Slides_Fundamentals of Investments - Chapter 7 pot

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C h a p t e r
Earnings and Cash Flow AnalysisEarnings and Cash Flow Analysis
second edition
Fundamentals
of
Investments
Valuation & Management
Charles J. Corrado Bradford D.Jordan
McGraw Hill / Irwin Slides by Yee-Tien

(Ted) Fu
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Cash Flow is a Company’s Lifeblood.
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Earnings and Cash Flow Analysis
Our goal in this chapter is to
acquaint you with the financial
accounting concepts necessary to
understand basic financial
statements and perform earnings and
cash flow analysis using these
financial statements.
Goal
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Sources of Financial Information
 Company annual reports
 Internet
Î The New York Stock Exchange at

 Securities and Exchange Commission (SEC)
Î Electronic Data gathering and Retrieval (EDGAR)
archives (including 10Ks and 10Qs) accessible
through the Internet (
)
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Sources of Financial Information
 SEC Regulation FD (Fair Disclosure) requires
companies making a public disclosure of
material nonpublic information to do so fairly
without preferential recipients.
Î Most companies satisfy Regulation FD by
distributing important announcements via e-mail
alerts to those who register for the service.
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Financial Statements
Balance sheet
Accounting statement that provides a
snapshot view of a company’s assets and
liabilities on a particular date.

Income statement
Summary statement of a firm’s revenues and
expenses over a specific accounting period,
usually a quarter or a year.
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Financial Statements
Cash flow statement
Analysis of a firm’s sources and uses of cash
over the accounting period, summarizing
operating, investing, and financing cash
flows.
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Work the Web
 Look at the Investing Basics section
at:

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The Balance Sheet
 Asset - Anything a company owns that has
value.
 Liability - A firm’s financial obligation.
 Equity - An ownership interest in the
company.
 Fundamental accounting identity:

Assets = Liabilities + Equity
The Balance Sheet
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The Balance Sheet
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The Income Statement
 Income - The difference between a company’s
revenues and expenses, used to pay dividends
to stockholders or kept as retained earnings
within the company to finance future growth.
Net income = Revenues – Expenses
= Dividends + Retained earnings
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The Income Statement
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The Cash Flow Statement
 Cash flow - Income realized in cash form,
whether from operations, investments, or

financing activities.
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The Cash Flow Statement
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Performance Ratios and Price Ratios

Gross margin =
Gross profit
Net sales

Operating margin =
Operating income
Net sales

Return on assets (ROA) =
Net income
Total assets

Return on equity (ROE) =
Net income
.
Stockholder equity
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Performance Ratios and Price Ratios

 Book value
=
Stockholder equity
per share (BVPS) Shares outstanding
 Earnings
=
Net income
.
per share (EPS) Shares outstanding
 Cash flow
=
Operating cash flow
per share (CFPS) Shares outstanding
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Performance Ratios and Price Ratios

Price-book (P/B) =
Stock price
BVPS

Price-earnings (P/E) =
Stock price
EPS

Price-cash flow (P/CF) =
Stock price
CFPS
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Work the Web
 Check out the security analysis
sections at:

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Financial Statement Forecasting
Pro forma financial statements
Statements prepared using certain
assumptions about future income, cash flow,
and other items. Pro forma literally means
according to prescribed form.
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The Pro Forma Income Statement
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The Pro Forma Cash Flow Statement
The Pro Forma Balance Sheet
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Projected Profitability and Price Ratios
Borg Corporation
Original Optimistic Pessimistic
Gross margin 22.22% 25% 20%
Operating margin 7.78% 10.83% 3%
ROA 3.64% 7.70% .77%
ROE 7.29% 14.43% 1.54%
BVPS $25 $28.63 $24.88
EPS $1.82 $4.13 $.38
CFPS $3.32 $3.98 $.48
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Projected Profitability and Price Ratios
Borg Corporation
Projected Stock Prices
Optimistic Pessimistic
BVPS ×

P/B $45.81 $39.81
EPS ×

P/E $90.86 $8.36
CFPS ×

P/CF $47.76 $5.76