Reading 13: Integration of Financial Statement Analysis

Page No. 181Date / /Reading 13: Integration ofFinancial Statement AnalysisM14.1 Framework for analysisIEstablish the objectiveInput- Analysts perspective (evaluate a debt or equityinvest" , or establish a credit rating)- Needs communicated by client or supervisor- Institutional guidelinesOutput- Purpose statement and specific question to be ans.- Nature and content of final report- Timetable and budget2Data CollectionInput- Financial statements- Communication with management , suppliers,Customers , , & competitorsOutput- Organized financial information 18)Page No. 182Date / /3Processing the data from Step2Output- Adjusted financial- Common-size- Ratios- Forecasts4Analyzing the data fromstep243OutputadtdzildoF-Results ofanalysisEngalsteplood5Develop andcommunicateconclusions"lessniInput- Resultsfromanalysis using reportsguidelinesOutput- Recommendationstastowboxstuden6Follow-up620addotamiTInput-Periodically update informationOutputtugal-update analysis 4 leco.loisson'thummaltugtNObasingfro Page No. 183Date / /AnalysisEarningssourcesand performanceAsset basePossitionCapitalstructerCapitalallocationdecisionsEarningsqualityandcash flow analysisMarket valuedecomposition -strpingassociate( core PLE)off - balance sheetfinancingAnti ciputingchangingaccountingStandardEarningSource&Per formanceM14.2 VMPDuPoint(ROE)analysisAssessthe firmsperformanceROEusingtheextendeddrivers by decomposingdupoint equ"TaxIntoperatingAssetFinBurdunBurdenmarginturnoverLeveraysROENLEBTEBITXXXRevAvg AssetEBTEBITRevAvg AssetsAug EquityEffectivetax RateNIRevTgafdptamoinlton Page No. 184Date / /Determine whether the firms earnings are generatedinvestment incomeinternally (from operations) from et consistions or fromfromassociates (equity method)Adjustment- Remove equity method income & the investmentasset from the extended Dupont cequationEquity method earnings after taxlineNI - equity accountedTypically = leave unadjusted unless theearningsSIMfinancing of the investment is knowROE=NLXEBIEBITRevEBTEBITRevAvg assetsAug Assetsa AdjAvy EquityAssets - Carrying value ofequity accounted investmentExampleThunderbird Corp201620152014.Rev75,2866892163781EBIT10,51793118313EBT946384747258Earning from associate893679627Net Income796768946023 Page No. 185Date / /BIs2016201520192013Total Assets80 26171 2647104361731Inv in associate6255590149513638Stockholder equity37964369943434827382Sol"TaxXIntXEBITXTotal XFinancial= ROEBurdenBurdenMarginAsset t/oleverage201482.98X87.31X13.03X0.955x2.165= 19.51201581.35 X91.01 x 13.51 X 0.963x2.007 1119.33201684.19 X89.98X13.97 x0.994x2.021= 21.26Adjustment to Tax Burden201620152014NI796768946023Earning from associate(896)(674)(627)Adj NI707162205396EBT946384th7258= Adj Tax Burden74.7273.4074-3584-19829881.3582.98Adjust to Asset Tlo2016201520142013Total Assets80261712647190361731Inv in associate(6255)(5901)(4951)(3638)Rdj Assets74006653636695258093Aug assets696856615862523Rev752866892163781Adj Asset Tle - Rev1.081-042lozAvg Asset0.9940.9630.955AJU LIFO Add to RE after tax shieldPage No. 176LiquidationDate//New Dupont (Adj)asTaxXInt(ofAssetEBITFinancidxx*= RotBurdenBurdenT/OMarginlevelage201474-3587.31x1.020 X13.03 X2.165=18.68201573.4091.01x1042x13.51x2007=18.8720167472x89.98X1.08 x13.97X2027=20.051AssetBase&CapitalStructureM14.3Examine theComposition- Common - SizeoftheB/Sassetsovertimeanalysisishelpful- Usefulinidentifyingacquisionsand goodwill- RecallthatgoodwillisnobutMonger amortizedsubjecttoimpairment.Ex :Thunderbird201620152019CA2503931.2%2971434.77.2923690.7PP&E1544519.2%1416119.97.1329318.5lden tifiable intangible50526.3%26413.7%19932.8GW23.39229.1%1995928.07.1889326.3other non Current Asset11324(4.1).978913.77.848511.Total asset80261100%71264100 %7190310- GW- CA- II- NCA ofPage No. (87nd2Oct2022 SandayDate//M143:AssotBaseandCapitalstructerExaminetheCompositionoftheB/Sassetsovertime- Common -Sizeanalysisishelpful- useful inidentifyingacquisions and goodwillRA- Recall thatgoodwillisno longeramortizedbut subjectedtoimpairment.Capital StructerTheCapitalStructermust support managementstrategicobjectivesandallowthefirmtohonoritsfutureobligationsExaminelong -termdebt - to - total CapitalSome liabilitiesarelessonerousthanothersandmay notne cessarilyreqanoutflowbenefitobligationofCash- Employee- Deferred Taxes- Restructuring provision- unearned RevEx201620152014LT'42908.6%486610.%57941247.other long term debt767915.4%666913.7%666314.2Stockholder equity37,96476.0%369943434873.476.27.Total long - term capital999334852946905 Page No.191Date//Working Capital20162015201420BCash & Equivalents4616369532613431Markatable sec2031433889157266AR1079510204100048266Inv6490562057134918other CA11078571343818Current Asset25039247192923624699AP9925880077826352Note payables17179108461318910305other CL3224308941273732CL30328227352509820,384Rev7528668,92163781COGS3152628 49926542Purchases323962840927,337Ave daily exp173.3159.5148.4Foreach Segment firm reports limited financialstatamentinfoFor primary segments must report sev (internal 4 externaloperating profit +aAiQ+Capexf dep4 amortIFRSonly Cash f AR + Market SecAvg Daily expPage No. 189Date//201620152014Current Ratio0.83log1.16Quick Ratio0.580.80.88Defensive interval100.0114.3199.4DSO50.953.552.3DOH70.172673.1Day payables(105.5)(106.5)(94.4)CCC15.519.631.0M14.4: Capital AllocationConsolidationCanhidetheindividualcharacteristicsofdissimilarsubsidiariesFirmsmustdisagregatefinancialinformationintoSegmentaltoassit usersidentifying:Segment disclousrearevaluablein- Rev andprofit bysegment- The relationshipbet"Capitalexpenditure&returns- Segments thatsholdbede-emphasizedMoreCapitalto low marginbiz-vesignalMoreCapitaltohighmarginbiz:-+ve signalofsegmentdatanot availSegmental AnalysisEBIT + Apros t dep = CF>)Reportablebizorgeoraphicsegments50% at of it Revfromsale externaltothefirm4107. ofRevorleastafirmsearningassets: Page No 190Date//Division AnalysisCompute%of Rev from each division% of assets used by each division% of operating profit (EBIT) Contributed by each division% of Capex attributed to each divisionDivisional marginsegment EBITResource allocationSegment Sale% Capex% assetsIf the ratio of proportional Capex to proportionalassets is greater than 1 :- Firm is growing the segmentresouices to the segmentby allocating moreIf less ratio than of proportional :Cupex to proportional assets isL-Firm- If less trend continues, the segment will becomeis allocating less resources to the segmentExamplessignificant over time.Rev by SeymentRev20162015Aircraft2019Automotive1102714.67.885612-8% -34631786346%12.3Y3275447.57.Marine302734752234529.7%2056629-87Speciality72831949130.619.7%67459.8%75 28661519.6Y.6892163781 Page No. 197Date / /EBIT by SegmentEBIT201620152014Aircraft2940 2321955 21%$9169620.47.Automotive505948.17.4674 50.2%411544.5%Marine248223.67.216023.2%202024.3%Speciality5365.1%5225.6%4825-8Assets by SeymentAsset201620152014Aircraft1477727.5%6861 15.4%5288 12.87Automotive20 05937.471955343%19166 46.6%Marine1231022.9%1192726.8%1077926.27.Speciality650921.1%621914.0%592814.47.536a559456041161Asset $ total assets due to un allocated & non segment assetsCapex by SegmentCopex201620152014Aircraft38311.3%33611.8%2401047.Automotive193242.3%119942.1%10184477Margin84124.87.66723.4%61826.9%Speciality73021.6%64922.7%42118.3 %338628482297* AnalysisbySeg mentAnalysisEBIT MarginsCapex 2 / Asset 1.20162015201620152014Riccraft221%22.1%21.6%0.410-770.81Automobile11.6 %14.3%13.6%1.130.960.95Marine11.1 %10.5%10.4%1.080.871.03speciality7.4%7.7%7.8%1.79?1.621.27 Page No. 192Date / /Dep & Est CF by SegmentDep&AmortEstCF201620152014201620152014Aircraft172165142261221201838Automotive644590603570352644718Marine377328366285924882386Specialty329318251865840733Total15221401136212039LO7124675Est CF = EBIT + Dep (Amort-Whensegmentalddta is not CepaAmortAnalysisCF ( AvggeneralyassetsEBIT Margin2016201520162015Aircraft24.1%34.9%22.17.22.1%Automotive28.8%27.2%14.67.14-37Marine23.6%21.9%11.17.10.57.Speciality13.6713-87.7.4%Tath7.7%MM14.5 : EarningsQuality&CF AnalysisEarningsquality(ROE >1PersistantandsubstituteSustanable"high qualityearningsareConsidEarningsCanbedisaggregatedintoCFB/S4ApprochaccualsusingCFstatementapproch Page No. [43Date / /Measureearningstoavgnetquality using the ratio of acudsInterpretation :-operatingassets.LowerRatio/higherqualityMeasureEarningQualityEarnings have aCFCompunentandanaccrualComponent:IlsAggregate Accruals = Accrual basedCash1earningsearningsAggregateaccrualsCunbemeasuredusingeitherBls approchCF(s apprachInverserelationshininaccluals4earning qualityBLS Based accrualsNet operating = (Total asset - Cash*) - (Total liabilities - Total debt)Assets (NOR)Also include CashAggregate accruals =NoAt -NoAt-equivalents & marketableENDBegsecuritiesAcciuals =Aggreagate AccrualsRatio(NoAt t NOA)+1- does not matterthe Better12 Page No. 194Date / /NOA201620152014Total assets802617126471903Cash & equi Sec(6697)(8033)(12176)Operating assets736146323159727Total liabilities422973427037555Debt CST & (TD)(21469)(15712)(18983)Operating liabilities208281855818572BLS Aggregate Accruals201620152014Operating assets736146323159727OperatingLiabilities(20 828)((18558)(18578)NOA52786446734055Aggreate actuals8113351865412013 NoA = 34614CF Based AccrualsAggregate accruals = NI - (CFO t + (Flt)Issue - diff treatment of Int and divunderIFRS4a AAPAccruals=Aggreagate accrualsRatio(NOACt NOA+. 1)12 Page No. 195Date//201620152014Net Income CFO7967689460239407.81737144Less Less: : CFI(11027)(7364)(3261)Aggregate accruals958760852140Accruals Ratiosuseful forComparingacross companies201620152014BLSBls Accruals8113= 16.6%3518 = 8.27.6541 - 17.37-Aug NOA487304291437885CIECE Acruals9587 =19-7y.6085 - 14-21.2140Sbe.Aug NOA48730the beeter4241437885So it isgetting badCashFlowAnalysisDeterminewhetherearningsareconfirmedwith CFAdjustoperatingCashflow (CFO)byadding backCash interestandCash How taxesif includedCGO- CompareadjustedCFotoEBITCalculateCash basisRatios :-ICash flow=CFO2 Operating- Adj CFO ((GO)ROEAvg Assetearning qualityEBIT CGO = CFO + tax + IntPage No. 196Paid with cashDate / /EBIT + Non -Cash charges - T in WC3 CF toCGO4CF toCGO==ReinvestmentCaperInt CoverageCash Int5CF to=CGOTotal debttotal debtExample201520192016CFO817371449907Plus : Cash mt Paid552419306215019681778Plus : Int paid CashCGO for GAAP12109105609228for IFRS only tax is adj because int can go in (FFCF Analysis201620152014Operating Earning QualityC6012104 = 1.1510560 - 1.1392281051793118313EBITCash ROE(Go12109 = (6.07.10560 - 14.87.9228 = 13-87715846681775763Avg AssetCF to Reinvest12019 = 3.610560 = 3-79228 140CGO338628482292Capex Page No. 197Date//201620152014CE to Total debtCGO12109 = 56.4%10560 = 67-249228 = 48.67.Total debt214691SF1218983CF Int CoverageCGO12109 = 21.910 560 = 25.29228 = 30.2Int paid552419306M146: Market value DecompositionDetermine the implied value of the prentexcludingthevalueofassociates.Mcap of parent- Parent Share of associate Map= Implied value of parentNote , : It may be necessary to convert the associatesMcapto the parents reporting currency at thecurrent exch rate7.Next determine the implied PLE of the parentby eliminating the associate income fromthe parent=Implied value of parent excluding associateNI - Parents Share of associate earningNote: It may be necessary to convert the associatesearningsto the parent reporting owning curreny41 ingAug Rate exch Page No. 198Date / /Details ofthunder birdAssociate o30%IntinEagleCorp aEUlistedfirmMcap : Thunderburd: $137 bnMcap : Eagle: € 60 bnYear end $ /E; 1.4Equity a/cIncome:$896msofThunder birdundjustedPIEMcap=137= 17.1Thunderbirds share of pro-suEarning8shares of eagles Map= 60bn X 307. X1.4= 25.2bnThunderbird Core PLES&P Multiple: 20.1Adj Mcap=137 - 25.2Adj earnings8 - 0.896= 15.7 Page No. 199Date / /ThunderbirdSupportROE tve & Growing-Growth in earning : organic acq 4 associateEurning Supported by CFCE supports Capex- law leverage,Cash return on assets growingcore PLE potential undervided?a Concerns- Potential earning manu pulation:accruals Ratio- Over allocation of resources to underperformingdivisions- Future impairment of goodwill- liquidity Issue