7 7 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 © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 2 Cash Flow is a Company’s Lifeblood. © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 3 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 © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 4 Sources of Financial Information Company annual reports Internet Î The New York Stock Exchange at http://www.nyse.com Securities and Exchange Commission (SEC) Î Electronic Data gathering and Retrieval (EDGAR) archives (including 10Ks and 10Qs) accessible through the Internet (http://www.sec.gov ) © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 5 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. © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 6 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. © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 7 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. © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 8 Work the Web Look at the Investing Basics section at: http://www.thestreet.com © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 9 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 7 - 10 McGraw Hill / Irwin [...]... 10.83% 7. 70% 14.43% $28.63 $4.13 $3.98 20% 3% 77 % 1.54% $24.88 $.38 $.48 © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 25 Projected Profitability and Price Ratios Borg Corporation BVPS × P/B EPS × P/E CFPS × P/CF McGraw Hill / Irwin Projected Stock Prices Optimistic Pessimistic $45.81 $39.81 $90.86 $8.36 $ 47. 76 $5 .76 © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 26... $26.18 $3.91 $6. 27 40.88% 3.13% 2.95% 4 .75 % $23.38 $1.11 $3. 47 © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 34 Adolph Coors Company Case Study BVPS × P/B EPS × P/E CFPS × P/CF McGraw Hill / Irwin Projected Stock Prices + 10% – 10% $58. 27 $52.03 $79 .46 $22.54 $69.19 $38.26 © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 35 Chapter Review Sources of Financial Information... McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 27 Adolph Coors Company Case Study McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 28 Adolph Coors Company Case Study McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 29 Adolph Coors Company Case Study 7 - 30 Adolph Coors Company Case Study McGraw... 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 22 The Pro Forma Cash Flow Statement McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 23 The Pro Forma Balance Sheet 7 - 24 Projected Profitability and Price Ratios Borg Corporation Original Gross margin Operating margin ROA ROE BVPS EPS CFPS McGraw Hill / Irwin 22.22% 7. 78% 3.64% 7. 29% $25 $1.82 $3.32... 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 13 The Income Statement McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 14 The Cash Flow Statement Cash flow - Income realized in cash form, whether from operations, investments, or financing activities McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 15 The Cash Flow... Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 31 Adolph Coors Company Case Study McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 32 Adolph Coors Company Case Study 7 - 33 Adolph Coors Company Case Study Original Gross margin Operating margin ROA ROE BVPS EPS CFPS McGraw Hill / Irwin + 10% – 10% 40.88% 6.90% 5. 97% 10. 97% $22.91 $2.51 $4.62... Shares outstanding McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 18 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 McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 19 Work the Web Check out the security analysis sections... © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 16 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) = McGraw Hill / Irwin Net income Stockholder equity © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 17 Performance Ratios... / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 20 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 McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 21 The Pro Forma Income Statement.. .7 - 11 The Balance Sheet McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc All rights reserved 7 - 12 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 . / Irwin Slides by Yee-Tien (Ted) Fu © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 2 Cash Flow is a Company’s Lifeblood. © 2002 by The McGraw-Hill Companies,. year. © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 7 Financial Statements Cash flow statement Analysis of a firm’s sources and uses of cash over the accounting. Equity The Balance Sheet 7 - 10 McGraw Hill / Irwin © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 - 11 The Balance Sheet © 2002 by The McGraw-Hill Companies,