Receivable
ACP 
Average Sales per day

Case of ABT (2006)

ACP = 40 (days)
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-11

Efficiency Ratios
Inventory Turnover
Cost of Goods Sold
IT 
Inventory

Case of ABT (2006)

IT = 12.86
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

6
16-12

Profitability Ratios
Profit Margin
Net Income  Interest
PM 
Sales

Case of ABT (2006)

PM = 0.09
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-13

Profitability Ratios
Return on Assets (ROA)
Net Income  Interest
ROA 
Total Assets

Case of ABT (2006)

PM = 0.25
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

7
16-14

Profitability Ratios
Return on Equity (ROE)
Net Income
ROE 
Equity

Case of ABT (2006)

PM = 0.35
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-15

Market Value Ratios

Price-Earnings Ratio (P/E)
Price per share
P/E 
Earnings per share

Case of ABT (2006)

P/E = 18
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

8
16-16

Market Value Ratios

Market-to-Book Ratio (P/B)
Price per share
P/B 
Book value per share

Case of ABT (2006)

P/B = 6.4
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-17

Ratio Analysis – Case of ABT

Benchmark 2006
2004 2005 2006 AGF SJ1 TS4 Mean
Current Ratio 1,16 1,07 1,94 1,65 3,15 2,07 2,20

Quick Ratio 0,49 0,71 1,47 1,07 0,95 1,58 1,27

Cash Ratio 0,06 0,10 0,11 0,08 0,11 0,03 0,08

Total Debt Ratio 0,70 0,70 0,39 0,36 0,28 0,43 0,36

Long-term Debt Ratio 0,05 0,06 0,01 0,00 0,00 0,09 0,03

Long-term Debt/Equity Ratio 0,16 0,18 0,01 0,00 0,00 0,16 0,04

Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

9
16-18

Ratio Analysis – Case of ABT

Benchmark 2006
2004 2005 2006 AGF SJ1 TS4 Mean

Total Asset Turnover 2,38 3,03 2,81 2,54 3,61 1,62 2,65

Fixed Asset Turnover 9,97 13,84 14,37 6,37 27,49 5,92 13,54

Average Collection Period 42,78 47,10 40,10 41,63 18,49 111,37 52,90

Inventory Turnover 5,03 11,49 12,86 10,84 5,44 8,46 9,40

Profit Margin 0,03 0,04 0,09 0,04 0,04 0,04 0,05

Return on Assets (ROA) 0,08 0,12 0,25 0,11 0,14 0,06 0,14

Return on Equity (ROE) 0,20 0,28 0,35 0,16 0,20 0,11 0,20

Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-19

Du Pont Analysis
Net Income
ROE =
Equity
Net Income Total Assets Sales Net Income + Interest
ROE = x x x
Equity Total Assets Sales Net Income + Interest

Asset Profit
Leverage Turnover Margin

Total Assets Sales Net Income + Interest Net Income

ROE = x x x
Equity Total Assets Sales Net Income + Interest

Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

10
16-20

Du Pont Analysis – Case of ABT

Year 2004 2005 2006 Benchmark 2006

Return on Equity (ROE) 0,20 0,28 0,35

1/ Total Assets / Equity (Leverage ) 3,34 3,30 1,63 1,58

2/ Sales / Total Assets (Asset Turnover ) 2,38 3,03 2,81 2,65
3/ (Net Income + Interest)/ Sales (Profit Margin ) 0,03 0,04 0,09 0,05
4/ Net Income / (Net Income + Interest) 0,74 0,69 0,87 0,94
5/ (1)*(4) 2,46 2,29 1,42 1,49
P/E 16,41 17,34

Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-21

Analysis of Price-Earning Ratio (P/E)

No growth assumption
Stock A Stock B
EPS 5$ 5$
Payout ratio 100 % 100 %
r 12.5 % 12.5 %
Number of outstanding shares 3M 3M

D1 5
PA  PB    40 ($)
r 0.125
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

11
16-22

Analysis of Price-Earning Ratio (P/E)

Growth assumption
Firm A engages in projects generating ROE of 15%
Plowback ratio: 60%; Payout ratio: 40% (D0 = 2 $ per share)
Added earnings: 1.35 M (growth rate: 9%)

D0 1  g  2 1.09
PA    62.29 ($)
rg 0.125  0.09
Present value of growth opportunities = 62.29 – 40 = 22.29 ($)

E P 1  PVGO 
P0   PVGO  0  1  
r E r E/r 
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

16-23

Analysis of Market-to-Book Ratio

(P/B)
D E  d E0  1  g   d
P  1  1
0 
rg rg rg
E0
 B0  1  g  d
B0 ROE  B0  1  g   d
 
rg rg
P0 ROE  1  g   d
 
B0 rg
Financial Statement Analysis Associate Prof. Nguyen Viet Dzung, PhD

12