Financial Analysis Fundamentals

corporatefinanceinstitute.com CFI Instructors

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Tim Vipond Justin Sanders Scott Powell

CEO & Instructor Instructor Director & Instructor Vancouver London Vancouver

Lisa Dorian Ryan Spendelow

Director & Instructor Instructor New York Hong Kong corporatefinanceinstitute.com Vertical and Horizontal Income Statement Analysis

corporatefinanceinstitute.com Session objectives

Learn the key Perform vertical and components of the horizontal analysis income statement

Benchmark against other companies in the industry

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Income Balance Statement of statement Sheet Cash Flows

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Financial analysis

Interpret financial Trend and ratio Financial statements results analysis

Pyramid ratio Basic ratio analysis Using ratio analysis analysis

corporatefinanceinstitute.com Components of ratio analysis

Ratio analysis covers two basic groups. When analysing the income statement, we use performance ratios – specifically those related to profitability.

Ratio analysis

Financial leverage Performance ratios ratios

Profitability ratios Efficiency ratios

corporatefinanceinstitute.com A breakdown of the income statement

Tensel

Income statement

$ millions Year 1 Year 2 Year 3 Year 4 Sales revenues are the most important components of the income statement and are used in several of the ratios seen Sales revenues 81,422 84,698 88,236 90,637 Sales revenues throughout the module.

COGS/COS (38,121) (37,756) (36,327) (42,938) Direct costs Cost of good sold relates to direct labor and raw materials Gross profit 43,301 46,942 51,909 47,699 Gross profit needed to create the product or service that is being sold, as well as depreciation on manufacturing equipment used in Research and Research & production. (5,884) (6,421) (7,893) (6,812) development development Gross profit tells us what the gross margin is before we take Marketing (23,507) (26,569) (29,732) (30,009) Marketing into account any other costs needed to keep the company Sales (1,764) (1,931) (2,530) (2,563) Sales running.

General and General & (2,960) (2,803) (2,762) (2,947) Indirect expenses are those required to keep the company administration administration going. The most common are: research & development, marketing, sales, and general & administration. EBIT (operating profit) 9,186 9,218 8,992 5,368 Income from ops

Interest (1,073) (1,102) (1,147) (1,182) Interest inc/exp Operating income is used to pay the government, creditors, and ultimately the shareholders. Taxes (2,761) (2,429) (2,193) (1,764) Taxes

Net income 5,352 5,687 5,652 2,422 Net income Net income is the final part of the income statement and represents what is remaining to be paid to the shareholders. corporatefinanceinstitute.com Vertical analysis

Net income Sales

Operating Tax income Sales Sales

Operating costs Gross profit Sales Sales

Personnel Selling Admin Labor Material Work R&D costs costs costs costs costs overhead Sales Sales Sales Sales Sales Sales Sales

corporatefinanceinstitute.com Gross profit margin

There are three key profitability ratios:

Gross profit Gross profit = Sales margin

corporatefinanceinstitute.com Operating profit margin

Operating profit EBIT = Sales margin

corporatefinanceinstitute.com Net profit margin

Net profit Net income = Sales margin

corporatefinanceinstitute.com Efficiency ratio

The tax ratio is the efficiency ratio that demonstrates how well managing tax.

Tax Tax expense = ratio Pre-tax income

corporatefinanceinstitute.com Solvency ratio

The interest coverage ratio tells us whether the company will be able to cover what it owes in interest to its creditors.

Interest coverage EBIT(DA) = Interest expenses ratio

corporatefinanceinstitute.com Horizontal analysis

Tensel Income statement CAD millions Year 1 Year 2 Year 3 Year4 Year 5 Sales revenues 81,422 84,698 88,236 90,637 Sales revenues COGS/COS (38,121) (37,756) (36,327) (42,938) Direct costs Gross profit 43,301 46,942 51,909 47,699 Gross profit

Research and development (5,884) (6,421) (7,893) (6,812) Research & development

Marketing (23,507) 26,569) (29,732) (30,009) Marketing Sales (1,764) (1,931) (2,530) (2,563) Sales

General and administration (2,960) (2,803) (2,762) (2,947) General & administration

EBIT (operating profit) 9,186 9,218 8,992 5,368 Income from ops

Interest (1,073) (1,102) (1,147) (1,182) Interest inc/exp Taxes (2,761) (2,429) (2,193) (1,764) Taxes Net income 5,352 5,687 5,652 2,422 Net income

Use calculations from the past five years to perform trend analysis and predict future performance corporatefinanceinstitute.com Horizontal analysis

corporatefinanceinstitute.com Benefits of horizontal analysis

Are margins rising or failing? Is performance improving or declining? What is causing margins to fall? Are margins impacted by indirect costs?

corporatefinanceinstitute.com Benchmarking

There are different ways to benchmark: • Compare your company to two or more competing companies • Compare your company’s ratios to the industry average

Your competitor/ Your company Industry average

corporatefinanceinstitute.com Sources of benchmarking information

Where can you find a competitor’s statements? • Three key online sites including EDGAR, SEDAR and RNS • Competitors’ investor relations websites

Historical ratios for companies can be found on MSN Money and Google Finance, but allow very little control over the information and provide little insights on the calculation of ratios.

Professional sources such as Bloomberg, Capital IQ, and equity research reports provide detailed information but are more costly.

corporatefinanceinstitute.com Conclusion

Understand past Income statement analysis is performance, to predict just the first step to the overall future success analysis

Use vertical and horizontal Make better investment analysis, as well as and credit decisions from benchmarking, to outside the company maximize your company’s performance

corporatefinanceinstitute.com Balance Sheet and Leverage Ratios

corporatefinanceinstitute.com Session objectives

Determine the financial Use the balance sheet to strength of a company determine how efficiently a by analyzing the company is being run balance sheet

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Income Balance Statement of statement Sheet Cash Flows

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Financial analysis

Interpret financial Trend and ratio Financial statements results analysis

Pyramid ratio Basic ratio analysis Using ratio analysis analysis

corporatefinanceinstitute.com Financial analysis

Sales Total Assets

Sales Sales Capital Assets Working Assets

Sales Sales Sales Other FA Inventory Receivables

Sales Sales Sales Sales Plant & Land & buildings Payables Cash machinery

corporatefinanceinstitute.com Components of ratio analysis

Ratio analysis covers two basic groups:

Ratio analysis

Financial leverage Performance ratios ratios

Profitability ratios Efficiency ratios Liquidity ratio Solvency ratio

corporatefinanceinstitute.com Short term liquidity ratios

Current Quick ratio ratio

corporatefinanceinstitute.com Current ratio

Accounts receivable Inventory Cash Prepaid expenses

푪풖풓풓풆풏풕 풂풔풔풆풕풔 푪풖풓풓풆풏풕 풍풊풂풃풊풍풊풕풊풆풔

Generic rule of thumb is 2:1

corporatefinanceinstitute.com Quick ratio or acid test ratio

푪풖풓풓풆풏풕 풂풔풔풆풕풔 − 푰풏풗풆풏풕풐풓풚 푪풖풓풓풆풏풕 풍풊풂풃풊풍풊풕풊풆풔

Generic rule of thumb is 1:1

corporatefinanceinstitute.com Asset turnover ratio

푺풂풍풆풔 푹풆풗풆풏풖풆 푻풐풕풂풍 풐풓 풏풆풕 푨풔풔풆풕풔

Tells us: How efficient is the company in using assets to generate revenue? For every 1 dollar of assets, how many dollars of revenue the company generates?

corporatefinanceinstitute.com Conclusion

Always use trend analysis to determine: • What are the ratios doing? • Are they improving or deteriorating?

Short term liquidity ratios are an early warning signal to cash flow issues.

corporatefinanceinstitute.com Working capital overview

Working capital

Current Asset – Current Liabilities

corporatefinanceinstitute.com Working capital overview

Working capital

Inventory Receivables Payables

Operating activities

corporatefinanceinstitute.com Working capital overview

Working capital

Accounts Accounts + Inventory - receivable payable

Operating activities

corporatefinanceinstitute.com Working capital funding gap

Company buys Company pays Company sells Customer pays inventory For inventory goods for goods

Payables Receivable

Inventory

Working Capital Funding Gap

Cash out Cash in

corporatefinanceinstitute.com Working capital funding gap

What would happen to the working Company buys Company pays Company sells Customer pays inventory capitalFor inventory fundinggoods gap? for goods

IncreasePayables DecreaseReceivable

Inventory

Working capital funding gap

Cash out Cash in

corporatefinanceinstitute.com Working capital funding gap

Company buys Company pays Company sells Customer pays inventory For inventory goods for goods

Delay company Payables Receivable Payments

Inventory Faster customer Payments Working capital funding gap ”Just-in-time”

Cash out Cash in

corporatefinanceinstitute.com The working capital efficiency ratios

2 Ratios for each Working capital Inventory, Accounts + efficiency ratio receivable, Accounts payable

corporatefinanceinstitute.com Inventory

Inventory efficiency ratios

퐶표푠푡 표푓 푠푎푙푒푠 퐼푛푣푒푛푡표푟푦 푋 365 퐼푛푣푒푛푡표푟푦 퐶표푠푡 표푓 푠푎푙푒푠

Inventory Inventory turnover ratio days ratio

corporatefinanceinstitute.com Accounts receivable

Accounts receivable efficiency ratios

푺풂풍풆풔 푨풄풄풐풖풏풕풔 풓풆풄. 푿 ퟑퟔퟓ 푨풄풄풐풖풏풕풔 풓풆풄. 푺풂풍풆풔

Receivable Receivable turnover ratio days ratio

corporatefinanceinstitute.com Accounts payable

Accounts payable efficiency ratios

푪풐풔풕 풐풇 풔풂풍풆풔 푨풄풄풐풖풏풕풔 풑풂풚. 푿 ퟑퟔퟓ 푨풄풄풐풖풏풕풔 풑풂풚. 푪풐풔풕 풔풂풍풆풔

Payable Payable turnover ratio days ratio

corporatefinanceinstitute.com The funding gap

Inventory days plus accounts receivable days minus accounts payable days will leave you with the working capital funding gap expressed as days.

+60 -30 +30 =60

Company buys Company pays Company sells Customer pays inventory For inventory goods for goods

Payables Receivable

Inventory

Working capital funding gap Cash out Cash in

corporatefinanceinstitute.com PP&E efficiency ratio

Property, plant and equipment ratio

PP&E turnover Sales = PP&E ratio

If the ratio is comparatively low, it means either sales are low or you have invested too much in PP&E.

corporatefinanceinstitute.com Conclusion

Financial analysis is Use in conjunction with important in understanding information from the income a company’s financial statement to gain valuable condition and performance company insights

With ratio and trend Performance can be analysis you can build improved to increase expectations of future operational efficiencies performance

corporatefinanceinstitute.com Cash Flow Statement and Ratios

corporatefinanceinstitute.com Session objectives

Understand the inflows Calculate solvency and and outflows of cash leverage ratios throughout the year

Examine funding options for an organization looking to grow

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Income Balance Statement of statement Sheet Cash Flows

corporatefinanceinstitute.com Analyzing cash flow groups

Each category of the statement of cash Cash flow flows enables you to analyze the movement of funds in the company

Asset Operational Financing strategy management management

Asset management relates specifically to Operational management refers Financing strategy reflects decisions made the management of investment in the to the operational strategy by management in relation to the company and is where commitment to followed by an organization. ”leverage” of the company. growth can be seen. • Margin management • Debt / Equity • Working capital • Long-term / Short-term • Absorbing • Volume management • Releasing • Operating profit • Other instruments • Capital expenditure • Interest / Dividends • >amortization •

There are many options available when looking for debt financing:

Debt

Operating line of Overdraft Term loans credit

Working capital Purchase assets funding gap

corporatefinanceinstitute.com Debt financing

• Bonds are a common form of debt financing • The normal contract with rate of interest is called the ”coupon”

• Issuing bonds is a common method of raising funds

• Most useful in funding long-term investments A bond is a debt instrument requiring the issuer (also called the debtor or “ borrower) to repay to the lender/investor the amount borrowed plus interest over some specified period of time

Source: Frank Fabozzi Bond “ Market analysis & strategies corporatefinanceinstitute.com Types of bonds

• Principal amount indexed to • Have coupons that remain Inflation- inflation Fixed rate constant throughout the life of the bond linked • Interest rate is fixed, but principal and interest payments grow

• Have coupons linked to an interest rate benchmark • The issuer has the right to repay Floating rate Callable the bond before the maturity • Coupon reset periodically (e.g. date every 3 months)

• Pay no interest • Can be converted into shares of Zero coupon • Trade at a discount from their Convertible stock in the issuing company value at maturity

corporatefinanceinstitute.com Warrants and convertibles compared

Bonds with warrants Convertible bonds • Tend to be more common in • Convertible bonds are issued private placements publicly • The warrant can be detached • The bond and the option are bundled together • Warrants are exercised for cash • Bonds are exchanged for common stock

corporatefinanceinstitute.com Types of syndicated loans

Syndicated lending is where two or more banks provide credit to one borrower in one agreement.

A loan with a fixed maturity and normally featuring the amortization of Term loans principal

Revolving credit Offering the borrower the right, but not the obligation to draw a loan facilities

Standby Lines only expected to be used in extraordinary circumstances (e.g. facilities commercial paper backup)

corporatefinanceinstitute.com Leasing as an option

When an asset is leased, it remains the property of the lessor. Different accounting standards treat leases differently depending on how the lease is structured.

Capital (finance) lease Operating lease Usually longer term; most of the Usually shorter term; risks and risks and rewards of ownership rewards do not transfer to the transfer to lessee lessee

Recorded on balance sheet Recorded in income statement

corporatefinanceinstitute.com Leasing as an option

A capital of finance lease is a way to borrow funds for assets directly through the assets’ owner Capital (finance) lease

corporatefinanceinstitute.com Leasing as an option

An operating lease is a way to obtain use of an asset until it is no longer required or useful Operating lease

corporatefinanceinstitute.com Who can tap into the debt markets

To raise debt financing… • Show a history of profitability • Have assets that can be pledged as security

If a company is not yet profitable… • Raise equity financing • Dilute the existing shareholder to raise capital

corporatefinanceinstitute.com Equity types – common shares

Equity consist largely of common shares. Ownership of common shares normally entitles the holder to:

Voting rights A right to vote on appointments to the board of directors

An equal share in earning after obligations to debt holders and preferred Ownership stockholders are met

A residual claim on the business and therefore have the ultimate control of the Residual claim company’s affairs

corporatefinanceinstitute.com Equity types – preferred share varieties

• Right to convert the preferred • Entitle holder to fixed rate of stock into common stock at a dividend and if unpaid arrears Cumulative Convertible specified future date at a cumulate specified rate of conversion

• Have extra rights. In addition to • Right to “retract” the share and receiving fixed dividend also pay the owner in cash at a Participating participate in company’s Retractable specified price at maturity surplus profit

• Will be redeemed at a specified future date at the option of Redeemable either the company of the shareholder

corporatefinanceinstitute.com Retained earnings

Share capital

Profit Equity Dividends

Retained earnings

corporatefinanceinstitute.com Managing the financing of business - leverage

Leverage expresses the relationship between funding provided by lenders and funding provided by shareholders.

High leverage Low leverage 20

Equity 80 Equity 80 Long and short Long and short term debt term debt 20 Capital employed (100) Capital employed (100)

corporatefinanceinstitute.com Growing the business using debt

Investment in Invest in PP&E assets Increase cash working capital

Debt

Assets

Equity

corporatefinanceinstitute.com Growing the business using debt

This is how you increase the leverage of the company by increasing debt rather than equity.

Increase debt Investment in assets Borrow from the bank Debt

Assets Equity

corporatefinanceinstitute.com The benefits of leverage

Leverage is effective for a number of reasons:

Reason 1 Reason 2 Reason 3 Reason 4 It is often very quick A short term line of credit Increasing debt the If a company requires a and inexpensive to may be ideal for current shareholders can large amount of funds obtain a loan of increasing inventory for a increase the value of the intended for long term extension of a line of seasonal business, and a company without having use and investment in credit from the bank long term fixed payment to reduce their share of the company, a share loan for a significant the company offering may be the best investment in equipment option to be used to increase production over a longer time period

corporatefinanceinstitute.com An effective capital structure

Debt is expensive

Debt

Cost % Cost Firm value

Cost of funds

Equity

40 % 60 % Leverage %

corporatefinanceinstitute.com An effective capital structure

Pay out more dividends Buy back shares

Cost % Cost Firm value Debt Cost of funds

Equity

40 % 60 % Leverage %

corporatefinanceinstitute.com An effective capital structure

Debt is expensive

Cost % Cost Firm value

Cost of Debt funds

Equity 40 % 60 % Leverage %

corporatefinanceinstitute.com An effective capital structure

“Sweet spot”

Cost % Cost Firm value Debt Cost of funds

Equity

40 % 60 % Leverage %

corporatefinanceinstitute.com Leverage ratios

There are several different ratios to use in order to assess the leveraging of a company:

Debt to 푰풏풕풆풓풆풔풕 풃풆풂풓풏풊풏품 풍풊풂풃풊풍풊풕풊풆풔 If the ratio is greater than 100%, more of an organization’s equity (or debt = 푻풐풕풂풍 풔풉풂풓풆풉풐풍풅풆풓′풔 풆풒풖풊풕풚 funding comes in the form of debt rather than equity to capital)

A ratio of 1 would be reasonable, but if it’s greater than 1, Debt to 푰풏풕풆풓풆풔풕 풃풆풂풓풏풊풏품 풍풊풂풃풊풍풊풕풊풆풔 then attention should be paid to how a company is managing TNW* = 푬풒풖풊풕풚 − 푰풏풕풂풏품풊풃풍풆 풂풔풔풆풕풔 its financing activities

The ratio would be used with conjunction with the debt to Total liabilities 푻풐풕풂풍 풍풊풂풃풊풍풊풕풊풆풔 equity ratio to determine the impact that operational to equity = 푬풒풖풊풕풚 liabilities has on the funding of the business

If the ratio is low, the company may be underleveraged. If the Total assets 푻풐풕풂풍 풂풔풔풆풕풔 company number is high, then the organization, while taking to equity = 푬풒풖풊풕풚 advantage of debt, may be over-levered

This ratio is used to assess the amount of leverage relative to 푰풏풕풆풓풆풔풕 풃풆풂풓풏풊풏품 풍풊풂풃풊풍풊풕풊풆풔 Debt to EBITDA = EBITDA, this ratio is commonly used by lenders. Can range by 푬푩푰푻푫푨 industry from 1 – 5 times corporatefinanceinstitute.com Conclusion

Analyze how management is Describe all the benefits and raising and using funds by possible pitfalls of leverage reviewing cash flow of the business

Understand how leverage The cash flow analysis is one can be altered using a side of the pyramid of ratios variety of debt and equity found in Module 4 options

corporatefinanceinstitute.com Rates of Return and Profitability Analysis

corporatefinanceinstitute.com Session objectives

Use the pyramid of ratios to explain what drives a company’s financial performance

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Income Balance Statement of statement Sheet Cash Flows

corporatefinanceinstitute.com Financial analysis

There are many important steps, such as trend and ratio analysis, in preparing a financial analysis. The starting point is the financial statements:

Financial analysis

Interpret financial Trend and ratio Financial statements results analysis

Pyramid ratio Basic ratio analysis Using ratio analysis analysis

corporatefinanceinstitute.com Pyramid of ratios introduction

Return on Equity

(ROE) =

푁푒푡 𝑖푛푐표푚푒 푆ℎ푎푟푒ℎ표푙푑푒푟′푠 푒푞푢𝑖푡푦

corporatefinanceinstitute.com Financial metrics

Financial Analysis Module 1 – Analyzing the income statement

Return on equity

Financial Analysis Module 3 – Funding the business

corporatefinanceinstitute.com ROE levers

Net profit Return on equity Total asset turnover Financial leverage = margin x x

푁푒푡 𝑖푛푐표푚푒 푁푒푡 𝑖푛푐표푚푒 푆푎푙푒푠 푇표푡푎푙 푎푠푠푒푡푠 퐸푞푢𝑖푡푦 = 푆푎푙푒푠 x 푇표푡푎푙 푎푠푠푒푡푠 x 퐸푞푢𝑖푡푦

corporatefinanceinstitute.com ROE levers

Net profit Return on equity Total asset turnover Financial leverage margin

corporatefinanceinstitute.com ROE levers

Net profit Return on equity Total asset turnover Financial leverage margin

Net profit margin = Net income / Sales

corporatefinanceinstitute.com ROE levers

Net profit Return on equity Total asset turnover Financial leverage margin

Total asset turnover = Sales / Total assets

corporatefinanceinstitute.com ROE levers

Net profit Return on equity Total asset turnover Financial leverage margin

Financial leverage = Total assets / Equity

corporatefinanceinstitute.com The Dupont analysis

ROE

퐴푠푠푒푡푠 푆푎푙푒푠 퐸퐵퐼푇 푃푟푒푡푎푥 푝푟표푓𝑖푡 푁푒푡 𝑖푛푐표푚푒 퐸푞푢𝑖푡푦 퐴푠푠푒푡푠 푆푎푙푒푠 퐸퐵퐼푇 푃푟푒푡푎푥 푝푟표푓𝑖푡

Volume Margin Capital structure Leverage equity Tax impact impact impact impact

corporatefinanceinstitute.com Secondary profitability ratios

Net Profit Margin

푁푒푡 𝑖푛푐표푚푒 푃푟푒푡푎푥 푝푟표푓𝑖푡 퐸퐵퐼푇 푃푟푒푡푎푥 푝푟표푓𝑖푡 x 퐸퐵퐼푇 x 푆푎푙푒푠

Tax impact Capital Margin impact structure impact

corporatefinanceinstitute.com Secondary profitability ratios

If taxes are zero, If debt is zero, these these two values two values would would be equal, be equal, are the and the ratio would ratio would equal equal one one

푁푒푡 𝑖푛푐표푚푒 푃푟푒푡푎푥 푝푟표푓𝑖푡 퐸퐵퐼푇 푃푟푒푡푎푥 푝푟표푓𝑖푡 퐸퐵퐼푇 푆푎푙푒푠 = = = Tax impact Capital Margin structure impact impact

corporatefinanceinstitute.com Secondary efficiency ratios

Total asset turnover

푆푎푙푒푠 푆푎푙푒푠 푊표푟푘𝑖푛푔 푐푎푝𝑖푡푎푙 푃푃&퐸

corporatefinanceinstitute.com Secondary efficiency ratios

At the time of initial investment the • Inventory ratio will be driven • Receivable down and will • Payable improve over time

푆푎푙푒푠 푆푎푙푒푠 푃푃&퐸 푊표푟푘𝑖푛푔 푐푎푝𝑖푡푎푙 = = PPE turnover Working capital turnover

corporatefinanceinstitute.com Secondary leverage ratios

퐷푒푏푡 퐿𝑖푎푏𝑖푙𝑖푡𝑖푒푠 퐸푞푢𝑖푡푦 퐸푞푢𝑖푡푦

Solvency

corporatefinanceinstitute.com Secondary leverage ratios

퐷푒푏푡 퐿𝑖푎푏𝑖푙𝑖푡𝑖푒푠 퐸푞푢𝑖푡푦 퐸푞푢𝑖푡푦 = = Debt to equity Liabilities to equity

If a company is 퐴푠푠푒푡푠 100% equity 퐸푞푢𝑖푡푦 funded, this ratio should equal one corporatefinanceinstitute.com Pyramid of ratios

Net Income / Equity

Net Income Operating Income Net Income Gross Profit Labor Costs R&D Overhead Sales Sales Pretax Profit Sales Sales Sales Sales

Sales Sales Sales Depreciation Material costs Selling costs Total Assets PP&E Working Capital Sales Sales Sales

Total Assets Gross Debt or Net Debt Inventory Receivables Payables Cash Equity EBITDA Turnover Turnover Turnover Turnover

The primary ratios make up Secondary ratios are on the Tertiary ratios make up the fourth tier of the the second tier of the third tier of the pyramid. The pyramid, and give us further detail and pyramid. This is where the ratios give a quick indication of breakdown of individual components. three levers of ROE are profitability, efficiency and situated. solvency.

corporatefinanceinstitute.com Return on Equity Primary ratios 2006 2007 2008 2009 2010 18,74% 25,43% 32,89% 32,22% 32,32%

Net Profit Margin Total Assets to Equity Asset Turnover 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 18,14% 20,80% 21,53% 17,10% 16,43% 1.16 1.24 1.40 1.36 1.34 0.89 0.95 1.09 1.37 1.47

Capital Structure Impact Tax Ratio PPE/Capital asset Turnover Working Capital Turnover 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 1.16 1.06 1.05 1.03 1.01 77,81% 73,53% 71,40% 67,58% 75,22% 6.33 6.23 8.51 8.29 7.64 5.34 4.11 4.37 4.42 5.33

EBIT Margin

2006 2007 2008 2009 2010 29,13% 26,58% 28,82% 24,61% 21,65%

Gross Margin SG&A Payable Turnover Inventory Turnover 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

55,20% 54,58% 51,26% 46,07% 44,03% 24,96% 17,70% 14,66% 13,51% 13,85% 9.75 10.59 18.80 13.31 13.59 6.88 5.39 7.39 8.75 13.46

Dep. & Amart. R&D Receivable Turnover

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2,42% 2,53% 1,80% 1,76% 2,08% 7,69% 7,78% 5,99% 6,19% 6,45% 5.95 4.96 4.81 4.87 5.34

Cash Turnover

Solvency Ratios Liquidity Ratios 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 4.50 4.49 5.07 13.24 9.64 Total Liabilities to Equity 0.16 0.24 0.40 0.38 0.34 Current Ratio 4.51 3.51 2.36 2.29 2.29

Debt to Equity 0.01 0.00 0.00 0.00 0.00 Quick Ratio 4.83 3.54 2.69 1.87 2.12 corporatefinanceinstitute.com Return on Equity Secondary ratios 2006 2007 2008 2009 2010 18,74% 25,43% 32,89% 32,22% 32,32%

EBIT Margin

2006 2007 2008 2009 2010 29,13% 26,58% 28,82% 24,61% 21,65%

Gross Margin SG&A Payable Turnover Inventory Turnover 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

55,20% 54,58% 51,26% 46,07% 44,03% 24,96% 17,70% 14,66% 13,51% 13,85% 9.75 10.59 18.80 13.31 13.59 6.88 5.39 7.39 8.75 13.46

Dep. & Amart. R&D Receivable Turnover

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2,42% 2,53% 1,80% 1,76% 2,08% 7,69% 7,78% 5,99% 6,19% 6,45% 5.95 4.96 4.81 4.87 5.34

Cash Turnover

Debt to Equity 0.01 0.00 0.00 0.00 0.00 Quick Ratio 4.83 3.54 2.69 1.87 2.12 corporatefinanceinstitute.com Return on Equity Tertiary ratios 2006 2007 2008 2009 2010 18,74% 25,43% 32,89% 32,22% 32,32%

EBIT Margin

2006 2007 2008 2009 2010 29,13% 26,58% 28,82% 24,61% 21,65%

Gross Margin SG&A Payable Turnover Inventory Turnover 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

55,20% 54,58% 51,26% 46,07% 44,03% 24,96% 17,70% 14,66% 13,51% 13,85% 9.75 10.59 18.80 13.31 13.59 6.88 5.39 7.39 8.75 13.46

Dep. & Amart. R&D Receivable Turnover

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2,42% 2,53% 1,80% 1,76% 2,08% 7,69% 7,78% 5,99% 6,19% 6,45% 5.95 4.96 4.81 4.87 5.34

Cash Turnover

Debt to Equity 0.01 0.00 0.00 0.00 0.00 Quick Ratio 4.83 3.54 2.69 1.87 2.12 corporatefinanceinstitute.com Return on Equity Final ratios 2006 2007 2008 2009 2010 18,74% 25,43% 32,89% 32,22% 32,32%

EBIT Margin

2006 2007 2008 2009 2010 29,13% 26,58% 28,82% 24,61% 21,65%

Gross Margin SG&A Payable Turnover Inventory Turnover 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010

55,20% 54,58% 51,26% 46,07% 44,03% 24,96% 17,70% 14,66% 13,51% 13,85% 9.75 10.59 18.80 13.31 13.59 6.88 5.39 7.39 8.75 13.46

Dep. & Amart. R&D Receivable Turnover

2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2,42% 2,53% 1,80% 1,76% 2,08% 7,69% 7,78% 5,99% 6,19% 6,45% 5.95 4.96 4.81 4.87 5.34

Cash Turnover

Debt to Equity 0.01 0.00 0.00 0.00 0.00 Quick Ratio 4.83 3.54 2.69 1.87 2.12 corporatefinanceinstitute.com Conclusion

Module 1 Module 2 Analyzing the income Analyzing the balance sheet statement

Module 3 Module 4 Funding the business Pyramid of ratios

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