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Business Analysis
Evaluate Prospects Evaluate Risks
1
CHAPTER
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Equity investors Creditors Managers Merger and Acquisition Analysts External Auditors Directors Regulators Employees & Unions Lawyers
Equity Analysis
Qualitative
Regulation
Director Oversight
Financial Management
1-3
1-4
Equity Analysis
Credit Analysis
Creditors Trade Creditors Non-trade Creditors
Provide major financing Most long-term Usually explicit interest Bear risk of default
Regulation
Director Oversight
Financial Management
Provide goods or services Most short-term Usually implicit interest Bear risk of default
1-5
1-6
Credit Analysis
Credit worthiness: Ability to honor credit obligations (downside risk)
Credit Analysis
Debt Characteristics
Seniority - order claims are paid Collateral - asset earmarked for claims Covenants - constraints on debtholders to protect creditors Other provisions - sinking fund requirements, etc.
Liquidity Ability to meet shortterm obligations Focus: Current Financial conditions Current cash flows Liquidity of assets
1-7
Solvency Ability to meet longterm obligations Focus: Long-term financial conditions Long-term cash flows Extended profitability
1-8
Equity Analysis
Equity Analysis
Regulation
Director Oversight
Passive Investing Aim: Diversification based on risk propensity & investment horizon Example: Indexing
Financial Management
Active Investing Aim: Beat the market -earn above normal stock returns Examples: Technical analysis & Fundamental analysis
1-9
1-10
Intrinsic Value
(or Fundamental Value)
Equity Analysis
Value of Company (or stock) without reference to market value (or stock price) Intrinsic value > Market value Intrinsic value < Market value Intrinsic value = Market value Buy Sell Hold Strategy
Regulation
Director Oversight
Financial Management
1-11
1-12
Accounting Analysis
Process to evaluate and adjust financial statements to better reflect economic reality
Comparability problems across firms and across time
Industry Analysis
Strategy Analysis
Financial Analysis
Manager estimation error Distortion problems Prospective Analysis Earnings management Distortion of business
Accounting Analysis
Accounting Risk
1-13
Intrinsic Value
1-14
Financial Analysis
Process to evaluate financial position and performance using financial statements
Prospective Analysis
Process to forecast future payoffs
Business Environment & Strategy Analysis Accounting Analysis Financial Analysis
Profitability analysis Evaluate return on investments Risk analysis Evaluate riskiness & creditworthiness Sources and uses Evaluate source & of funds analysis deployment of funds
1-15
Common tools
Ratio analysis
1-16
Intrinsic Value
Business Activities
Competition Market demands Planning Activities: Goals & Objectives Pricing
Business Activities
Financing activities Owner (equity)
Tactics
Nonowner (liabilities)
Distribution
Promotion Projections
Financing
Managerial performance
1-17
Opportunities
Obstacles
1-18
Business Activities
Investing activities Buying resources Selling resources
Business Activities
Planning Activities
Investing Activities
Financial Activities
Investing
Financing
Operating Activities
Revenues and expenses from providing goods and services
1-19
Investing = Financing
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Kodak
Dec 31, 1998 (In millions, except per share data)
Financing
Current:
l
l l l
Operating
l
l l l l l
Cash Accounts Receivable Inventories Marketable Securities Land, Buildings, & Equipment Patents Investments
Noncurrent:
l
Sales Cost of Goods Sold Selling Expense Administrative Expense Interest Expense Income Tax Expense
Noncurrent:
l
l
l l
Assets Current Assets Cash and cash equivalents Marketable securities Receivables Inventories Deferred income tax charges Other Total current assets Properties Land, buildings and equipment at cost Less: Accumulated depreciation Net properties Other Assets Goodwill (net of accumulated amortization of $534) Long-term receivables and other non-current assets Deferred income tax charges Total Assets
Liabilities and Shareholders Equity $ 457 43 2,527 1,424 855 293 5,599 13,482 7,568 5,914 Current Liabilities Payables Short-term borrowings Taxes - income and other Dividends payable Deferred income tax credits Total current liabilities Other Liabilities Long-term borrowings Post-employment liabilities Other long-term liabilities Deferred income tax credits Total liabilities Shareholders' Equity Common stock, par value $2.50 per share, 950,000,000 shares authorized; issued 391,292,760 shares Additional paid in capital Retained earnings Accumulated other comprehensive loss Treasury stock, as cost, 68,494,402 shares Total shareholders' equity Total liabilities and equity $ 3,906 1,518 593 142 19 6,178 504 2,962 1,032 69 10,745
1-22
Income Statement
Kodak
For Year Ended Dec. 31, 1998 (In millions, except per share data)
Sales Cost of goods sold Gross profit Selling, general and administrative expenses Research and development costs Purchased research and development Restructuring costs and asset impairments EARNINGS FROM OPERATIONS Interest expense Other income (charges) Earnings before income taxes Provision for income taxes Earnings from continuing operations Gain on sale of discontinued operations NET EARNINGS 1-23
$13,406 7,293 6,113 3,303 880 42 1,888 110 328 2,106 716 1,390 $ 1,390
Shareholders Equity Dec 31, 1997 Net earnings Other comprehensive income (loss): Unrealized holding gains arising during period ($122 million pre-tax) Reclassification adjustment for gains included in net earnings ($66 million pre-tax) Currency translation adjustment Minimum pension liability adjustment ($7 million pre-tax) Other comprehensive income Comprehensive income Cash dividends declared Treasury stock repurchased (3,541,295 shares) Treasury stock issued under employee plans (3,272,713 shares) Tax reductions - employee plans Shareholders Equity Dec 31, 1998
$978
(58) 46 $902
(570) $6,163
91 ($111)
1-24
Statement of Cash Flows for Year Ended Dec. 31, 1998 Operating Cash flows $ 1,483 Investing Cash flows (1,839) Financing Cash flows 77 Exchange rate changes on cash 8 Net Change in Cash $ (271) Cash Balance, Dec. 31, 1997 728 Cash Balance, Dec. 31, 1998 $ 457 Income Statement for Year Ended Dec. 31, 1998 Sales $13,406 Expenses 12,016 Net Earnings $ 1,390 Other Comprehensive Income 91 Comprehensive Income $ 1,481 Statement of Shareholders Equity for Year Ended Dec. 31, 1998 Share Capital, Dec. 31, 1997 Adjustments/Stock Issue Share Capital, Dec. 31, 1998 Retained Earnings, Dec. 31, 1997 Add: Comprehensive Income Less: Dividends Retained Earnings, Dec. 31, 1998 Treasury Stock, Dec. 31, 1997 Treasury Stock Issued Treasury Stock Repurchased Treasury Stock, Dec. 31, 1998 $ 1,892 (12) $ 1,880 $ 5,141 1,481 (570) $ 6,052 $ 3,872 186 (258) $ 3,944 Balance Sheet Dec. 31, 1998 Assets Cash Non-Cash Assets Total Assets Liabilities & Equity Total liabilities Equity: Share Capital Retained Earnings Treasury Stock Total equity Liabilities & Equity
$ 9,984
$10,745
(Period of time)
1-26
(Period of time)
Additional Information
(Beyond Financial Statements)
Analysis Preview
Yr1 Yr2 Yr3
Management Discussion & Analysis (MD&A) Management Report Auditor Report Notes to Financial Statements Supplementary Information (10-K, 10-Q, 8-K, 20-F) Proxy Statement Social Responsibility Report
Comparative Analysis Purpose: Evaluation of consecutive financial statements Output: Direction, speed, & extent of any trend(s) Types: Year-to-year Change Analysis Index-Number Trend Analysis
1-28
1-27
Analysis Preview
Year-to-Year Analysis
Kodak's Comparative Income Statements
Change Change (in mil.) % (7.8)% $ 13,406 $14,538 ($ 1,132) 7,293 7,976 (683) (8.5) $ 6,113 $ 6,562 ($ 449) (6.8) 1998 1997 3,303 922 $ 1,888 110 328 $ 2,106 716 $ 1,390 3,912 1,230 1,290 $ 130 98 21 $ 53 48 $ 5 (609) (308) (1,290) $ 1,758 12 307 $ 2,053 668 $ 1,385 (15.6) (25.0) (100) 1,352 (12.2) 1,461 3,873 1,391 27,700
Sales Cost of goods sold Gross profit Operating Expenses: Selling, general and admin. Research and development Restructuring costs Earnings from operations Interest Expense Other income (charges) Earnings before income taxes Provision for income taxes Net earnings
Sales Total operating expenses Earnings from operations Net earnings Total assets Shareholders' equity
1-30
1-29
Analysis Preview Common-Size Analysis Purpose : Evaluation of internal makeup of financial statements Evaluation of financial statement accounts across companies Output: Proportionate size of assets, liabilities, equity, revenues, & expenses
1-31
1997
100.0% 54.9 45.1% 26.9 8.5 8.9 0.9% 0.7 0.1 0.3% 0.3 0.0%
Analysis Preview
Valuation
Valuation - an important goal of many types of business analysis
Purpose: Estimate intrinsic value of a company (or stock) Basis: Present value theory (time value of money)
1-34
Market Efficiency
assumes competent and informed analysis distinguish aggregate from individual behavior reflects information (both reliable and unreliable) cross-country differences in rewards to analysis
Financial statement analysis relevant to more than just market analysis, e.g.,
1-36
credit and lending auditing valuation of nonpublicly traded firms mergers and acquisitions etc...