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Assessing a company Financials

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by

Julie Molierac

on 23 October 2014

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Transcript of Assessing a company Financials

Compound Annual Growth Rate:







2008 Sales/2004 Sales: 2.12173913
Raise to 1/4 Years: 1.20690475
Subtract 1: 0.20690475
During the four year period ended December 31, 2008, SciTronics' sales grew at
20.69%
compound rate.

Steps & : Analyze fundamentals
Step : Analyze investments to support the Business Unit(s) Strategy (ies)
Corporate financial system driven by
:
firm's
goals
business unit choices and
strategies
Market conditions
Operating characteristics

"Strategies and sales growth of each units determines the
investment in assets
needed to support the strategies and its effectiveness"

Response of competitors and regulators :
influence the
competitive and profit performance
the need for
external finance
access to
debt and equity markets
Business units strategies requires
:
Investment in account receivable
Inventories
Plan and Equipment
Acquisitions

Step 3= attempt to estimate the amount tied up in each of the asset types, by virtue of sales growth and the improvement? deterioration in asset management


Rough estimate
by studying
:
The past pattern of the collection period
Days of inventory
Plant ans equipment % of COGS
Applying " a reasonable value for each category to the sales forecast or forecast of COGS

Extrapolation of past performance assumes that:
the future underlying market
competitive and regulatory conditions
=unchanged from the historical performance

Assessing a company's financial Health
Conclusion
SUU Business School MBA
Matt Walter Mark Taylor Danny Wray Julie Molierac
Steps : Assess future profitability and competitive performance
Strong sustained profitability important determinant of
:
firm's access to
debt / equity
finance on acceptable terms
ability to
self-finance growth
through retention of earnings
capacity to place
major bets on risky
new technologies / markets/ products
Valuation
of the company

Assess future profitability Analyze its past pattern of profitability:
Steps : Assess future external financing needs
Future external financial needs?
future sales growth
Length of cash cycle
Future level of profitability / profit retention
After estimating future financing needs, need to identify the target sources : insurance companies, banks, public debt market, public equity market...

Need to establish financial policies that ensure access to financing on acceptable terms

Steps : Assess viability of the 3- to 5- year plan
Questions
Steps : Perform stress test under scenarios of Adversity
"Financing plans works well if assumptions based turn out to be accurate"
Steps : Formulate current financing plan
How should the firm meet its financing needs in the current year?

How should it
balance the benefits
of future financing flexibility with
temptation
to delay the sale of equity by
financing with debt
now, in hopes of realizing a higher price in the future?
What has been the average level, trend and volatility of profitability?
Is the level of profitability sustainable, given the outlook for the market and for competitive and regulatory pressures?
Is the current level of profitability at the expense of future growth / profitability?
How management initiated major profit improvement programs? Unique to the firm or industry wide and may be reflected in lower prices rather than higher profitability?
Hidden problems (suspicious high levels or buildups of accounts receivables etc)?
Steps : Ensure access to target sources of external finance
Questions :
How sound the firm's financial structure? level of productivity, level of business risk, cash flow, future need for finance?
How will the firm service its debt? counting on financing with debt or equity to what extend?
Assured access on acceptable terms to the equity markets? how many shares could be sold at what price in " good times"? period of adversity?
Criteria used by each target sources if finance to determine if finance will be provided and in what terms?
Recipe for an ever increasing appetite for external finance:
Rapid growth with long cash cycle
Low profitability / low profit retention
High sales growth does not always result in a need for additional external finance
Is the operating plan on which the financial forecasts are based achievable?
Will the company achieve its strategic, competitive, and financial goal?
Will the resources required by the plan be available?
How will the firm's competitive, organizational, financial health at the end of the 3 to 5 years compare with its condition at the outset?
Insufficient test on situations with volatile and unpredictable conditions
The test of the soundness of a 3- to 5- year plan is whether
:

continuity of the flow of
funds to strategic programs
to be maintained under
scenarios of adversity
for the firm or capital markets

or to be maintained as well as one's competitors can maintain the funding of their programs
What are the financial measures that can be useful in understanding the past performance of the company?

Extrapolation of past performance
can provide valuable insights into
future health and balance
of the corporate financial system
Historical analysis
can identify possible
opportunities
to improve asset management or margin and basis for

evaluation attractiveness
of a business/
effectiveness
of a management team
Financial ratios and Financial Analysis
Danny Wray
Matt Walter
Leverage ratios: How soundly is the company financed?
Mark Taylor
A warning
The case of the unidentified industries
"The calculated ratios are no more valid than the financial statements from which they are derived"
"Quality of the financial statements should be assessed and appropriate adjustments should be made before ratios are calculated"
Assessing the reasonableness of accounting choices and assumptions
Accurate, measurable, reasonable, trustworthy, explainable
Series of questions that may help you in assessing the future financial health
The ratios are useful in answering some of the questions +historical trend
BUT important to compare actual absolute value with some standard to see if the firm is performing well
No single ratio is appropriate to all industries
Julie Molierac
5 Types of companies
Electric utility
Japanese automobile manufacturer
Discount general merchandise retailer
Automated test equipment/ systems company
Upscale apparel retailer
Sales growth
SciTronics' profit as a percent of sales in 2008 was
5.7%
. This represents an
increase from 3.4%

in 2005.

SciTronics had a total of
$112,000
of capital at year-end 2008 and earned, before interest but after taxes (EBIAT),
$16,000
in 2008.
It's return on capital was 14% in 2008, which represented an increase from the 8% in 2005.

SciTronics had
$75,000
of owners' equity and earned
$14,000
after taxes in 2008. Its return on equity was
18.7%
,
which represented an increase from the 8.2% earned in 2005.

Profitability ratio
Total asset turnover for SciTronics in 2008 can be calculated by dividing
$244,000 into $159,000
.
The Turnover decreased slightly from 1.58 times in 2005 to 1.53 times in 2008.


SciTronics had
$66,000
invested in accounts receivables at year-end 2008. Its average sales per day were
$668
during 2008 and its average collection period was 99 days.
This represented a decrease from the average collection period of 104 days in 2005.


SciTronics apparently needed
$29,000
of inventory at year-end 2008 to support its operations during 2008. Its activity during 2008 as measured by the cost of goods sold was
$74,000
. It therefore had an inventory turnover of 2.55 times.
This represented a slight increase from 2.05 times in 2005.


SciTronics had net fixed assets of
$18,000 and sales of $244,000
in 2008. Its fixed asset turnover ratio in 2008 was 13.56 times, a
decrease from 16.33 times in 2005.

Activity (asset mgmt) ratios
The operating and competitive characteristics of a company's industry influence its ivestment and financial structure of the balance sheet
Consider operating and competitive characteristics of the industry and their implications:



inventory turnover
amount of PPE
profit margins and profitability
appropriate financing structure
Electric Utility
Japanese Automobile
Upscale apparel
Discount retailer
Test equipment/system
What is your assessment of the performance of SciTronics during the 2005 - 2008 period?
Has its financial strength and its access to external sources of finance improved or weakened?
What are the 2 - 3 most important questions you would ask management as the result of your analysis?
Full transcript