Financial Statement Analysis: Quantitative Techniques — Analyzing Solvency, Price Multiples, and Cash Flow (Portfolio 5134)  

BNA Tax and Accounting Portfolio 5134-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Solvency, Price Multiples, and Cash Flow (Accounting Policy and Practice Series), explains and illustrates how users of financial statements can employ a wide variety of quantitative techniques to improve the usefulness of the information contained in those statements. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial. 

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Description

BNA Tax and Accounting Portfolio 5134-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Solvency, Price Multiples, and Cash Flow (Accounting Policy and Practice Series), explains and illustrates how users of financial statements can employ a wide variety of quantitative techniques to improve the usefulness of the information contained in those statements. This work complements BNA Tax and Accounting Portfolio 5133-2ndFinancial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Accounting Policy and Practice Series), as well as other Portfolios in the Accounting Policy and Practice Series that focus on specific accounting subjects.

The three major categories of quantitative techniques discussed in this Portfolio are:



• trend analysis, which analysts use to identify changes in financial statement and related information within an organization over time;
• common-size analysis, which helps analysts compare an organization's financial position and performance with those of other organizations and with industry or sector benchmarks; and
• ratio analysis, which allows analysts to examine various relationships among financial statement items and related information.


The Portfolio explains and illustrates how analysts employ those techniques to meet the objectives of analyzing an organization's (1) long-term financial risks arising from the use of debt, (2) overall performance in the securities market, and (3) operating, investing, and financing cash flows. The Portfolio also explains several integrated frameworks that help analysts comprehensively assess an organization's overall financial performance using financial statements and related information. These integrated frameworks use many of the quantitative techniques explained in the Portfolio's first sections. In addition, the Portfolio describes and illustrates the financial statement forecasting process. This Portfolio's Worksheets contain sample disclosures of financial statement information and quantitative analyses.

The Portfolio contains numerous examples of questions that various types of financial statement users address during quantitative financial statement analyses. A complete financial statement analysis, however, requires using qualitative techniques to more fully assess an organization's actual financial position and performance and more accurately forecast the organization's value. BNA Tax and Accounting Portfolio 5122-2ndFinancial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series), describes and illustrates those qualitative techniques.

This Portfolio may be cited as BNA Tax and Accounting Portfolio 5134-2nd, Glazer and Stevens, Financial Statement Analysis: Quantitative Techniques-Analyzing Solvency, Price Multiples, and Cash Flow (Accounting Policy and Practice Series).

Authors

Alan S. Glazer

Alan S. Glazer, A.B., Franklin & Marshall College; M.A. and Ph.D., University of Pennsylvania, served as associate director of the Independence Standards Board's conceptual framework project and has written several articles on auditor independence and accounting ethics. Dr. Glazer is the co-author with Martha L. Benson of BNA's Tax and Accounting Portfolio 5201, Accounting for Museums (Accounting Policy and Practice Series) and with Glenn L. Stevens of Portfolio 5122-2nd, Financial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series) and BNA Tax and Accounting Portfolio 5133-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Accounting Policy and Practice Series). He has been teaching financial accounting at Franklin & Marshall College, Lancaster, Pennsylvania, since 1975, where he is the Henry P. and Mary B. Stager Professor of Business and chair of the Department of Business, Organizations and Society. He is a CPA (inactive) in Pennsylvania.

Glenn L. Stevens

Glenn L. Stevens, B.A. in Economics, Lycoming College; MBA in Management and Masters in Finance, Loyola College in Baltimore, Maryland; Ph.D., Pennsylvania State University, taught finance courses at Franklin & Marshall College, Lancaster, Pennsylvania, from 1995 through his retirement in June 2007. Before serving on the Franklin & Marshall College faculty, Dr. Stevens spent a career in agricultural banking with the Farm Credit Bank of Baltimore, where he served as chief financial officer and held other executive positions. He retired from the bank as executive vice president and chief operating officer following its merger into Agfirst Farm Credit Bank. He is the co-author with Alan S. Glazer of BNA Tax and Accounting Portfolio 5122-2nd, Financial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series) and BNA Tax and Accounting Portfolio 5133-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Accounting Policy and Practice Series).

Table of Contents

Detailed Analysis
I. Scope of Portfolio
II. Debt and Solvency Analysis
A. Objectives and Focus
B. Assessing Financial Risks
C. Analyzing Debt and Solvency
D. Computational Issues
E. Component (or Capital Structure) Ratios
1. Debt to Total Assets Ratio
2. Debt to Equity Ratio
3. Total Liabilities to Equity Ratio (or Debt Ratio)
F. Coverage (or Debt Service) Ratios
1. Uses
2. Types
a. Interest Coverage Ratio (or Times Interest Earned)
b. Fixed Charge Coverage Ratio
c. Cash Flow to Total Debt Ratio
G. Example of Debt and Solvency Analysis
1. Measures
2. Debt to Total Assets Ratio
3. Debt to Equity Ratio
4. Total Liabilities to Equity Ratio
5. Interest Coverage Ratio
6. Cash Flow to Total Debt Ratio
7. Summary of Debt and Solvency Ratio Analysis
H. Other Measures Used in Debt and Solvency Analyses
III. Price Multiples and Valuation Analysis
A. Objectives and Focus
B. Price to Earnings (P/E) Ratio
C. Price Earnings Growth Ratio (PEG)
D. Sustainable Growth Rate (SGR)
E. Book Value Per Share and Market-Price-to-Book-Value Ratio
1. Book Value Per Share
2. Market-Price-to-Book-Value Ratio
F. Dividend Ratios
1. Dividend Payout Ratio
2. Dividend Yield (or Dividend-Price) Ratio
3. Total Payout Ratio
G. Example of Price Multiples and Valuation Analysis
1. Measures
2. Price to Earnings Ratio
3. Price Earnings Growth (PEG) Ratio
4. Sustainable Rate of Growth
5. Book Value Per Share
6. Market-Price-to-Book-Value Ratio
7. Dividend Payout Ratio
8. Dividend Yield
9. Total Payout Ratio
10. Summary of Price Multiples and Valuation Analysis
IV. Cash Flow Analysis
A. Objectives and Focus
B. Reporting Cash Flow Information
1. Classifications in Statements of Cash Flows
2. Analyzing Cash Flow Information
C. Cash Flow Per Share (or Cash Earnings Per Share)
D. Cash Flow Return on Assets Ratio
E. Operating Cash Flow Ratios
F. EBIT (Earnings Before Interest and Taxes), EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), and Related Ratios
G. Cash Burn Rate, Months to Burnout, and Defensive Interval
H. Cash Flow Adequacy Ratio
I. Cash Reinvestment Ratio and Cash Flow to Capital Expenditures Ratio
J. Cash Income Tax Rate
K. Free Cash Flow
L. Example of Cash Flow Analysis
1. Ratios
2. Cash Flow Per Share
3. Cash Flow Return on Assets
4. Cash Flow to Total Liabilities
5. EBIT and EBITDA
6. Cash Burn Rate and Months to Burnout
7. Defensive Interval
8. Cash Flow Adequacy Ratio
9. Cash Reinvestment Ratio
10. Cash Flow to Capital Expenditures Ratio
11. Cash Income Tax Rate
12. Free Cash Flow
13. Summary of Cash Flow Ratios Analysis
M. Other Cash Flow Measures
V. Integrated Quantitative Analysis Frameworks
A. Objectives and Focus
B. DuPont Analysis
1. Basic Version
2. Expanded Version
3. Example
4. Limitations
C. Delta Factor Reference Tables
D. Performance Measures, Dashboards, and Balanced Scorecard
E. Economic Value Added (EVA) and Market Value Added (MVA)
F. Total Return to Shareholders (TRS) and Total Shareholder Return (TSR)
G. Shareholder Value Analysis (SVA)
H. Cash Flow Return on Investment (CFROI)
I. Bankruptcy Prediction Models
J. Value-at-Risk (VAR)
VI. Financial Statement Forecasting
A. Objectives and Focus
B. Financial Statement Forecasting Process
C. Forecasting Principles
D. Steps in Financial Statement Forecasting
1. Understanding Past Performance
2. Forecasting Financial Statement Information
a. Sales-Driven Financial Statement Forecasting
b. Pro Forma Income Statements
c. Pro Forma Balance Sheets
d. The Balance Sheet “Plug” Figure
e. Pro Forma Statements of Cash Flows
3. Sensitivity and Scenario Analysis
E. Computerized Models
F. Example of the Financial Statement Forecasting Process
1. Historical Information
2. Assumptions
3. Pro Forma Financial Statements
4. Analysis of Pro Forma Financial Statements
5. Sensitivity and Scenario Analysis
G. Summary of Financial Statement Forecasting

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 Glossary of Abbreviations and Acronyms
Worksheet 2 Hypothetical, Inc. Financial Statements
Worksheet 3 Debt and Solvency Disclosures
Worksheet 4 Requirements for and Examples of the Earnings to Fixed Charges Ratio1
Worksheet 5 Cash Flow Disclosures
Worksheet 6 EBIT and EBITDA Disclosures
Worksheet 7 Free Cash Flow Disclosures
Worksheet 8 Economic Value Added (EVA®) Disclosures
Worksheet 9 Value-at-Risk Disclosures
Worksheet 10 Comparison of Ratios and Other Indicators Examined in Portfolio Compared to Ratios Used by eVal Forecasting Model
Worksheet 11 Hypothetical Inc., Comparative Trend Balance Sheets
Worksheet 12 Hypothetical Inc., Common-Size Balance Sheets
Worksheet 13 Hypothetical Inc., Profitability Measures
Worksheet 14 Hypothetical Inc., Comparative Trend Statements of Income
Worksheet 15 Hypothetical Inc., Common-Size Statements of Income