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FinanceFinance
““A practical and hands on course on the valuation and financial management of corporationsA practical and hands on course on the valuation and financial management of corporations ””
FINC 5000FINC 5000
Joint MBA Program Shanghai Joint MBA Program Shanghai –– week 1- 2013 week 1- 2013
This week’s agenda
• Textbook chapters 1-3– Financial Management Intro– Financial Statements– Analysis of Financial Statements
• Practicing Assignments • Homework Assignments • In the News (HP, Yahoo! a.o.)
$
Financial Management (ch.1)
• What are the most admired companies in the world? (see www.fortune.com)
• Innovative companies• High management quality companies• High employee talent companies• High product quality companies• High return on investment value
companies• Financial sound companies• Social responsible (ethical) companies• Efficient use of assets companies
Norms and values…
How admired is Google Inc.?
• Follow the mentioned criteria for being admired and figure out on what criteria Google Inc. is scoring strong and weak…
• Try to find some evidence on the global net for your qualifications
• Make a one page feed back slide
• indicate per criteria the research you found that back your statements
Love to go to work!
@
Forms of companies• (1)Sole proprietorship
– Easy and inexpensive to raise– Subject to only a few government regulations– No corporate income taxes– Full liability of owner– Difficult to acquire capital– The life of the company stops when the owner dies
Your local store…
Forms of companies• (2) Partnership
• Low cost and easy to form• Unlimited liability (for some or all partners)• Limited life of the company• Difficult to transfer ownership• Difficult to raise large capital
From partnership…
Forms of companies
• (3) Corporations• Unlimited life time• Limited liability• Easy to transfer ownership• Taxed at corporate tax level (about 35%)• Setting up is complex and costly• Many reporting regulations/obligations
…to corporation!
Setting up a Corporation…
• The incorporators of the corporation have to:
• Create a charter of the company– Name of the company– Types of activities of the company– Amount of capital stock– Number and names/addresses of
directors• Define a set of so called bylaws for
the company– How directors are elected– Will shareholders have the first right
on newly issued shares (right of first refusal)
– The conditions for changing the bylaws of the company
The right of first refusal…
The objective of Finance
• To maximize value to stockholders (van Horne-Stanford)• Increase stockholders value in the value of the firm
(Breadley and Myers)• Maximize wealth of stockholders (Copeland &Weston)• Maximize the price of common stock (Brigham &
Gapenski)• Maximize current value per share (Ross,
Westerfield,Jordan; your textbook)• Maximize the value of the firm (your instructor)
Creating Value…
• For stakeholders of the company like:– Customers (sustainable flow
of products and services)– Suppliers (sustainable flow of
raw material orders) – Employees (sustainable jobs
with career perspectives) – Shareholders (growing share
value and dividends)– Banks and Financial
Institutions (sustainable pay back of loans and interest)
– The Government … (more profit is more tax income)
Textbook approach…
In reality companies create value by…
• Increasing Free Cash flow (FCF)
• Reducing The Weighted Average Cost of Capital (WACC%)
• The Company Value = The Company Value = Long Term FCF/ WACC%Long Term FCF/ WACC%
Increased FCF or lower WACC% ?
Free Cash Flow is…• NOPAT (Operating profit or
Earnings before Interest and Tax so called EBIT after tax) +
• Depreciation –
• The increase in Net Working Capital (NWC) –
• Capital Expenditure (CAPEX)
NOPAT you will find in the income statement of your company
Depreciation you will find in the income statement and cash flow statement of your company
NWC=Accounts Receivables plus Inventories minus Accounts Payables; the change from your to year you can calculate (a decrease in NWC from one year to another is a Cash In Flow so this adds to FCF
CAPEX you will find in the cash flow statement it’s the amount spend on investments…
Simple Valuation…• So if Google Inc. in the Long Term So if Google Inc. in the Long Term
can generate a FCF of $ 3 bln. And can generate a FCF of $ 3 bln. And the WACC% of Google Inc. is 10% the WACC% of Google Inc. is 10% then the value of Google Inc. is then the value of Google Inc. is (follow the formula)(follow the formula)
• Company Value (Google Inc.)= $ 3 Company Value (Google Inc.)= $ 3 bln./0.10= $ 30 bln.bln./0.10= $ 30 bln.
• Of course this is an example and I Of course this is an example and I just made up the estimated FCF and just made up the estimated FCF and WACC% we will learn during the WACC% we will learn during the course how to estimate FCF and course how to estimate FCF and WACC% to enable us to calculate the WACC% to enable us to calculate the value of any company…under value of any company…under assumptionsassumptions
• This in fact is the core capability of This in fact is the core capability of financefinance
• Once we can calculate the value of a Once we can calculate the value of a company periodically we can company periodically we can calculate if the company is in fact calculate if the company is in fact creating value for its stakeholders or creating value for its stakeholders or destroying valuedestroying value
Google INC on NASDAQ 19th August
Assignment 1: Value your S&P company
• You have picked a S&P500 company to work on during the course– Try to figure out what the Long Term
Free Cash Flow is of your company by reading its annual reports (1999-2010) Limit yourself to the financial paragraph
– Assume your companies’ WACC% is anywhere in between 5% and 25%; 5% if your company is extremely financially solid and rather low risk, 25% if your company has a very volatile performance over the last 5 years and a bumpy road ahead and is an extremely high risk business (you may pick any WACC% in between)
– Calculate the Company Value of your company under these assumptions
(ad 1) Value your S&P company (h@)
• Now look up the Long Term debt from the latest available Balance Sheet (sure you will find it under liabilities)
• Subtract this figure from the Company Value you found in 1a)
• Now you have the companies’ equity value• Divide that number by the number of
common shares outstanding• Now you find the equity value per share
outstanding or the calculated share price of your company
• Compare this share price with the current share price of your company (take the latest closing price for comparison)
• Does the market value the share of your company higher (over priced) or lower (under priced) then what you calculated?
• Why do you think there is a difference?
Help…
• You can find your companyYou can find your company’’s figures at s figures at www.sec.gov
– Go to Filings and Forms (EDGAR)Go to Filings and Forms (EDGAR)– Search for company filingsSearch for company filings– Look up the ticker symbol of your company at Yahoo Look up the ticker symbol of your company at Yahoo
Finance (symbol lookup)Finance (symbol lookup)– Plug in the found ticker symbol at EDGARPlug in the found ticker symbol at EDGAR– Try GOOG and you will find all the filings of Google Try GOOG and you will find all the filings of Google
Inc.Inc.– Now search for the latest 8 and 10-K (annual reports) Now search for the latest 8 and 10-K (annual reports)
filings or 10-Q (quarterly reports) filings or 10-Q (quarterly reports)
More help…
• Go to Yahoo Finance• Plug in the ticker of your company• See the left hand buttons “More
on…”• For a quick scan of your company• Click Profile, Key Statistics• For Historical Share Prices click…• Professional research on your
company…• Company events, news on your
company…• Everything is here…Use it!
Do You… ?
All lights are green…
Financial Management in the 21st century
• Further Globalization TrendsFurther Globalization Trends
– The world is one big marketThe world is one big market– Products will be made in lowest cost countriesProducts will be made in lowest cost countries– Raw materials will be sourced in lowest cost countriesRaw materials will be sourced in lowest cost countries– Business will concentrate in Emerging marketsBusiness will concentrate in Emerging markets
• Increasing role of IT and the InternetIncreasing role of IT and the Internet
– The world is one big information networkThe world is one big information network– Technology will allow for faster and better decisionsTechnology will allow for faster and better decisions– Information will be real time on line availableInformation will be real time on line available– Video conferencing will replace time consuming travelVideo conferencing will replace time consuming travel– Electronic Commerce will increase fastElectronic Commerce will increase fast– Social Networks will replace messagingSocial Networks will replace messaging
• Increasing impact of Business EthicsIncreasing impact of Business Ethics
– Companies conduct towards stakeholders is Companies conduct towards stakeholders is getting more attentiongetting more attention
– The social responsibility of the company is in The social responsibility of the company is in high focushigh focus
Meet any time any where…
Agency Conflicts• Stockholders versus
Management:• Owners have other interests
then managers…• Managers can be encouraged
to do the things that shareholders want them to do through bonuses and option plans related to performance…
• Shareholders versus Creditors:• Creditors have other interest
then shareholders• Restrictive covenants in debt
agreements• In the long term fair play must
be obeyed
Beware of agency problems…
Financial Statements (ch.2)
• ““Kicking the tires!Kicking the tires!”” or or understanding how a understanding how a company is doing…company is doing…
• You need to know how to You need to know how to interpret the financials of a interpret the financials of a company when you are in company when you are in business…business…
• Only three financial Only three financial statements are of importance:statements are of importance:
• The Balance Sheet of a The Balance Sheet of a companycompany
• The Income Statement The Income Statement (or P&L Profit and Loss)(or P&L Profit and Loss)
• The Cash Flow The Cash Flow Statement Statement
Keeping you above water
The Balance Sheet• Left hand side of the balance sheet Left hand side of the balance sheet
shows the assets of the companyshows the assets of the company• Assets are fixed (buildings, machines, Assets are fixed (buildings, machines,
land) or current (cash, receivables land) or current (cash, receivables from customers, inventories)from customers, inventories)
• The right hand side tells you how the The right hand side tells you how the company finances its assets company finances its assets
• Financing can be done with equity Financing can be done with equity (shareholders pay in capital and buy (shareholders pay in capital and buy shares) or debt (long term debt and shares) or debt (long term debt and loans from banks or short term debt loans from banks or short term debt like short term facilities with banks or like short term facilities with banks or through delaying the payment of bills through delaying the payment of bills from suppliers i.e. so called accounts from suppliers i.e. so called accounts payable) payable)
Let us have a look at:
Comparative Balance SheetMicrosoft (in millions)
The Income statement
• Covers a specific Covers a specific period (mainly year, half period (mainly year, half year or quarter)year or quarter)
• Reflects sales Reflects sales performance, cost performance, cost control and profitabilitycontrol and profitability
• Operating Income is Operating Income is EBITDA (Earnings EBITDA (Earnings Before Interest and Tax)Before Interest and Tax)
• NOPAT is EBITDA NOPAT is EBITDA minus (provisions for) minus (provisions for) Tax (calculate Tax (calculate MicrosoftMicrosoft’’s NOPAT in s NOPAT in the next slide) the next slide)
$1,000
$1,500
$2,000
$2,500
Q4-FY03
Q1-FY04
Q2-FY04
Q3-FY04
Q4-FY04
+20% +20% Y/Y Y/Y
GrowtGrowthh
Server & Tools RevenueServer & Tools Revenue
Income Statement Income Statement Q4- 2004Q4- 2004
Cash Flow Statement• Shows the performance of the Shows the performance of the
company over a period of time company over a period of time in generating cashin generating cash
• Shows how the company uses Shows how the company uses that cash generated to invest in that cash generated to invest in assets (both fixed and current), assets (both fixed and current), or to reduce the debt level by or to reduce the debt level by paying back loans paying back loans
• Shows how the company Shows how the company acquires cash from outside acquires cash from outside (bank loans) when the cash (bank loans) when the cash generated is not enough to generated is not enough to fund all ambitious plans of the fund all ambitious plans of the company…company…
The real money is here…
Cash Flow (1)Where the cash comes from….Where the cash comes from….
Operations
Net income $ 7,346 $ 7,829 $ 9,993
Cumulative effect of accounting change, net of tax 375 – –
Depreciation, amortization, and other noncash items 1,536 1,084 1,439
Net recognized losses on investments 2,221 2,424 380
Stock option income tax benefits 2,066 1,596 1,376
Deferred income taxes (420) (416) 336
Recognition of unearned revenue (6,369) (8,929) -11,292
Accounts receivable (418) (1,623) 187
Other current assets (482) (264) 412
Other long-term assets (330) (9) (28)
Other current liabilities 774 1,449 35
Other long-term liabilities 153 216 440
Net cash from operations 13,422 14,509 15,797
Cash Flow (2)
Where the cash is used….Where the cash is used….
Financing
Common stock issued 1,620 1,497 2,120
Common stock repurchased (6,074) (6,069) (6,486)
Repurchases of put warrants (1,367) – –
Common stock dividends – – (857)
Other, net 235 – –
Net cash used for financing (5,586) (4,572) (5,223)
Investing
Additions to property and equipment (1,103) (770) (891)
Acquisitions of companies, net of cash acquired – – (1,063)
Purchases of investments -66,346 (89,386) -89,621
Maturities of investments 5,867 8,654 9,205
Sales of investments 52,848 70,657 75,157
Interpreting your company’s performance
• To understand how To understand how your company is your company is doing you need to doing you need to know much more know much more then just the then just the financialsfinancials
• The strategy, the The strategy, the competition, the competition, the market market environment, the environment, the innovation, the innovation, the risksrisks
• For all the different For all the different segments that your segments that your company is company is operating in…operating in…
Nokia is much more then just Mobile Phones…
Key Business Risks
Linux and non-commercial softwareLinux and non-commercial softwareDifficult foreign exchange comparables for 2005Difficult foreign exchange comparables for 2005Difficult 2005 comparables on PC and Server unit Difficult 2005 comparables on PC and Server unit demand demand Reduction in Upgrade Advantage revenueReduction in Upgrade Advantage revenueExecution of business planExecution of business planOngoing legal riskOngoing legal risk
For further information regarding risks and uncertainties associated with Microsoft’s business, For further information regarding risks and uncertainties associated with Microsoft’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Issues and Uncertainties” sections of Microsoft’s SEC filings, including, but not Operations” and “Issues and Uncertainties” sections of Microsoft’s SEC filings, including, but not limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q.limited to, its annual report on Form 10-K and quarterly reports on Form 10-Q.
Segment Performance
Information WorkerInformation Worker $2.9B$2.9B▲▲ 2323%%
Server & Tools Server & Tools $2.3B$2.3B▲▲ 20%20%
Home & EntertainmentHome & Entertainment$499M$499M ▲▲ 3%3%
MSNMSN$588M $588M ▲▲ 5%5%
Microsoft Microsoft Business Business SolutionsSolutions
$196M$196M ▲▲ 9%9%
Mobile and Mobile and Embedded Embedded
DevicesDevices$70M$70M▲▲ 59%59%
ClientClient$2.8B$2.8B ▲▲ 9%9%
Assignment 2 (a): Annual report
• Your company is a S&P500 company and you will be able to Your company is a S&P500 company and you will be able to find its latest annual reports on its website (investor relations) find its latest annual reports on its website (investor relations) or at www.sec.govor at www.sec.gov
• Download the annual reports 1999-2010 and keep them in your Download the annual reports 1999-2010 and keep them in your files for quick reference also download the last quarters 1-2 of files for quick reference also download the last quarters 1-2 of FY 2011FY 2011
• Copy the Balance sheet, Income statement and Cash flow Copy the Balance sheet, Income statement and Cash flow statement of each year to an EXCEL spreadsheet such that you statement of each year to an EXCEL spreadsheet such that you can generate a 10 year overview (1999-now) for each statementcan generate a 10 year overview (1999-now) for each statement
• Perform a segment analysis and Business Risk assessment; Perform a segment analysis and Business Risk assessment; what segments are the money makers which ones are the value what segments are the money makers which ones are the value destructorsdestructors
• Now look at your figures and draw conclusions:Now look at your figures and draw conclusions:• How have the assets developed in the balance sheetHow have the assets developed in the balance sheet• How has the company financed its assets over the How has the company financed its assets over the
years (mainly debt or equity?)years (mainly debt or equity?)• How has the sales growth been over the yearsHow has the sales growth been over the years• And how has the profitability performedAnd how has the profitability performed• Is the company generating enough cash to fund its Is the company generating enough cash to fund its
growthgrowth• For what purposes is the company using the cash For what purposes is the company using the cash
generated (pay back loans or invest in future generated (pay back loans or invest in future expansion?) expansion?)
Assignment 2(b): Annual report• For companies that follow the For companies that follow the
calendar year for reporting we calendar year for reporting we have in any case 2 quarters have in any case 2 quarters (first half of 2011) of more (first half of 2011) of more recent financial data available; recent financial data available; download these data (Q-10 form download these data (Q-10 form in sec.gov)in sec.gov)
• For these companies we also For these companies we also have Q3 almost or just now have Q3 almost or just now available; check investor available; check investor relations and the release of Q3 relations and the release of Q3 financials for your company and financials for your company and download them when availabledownload them when available
• Now review your conclusions of Now review your conclusions of (2a) based on the latest (2a) based on the latest financials and management financials and management reportsreports
UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2004
Commission File Number 1-11605
Other Performance measures• ROIC (Return on invested ROIC (Return on invested
Capital) relating NOPAT Capital) relating NOPAT (operating result after tax) with (operating result after tax) with Capital invested (Fixed assets Capital invested (Fixed assets plus Net Working Capital)plus Net Working Capital)
• EVA (Economic Value Added) EVA (Economic Value Added) calculating NOPAT after calculating NOPAT after deduction of the Cost of Capital deduction of the Cost of Capital over the Capital investedover the Capital invested
• MVA (Market Value Added) MVA (Market Value Added) calculating the Market Value calculating the Market Value (common shares outstanding (common shares outstanding times share price per share) of times share price per share) of the Stock of the company the Stock of the company minus all paid in capital (Equity minus all paid in capital (Equity Capital Supplied by Capital Supplied by Shareholders)Shareholders)
Some websites for your information
CFO.com calculated the ranking in EVA
'02 '99 Company MVA MV Capital EVA'02 '99 Company MVA MV Capital EVA
1 2 General Electric 222,767 322,290 99,423 5,9831 2 General Electric 222,767 322,290 99,423 5,983
2 4 Microsoft 212,340 237,547 25,207 2,2012 4 Microsoft 212,340 237,547 25,207 2,201
3 6 Wal-Mart Stores 207,346 280,970 73,624 2,9283 6 Wal-Mart Stores 207,346 280,970 73,624 2,928
4 22 Johnson & Johnson 124,237 171,829 47,592 2,8394 22 Johnson & Johnson 124,237 171,829 47,592 2,839
5 12 Merck 107,076 144,624 37,548 3,8725 12 Merck 107,076 144,624 37,548 3,872
6 32 Procter & Gamble 92,231 133,248 41,017 2,3156 32 Procter & Gamble 92,231 133,248 41,017 2,315
7 8 IBM 90,422 193,955 103,533 (8,032)7 8 IBM 90,422 193,955 103,533 (8,032)
8 13 Exxon Mobil 85,108 273,634 188,526 (2,175)8 13 Exxon Mobil 85,108 273,634 188,526 (2,175)
9 21 Coca-Cola 82,413 107,007 24,594 2,4969 21 Coca-Cola 82,413 107,007 24,594 2,496
10 3 Intel 77,395 114,574 37,179 (3,736)10 3 Intel 77,395 114,574 37,179 (3,736)
SampleSample
Assignment (2c): Calculate• For your company determine:For your company determine:
• ROIC based on the ROIC based on the latest available financialslatest available financials• MVA MVA • EVAEVA• Now compare the ROIC, MVA and EVA of the Now compare the ROIC, MVA and EVA of the
main competitor of your companymain competitor of your company• Which company is performing better ?Which company is performing better ?
Recommended Reading
Nominal Corporate tax rates (US)
• Corporate Tax Rates*
• Tax Rate Taxable IncomeTax Rate Taxable Income
• 15% $ 1 - 50,000 15% $ 1 - 50,000 • 25% 50,001 - 75,000 25% 50,001 - 75,000 • 34% 75,001 - 100,000 34% 75,001 - 100,000 • 39% 100,001 - 335,000 39% 100,001 - 335,000 • 34% 335,001 - 10,000,000 34% 335,001 - 10,000,000 • 35% 10,000,001 - 15,000,000 35% 10,000,001 - 15,000,000 • 38% 15,000,001 - 18,333,333 38% 15,000,001 - 18,333,333 • 35% over 18,333,333 35% over 18,333,333
• * Personal service corporations pay a flat 35%.* Personal service corporations pay a flat 35%. Empty your pockets
Tax Havens• Companies have the task to create
value for their shareholders• Paying taxes is in conflict with that
objective• Many companies raise “off shore”
subsidiary's to avoid taxes• Famous tax havens are:
• The Bahama’s• Grand Cayman islands• Monaco• The Netherlands Antilles• Ireland (only 12% corporate tax)
Pay tax or take a holiday?
The BahamaThe Bahama’’ss
Assignment (2d): Tax• Your company has made Your company has made
provisions in its Income Statement provisions in its Income Statement over the past 5 years to pay taxes over the past 5 years to pay taxes over its taxable incomeover its taxable income
• Calculate tax (t) as a % of Calculate tax (t) as a % of Operating Profit (EBIT) over the Operating Profit (EBIT) over the years 2003-08 and estimate 2009years 2003-08 and estimate 2009
• Has your company paid the full Has your company paid the full amount of taxes or does it use amount of taxes or does it use ““off off shoresshores””??
• What was the average tax rate (%) What was the average tax rate (%) over the period 2003-2008 and over the period 2003-2008 and what was the variance ? what was the variance ?
Valuing taxes…
Analysis of Financial Statements (ch.3)
• Business People perform a Business People perform a 2 step approach to 2 step approach to understand how a company understand how a company is doing:is doing:
• SkimSkim: try to get a quick overall and basic understanding of what the company is doing
• ScanScan: try to get a quick understanding of how the company is doing financially
Through looking at the Through looking at the company in its company in its environment environment (competition/industry)(competition/industry)
Through Financial Through Financial Ratio AnalysisRatio Analysis
Financial RatiosFinancial Ratios:• Liquidity RatiosLiquidity Ratios: how many assets can be
quickly converted to cash to pay the company’s bills?
• Asset Management RatiosAsset Management Ratios: How effectively does the company manages its assets?
• Debt Management RatiosDebt Management Ratios: How does the financial leverage effects the risk and returns of the company?
• Profitability RatiosProfitability Ratios: what is the profit performance of the company?
• Market value RatiosMarket value Ratios: How do earnings and shareholders value are related for the company?
• Du Pont ChartsDu Pont Charts: How is the company doing on its main ratios on asset and operational performance ?
Run the math…
Liquidity ratios• Current ratioCurrent ratio: current assets/current liabilities• Quick ratioQuick ratio: (current assets-inventories)/current
liabilities
• Inventories are in general not so easy to change Inventories are in general not so easy to change to cash (it will take some time) so excluding to cash (it will take some time) so excluding inventories from the ratio will give a better inventories from the ratio will give a better understanding of the real liquidity of the understanding of the real liquidity of the company… (note: liquidity is the ability for the company… (note: liquidity is the ability for the company to pay all its bills in the near future)company to pay all its bills in the near future)
• High current/quick ratios (at least at value 1) High current/quick ratios (at least at value 1) indicate that the company can fulfil its short term indicate that the company can fulfil its short term obligations (current liabilities) i.e. pay its bills for obligations (current liabilities) i.e. pay its bills for the period to comethe period to come
Asset Management ratios
• Inventory turnover ratioInventory turnover ratio: Sales/Inventories
• DSO DSO (days of Sales Outstanding in Accounts Receivables) : Accounts Receivables/Sales per day
• Note Sales per day= Sales/365 days
• Fixed assets turnover ratioFixed assets turnover ratio: Sales/Fixed assets
• Total assets turnover ratioTotal assets turnover ratio: Sales/Total assets
Getting the picture
Debt Management ratios
• Debt ratioDebt ratio: Total debt/Total Assets• what part of total assets is financed
with debt
• Times Interest Earned ratio (TIE)Times Interest Earned ratio (TIE) : EBIT/interest charges
• Note: EBIT= Earnings Before Interest and Tax or Operational Profit and interest charges is the interest expenses in the income statement
• EBITDA coverage rationEBITDA coverage ration: (EBITDA+lease payments)/(Interest+principal payments+lease payments)
• Note: EBITDA is EBIT plus Depreciation and Amortization
Uncovering real performance
Profitability ratios
• Profit Margin on SalesProfit Margin on Sales: Net income/Sales
• Basic Earning PowerBasic Earning Power: EBIT/Total Assets
• Return on Total assetsReturn on Total assets: Net income/Total assets
• Return on Common Return on Common EquityEquity: Net income/common equity Playing with the shareholders
Market Value ratios
• Price-Earnings ratio (PE)Price-Earnings ratio (PE) : Price per share/earnings per share
• Price-Cash Flow ratioPrice-Cash Flow ratio: Price per share/cash flow per share
• Book value per shareBook value per share: Common equity/number of shares outstanding
• Market to Book ratioMarket to Book ratio: Market price per share/Book value per share
What shoe will fit ?
Assignment (3a):Trend Analysis
• Calculate all the ratios for your company (in Calculate all the ratios for your company (in Excel)Excel)
• Calculate the ratios over 10 yearsCalculate the ratios over 10 years• Graph the results and interpret the numbersGraph the results and interpret the numbers
• Do the same for the main competitors of the Do the same for the main competitors of the companycompany
• Now: Draw conclusions !Now: Draw conclusions !
• How is your company doing compared to its How is your company doing compared to its competitors?competitors?
• What is your forecast for the ratios for FY 2011 What is your forecast for the ratios for FY 2011 based on the 10-Q (quarterly reports) of your based on the 10-Q (quarterly reports) of your company that are available to date ( 3 quarters company that are available to date ( 3 quarters are already available in this calendar year)are already available in this calendar year)
• Note: if you want to use www.sec.gov to find the Note: if you want to use www.sec.gov to find the 10-Q reports use the ticker symbol to enter the 10-Q reports use the ticker symbol to enter the EDGAR databaseEDGAR database
Du Pont scheme
• Du Pont Du Pont introduced a introduced a comprehensive comprehensive scheme of ratios scheme of ratios that enables that enables companies to companies to make a quick make a quick scan and scan and compare their compare their performance with performance with other companies other companies in the industryin the industry
Assignment (3b): Du Pont scheme
• Follow the textbook scheme Follow the textbook scheme of Du Pont on page 93 of Du Pont on page 93 (depend on your edition)(depend on your edition)
• Develop a Du Pont chart for Develop a Du Pont chart for your companyyour company
• Indicate the good Indicate the good performances with bright performances with bright greengreen
• The areas of concern with The areas of concern with orange andorange and
• The areas of Alarm with The areas of Alarm with bright red!bright red!
O
O
Assignment (3d): Looking beyond the numbers
• Are there any risks you perceive for Are there any risks you perceive for your companies industry or/and your companies industry or/and products and services or its markets products and services or its markets that can/will threaten its survival?that can/will threaten its survival?
• Ask yourself: how dependant is my Ask yourself: how dependant is my company on a single product, a company on a single product, a single customer, a single supplier ?single customer, a single supplier ?
• In what countries does my company In what countries does my company operate; are these countries high risk operate; are these countries high risk ? (Iraq ? (Iraq –– Thailand- Iran- Afganistan- Thailand- Iran- Afganistan- Syrie, Libya, Yemen, Egypt, Greece, Syrie, Libya, Yemen, Egypt, Greece, Portugal, Ireland…)Portugal, Ireland…)
• How vulnerable is the current How vulnerable is the current technology base of my company? technology base of my company? Can my company innovate at the Can my company innovate at the same or higher pace as the industry?same or higher pace as the industry?
Dark clouds over the future ?
That’s it for this week…
• Please forward your Please forward your assignments to me before assignments to me before the next on line class the next on line class (see (see the syllabus)the syllabus)– [email protected][email protected]– [email protected] (for [email protected] (for
large files)large files)• Next week we will cover Next week we will cover ““The The
time value of moneytime value of money”” (chapter (chapter 8) Please start reading…8) Please start reading…
• Feel free to give me any feed Feel free to give me any feed backs…(thanks)backs…(thanks)
• Enjoy!Enjoy!