Topik

1. Overview of Financial Reporting, Financial Statement Analysis, and

Valuation (W1, S1)
2. Accounting Quality, Income v.s. Cash Flows (W2-3, W6, S2, S7)
3. Profitability and risk analysis (W4-5, S8, S10)
4. Financing Activities (W7, S3)
5. Investing Activities (W8, S4-5)
6. Operating Activities (W9, S6)
7. Forecasting Financial Statements (W10, S9)
8. Valuation (W11-14, S11)
9. Laporan Keuangan Pemerintah Pusat
10. Laporan Keuangan Pemerintah Daerah
11. Laporan Keuangan Bank Indonesia
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Chapter 4
Profitability
Analysis
Overview of Profitability Analysis
Evaluates whether managers are effectively

Chapter: 04
executing a firms strategy.
Helps to develop an understanding of a firms

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performance to enable forecasts of future
performance.
Approaches to understanding firms net
income:
Overview of Profitability Analysis (Contd.)
Alternative transformations of measured net

Chapter: 04
income:
Earnings per share analysis

4
Common-size analysis
Percentage change analysis
Alternative definitions of profits
Rate of Return Metrics:
Return on total assets
Return on common equity
Alternative Approaches to Analyzing Net
Income

Chapter: 04
5
Earnings Per Share
One of the most frequently used measures of profitability.

Chapter: 04
The only financial ratio that GAAP requires firms to disclose on the
face of the income statement.
Covered explicitly by the opinion of the independent auditor.

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Types of EPS:
Basic EPS (Simple Capital Structure)
Diluted EPS (Complex Capital Structure)
Calculating EPS
Basic EPS (Simple Capital Structure)

Chapter: 04
For the firms do not have:
Outstanding convertible bonds or convertible preferred stock that can
be exchanged for shares of common stock.

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Options or warrants that holders can use to acquire common stock.
Basic EPS is calculated as:

Net Income - Preferred Stock Dividends

Weighted Average Number of
Common Shares Outstandin g
Calculating EPS (Contd.)
Diluted EPS (Complex Capital Structure)

Chapter: 04
For the firms that have Convertible securities and/or stock options or
warrants outstanding.
Presents two EPS amounts: Basic EPS & Diluted EPS

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Diluted EPS reflects the dilution potential of convertible securities,
options, and warrants.
Diluted EPS is calculated as:

Net Income - Preferred Stock Dividends Adjustmen ts for Dilutive Securities

W eighted Average Weig hted Average Number
Number of Common of Shares Issuable from
Shares Outstandin g Dilutive Securities
Criticisms of EPS
It does not consider the amount of assets or capital required to

Chapter: 04
generate a particular level of earnings.
Two firms with the same earnings and EPS are not necessarily
equally profitable.

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The number of shares of common stock outstanding serves as a
poor measure of the amount of capital in use.
Despite the above criticisms of EPS as a measure of profitability, it
remains one of the focal points of announcements and is frequently used
valuing firms.
Common-Size Analysis
Simple way of creating greater comparability across firms and for

Chapter: 04
same firm through time.
Most frequently utilized in:
Income statement: by expressing all line items scaled by revenues.

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Balance sheet: by expressing all line items scaled by total assets.
Common scaling enables figures across firms and across time to be
more comparable.
Percentage Change Analysis
Computes percentage changes in individual

Chapter: 04
line items.
Can be compared across firms or across time.

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Focus is not on the financial data themselves,
but on the changes in individual line items
through time.
Alternative Definitions Of Profits
Analysts use measures of past profitability to

Chapter: 04
forecast the firms future profitability.
These may include:

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Comprehensive Income
Operating Income, EBIT, EBITDA, and Other Profit
Measures
Segment Profitability
Pro Forma, Adjusted, or Street Earning
 Return On Assets
Independent of firms financing decisions.

Chapter: 04
Measures ongoing profitability.
Unusual or nonrecurring items (such as

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restructuring charges), may be removed, net
of tax.
Return on Assets is calculated as:
Net Income (1 - Tax Rate)(Inte rest Expense) Minority Interest in Earnings
Average Total Assets
Net Income (1 - Tax Rate)(Inte rest Expense) Minority Interest in Earnings
Average Total Assets

Disaggregating ROA
ROA can be further disaggregated into:

Chapter: 04
ROA Profit Margin for ROA x Asse ts Turnover

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Where :
Adjusted Net Income
Profit Margin
Sales
Sales
Assets Turnover
Average Total Assets
Realized ROA versus Expected
ROA
Realized ROA is derived from financial statement data for a

Chapter: 04
particular period and will not necessarily correlate perfectly with
expected returns.
Reasons for this may be:

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Faulty assumptions were used in deriving expected ROAs.
Changes in the environment.
ROA is an incomplete measure of economic rates of return.
Elements of risk - differences in ROAs
Three elements of risk help in understanding

Chapter: 04
differences across firms and changes over
time in ROAs:

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Operating leverage: Refers to proportion of fixed
costs relative to variable costs.
Cyclicality of Sales: Are sales sensitive to economic
conditions.
Product Life Cycle: Relates to the stage and length
of firms product life.
Trade-Offs between Profit Margin and Assets
Turnover
Important to examine the differences

Chapter: 04
between the relative mix of profit margin and
assets turnover.

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Differences in ROA due to relative mix of
profit margin and assets turnover can be
explained by:
Microeconomic Theory
Business Strategy
Microeconomic Theory
Capacity Constraint

Chapter: 04
Heavy fixed capacity costs and lengthy periods
required to add new capacity.

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There is an upper limit on the size of assets
turnover achievable.
Only way to increase ROA is to increase profit
margin.
The firms usually achieve the high profit margin
through some form of entry barrier.
Microeconomic Theory (Contd.)
Competitive Constraint

Chapter: 04
For firms whose products are commodity- like.
Few entry barriers and intense competition.

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There is an upper limit on the achievable level of
profit margin for ROA.
Only way to improve ROA is to achieve high asset
turnover.
Firms achieve the high assets turnovers by
controlling costs with aggressively low prices to
gain market share.
Business Strategy
Two generic alternative strategies for a

Chapter: 04
particular product are:
Product differentiation strategy-

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Differentiate a product to obtain market power over
revenues and, therefore, profit margins.
Low-cost leadership strategy-
Enabling the firm to charge the lowest prices and to
achieve higher sales volumes.
Analyzing the Profit Margin
for ROA
Sales

Chapter: 04
Individual expenses
Cost of goods sold
Selling, General, and Administrative Expenses

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Income taxes
Profit margin
Segment data: Permits the analyst to examine ROA, profit margin,
and assets turnover at an additional level of depth.
Analyzing Total Assets
Turnover
Captures how efficiently assets are being utilized to generate

Chapter: 04
revenues.
Provides insight into changes in the total assets turnover by
examining turnover ratios:

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Accounts receivable turnover- Indicates the average time until firms
collect accounts receivable in cash.
Inventory turnover- Indicates the length of time needed to produce,
hold, and sell inventories.
Fixed assets turnover- Measures the relation between sales and the
investment in property, plant, and equipment.
Return on Common
Equity
Measures the return to common stock holders after subtracting

Chapter: 04
operating expenses and costs of debt financing and preferred
stock.
It should adjust net income for nonrecurring charges, as in ROA.

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Explicitly accounts for the cost of debt and preferred stock
financing.
ROCE is calculated as:
Net Income Preferred Stock Dividends
Average Common Stockholde rs Equity
Relating ROA to ROCE
ROA measures operating performance

Chapter: 04
independent of financing.
ROCE considers the cost of debt and preferred

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stock financing.
Disaggregating ROCE
ROCE can be further disintegrated into:

Chapter: 04
ROCE =
Profit Margin for ROCE x Assets Turnover x Capital Structure Leverage

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Average
Net Income to Common Sales Total Assets
x x
Sales Averag e Average Common
Total Assets Shareholde rs Equity
Leverage refers to use of debt to increase return to
common stockholders
ROCE > ROA
When ROA > Cost of debt and Preferred stock financing.
Interpreting Financial Statement Ratios
Comparing with Earlier Periods

Chapter: 04
Raise the following questions:
Has the firm made a significant change in its product, geographic, or
customer mix?

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Has the firm made a major acquisition or divestiture?
Has the firm changed its methods of accounting over time?
Are there any unusual or nonrecurring amounts that impair a
comparable analysis of financial results across?
Interpreting Financial Statement Ratios
(Contd.)

Comparing with Other Firms

Chapter: 04
Consider the following:
Definition of the industry

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Calculation of industry average
Distribution of ratios around the mean
Definition of financial statement ratios
Ketentuan Tugas
Satu kelompok terdiri dari maksimal lima anggota.
Masing-masing kelompok memilih sektor/industri yang berbeda.
Setiap mahasiswa mengumpulkan tugas pribadi sebagai attachment email
ke yhadiwibowo@gmail.com selambat-lambatnya H-2 (pukul 24:00) dari
pertemuan terjadwal.
Format Subject email: ALKMBK kelas nomor absen Tugas nomor
tugas; contoh: ALKMBK 8B 07 Tugas 02.
File yang dikirim berupa file doc/docx dan xls/xlsx harus disertakan bila
melibatkan perhitungan angka.
Format nama file sama seperti subject email, contoh ALKMBK 8B 07 Tugas
02.docx dan/atau ALKMBK 8B 07 Tugas 02.xlsx
Penyampaian tugas dianggap sah bila file attachment dapat dibuka (cek
dengan cc ke email sendiri).
Setiap menit/jam keterlambatan akan mengurangi penilaian, dengan alasan 35
apa pun.
Tugas 03
Individu:
Terhadap perusahaan yang dipilih, lakukan:
Profitability analysis
Laporan individu disampaikan selambat-lambatnya pada
20 Maret 2017 pukul 24:00 untuk kelas 8A dan 8C
21 Maret 2017 pukul 24:00 untuk kelas 8B
Kelompok:
Kompilasikan laporan-laporan dari setiap anggota kelompok menjadi perbandingan antara
perusahaan-perusahaan dalam satu sektor.
Profitability analysis
Laporan kelompok disampaikan selambat-lambatnya pada
21 Maret 2017 pukul 24:00 untuk kelas 8A dan 8C
22 Maret 2017 pukul 24:00 untuk kelas 8B

36
Chapter 5
Risk Analysis
Financial Statement Analysis of
Risk
Types of Risk:

Chapter: 05
Financial flexibility
Short-term liquidity risk
Long-term solvency risk

38
Credit risk
Bankruptcy risk
Market equity risk
Financial reporting manipulation risk
Framework for Financial Statement Analysis
of Risk

Chapter: 05
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Analyzing Financial
Flexibility
Financial leverage can enhance the return to common shareholders.

Chapter: 05
Disaggregation of ROCE provides insight about the degree of
benefit derived from using leverage.
Higher leverage generally suggests greater financial risk.

45
Risk is primarily attributable to the costs of borrowings.
Analyzing Financial Flexibility (Contd.)
An alternative disaggregation of ROCE from the one discussed in

Chapter: 05
the previous chapter is:

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ROCE Operating ROA (Leverage x Spread)

Where :
NOPAT
Operating ROA
Average Net Operating Assets
Total Liabilities
Leverage 1
Common Equity
Operating ROA - Net Borrowing Rate
Spread
Average Financing Obligations
Analyzing Short-Term
Liquidity Risk
Measures a firms ability to generate sufficient cash to supply

Chapter: 05
operating working capital needs and to service debts.
Short-term liquidity problems can arise from the following:
Untimed cash inflows and outflows.

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High Degree of long-term leverage.
Short-Term Liquidity Risk
(Contd.)
Financial statement ratios:

Chapter: 05
Current ratio: It indicates the amount of cash available and other
current assets of the firm, relative to obligations coming due.
Quick ratio:

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Also called as Acid Test Ratio.
Includes in only those current assets the firm could convert quickly
into the cash (Cash, Marketable securities & Receivables).
Short-Term Liquidity Risk
(Contd.)
Operating cash flow to current liabilities: It indicates the amount of

Chapter: 05
cash from operations after funding working capital needs.
Working capital activity ratios: Rate of activity measures used to
study cash-generating ability of operations and short-term liquidity

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risk of a firm are:
Accounts Receivable Turnover
Inventory Turnover
Accounts Payable Turnover
Short-Term Liquidity Risk
(Contd.)
Revenues to cash ratio:

Chapter: 05
Reflects the net effect of operating, investing, and financing activities
on cash and managements judgments about the desired level of
cash.

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Lenders prefer a smaller revenue to cash ratio and large number of
days revenue available as cash on hand.
Days revenue held in cash:
It measures the number of days sales the firm has on hand as
available cash.
It will be useful for forecasting financial statements.
Analyzing Long-Term Solvency
Risk
Examines a firms ability to make interest and principal payments

Chapter: 05
on long-term debt and similar obligations.
Three measures used to examining long-term solvency risk are:
Debt ratios

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Interest coverage ratio
Operating cash flow to total liabilities ratio
Long-Term Solvency Risk
(contd.)
Debt Ratios:

Chapter: 05
It is used to measure the amount of liabilities, particularly long-term
debt in a firms capital structure.

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The higher this proportion, the greater the long-term solvency risk.
It is the alternative computation of leveraged used in the ROCE, in
previous chapter.
Long-Term Solvency Risk
(contd.)
Commonly used measures of Debt Ratios:

Chapter: 05
Total Liabilities
Liabilities to Assets Ratio

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Total Assets

Total Liabilities
Liabilities to Shareholders Equity Ratio
Total Shareholders Equity

Long - Term Debt to Long - Term Capital Ratio

Long - Term Debt

Long - Term Debt Total Shareholders Equity

Long - Term Debt

Long - Term Debt to Shareholders Equity Ratio
Total Shareholders Equity
Long-Term Liquidity Risk
(Contd.)
Interest coverage ratio:

Chapter: 05
It indicates the number of times a firms income or cash flows could
cover interest charges.
Operating cash flow to total liabilities ratio:

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Considers the firms ability to generate cash flow from operations to
service debt.
Analyzing Credit Risk
Potential lenders to a firm, assess the likelihood that the firm will

Chapter: 05
pay periodic interest and repay the principal amount.
Lenders may use following checklist as factors.
Circumstances leading to need for loan.

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Credit History
Has a firm borrowed in past and has it successfully repaid it?
Poor credit history can doom a firm to failure.
Analyzing Credit Risk
(contd.)
Cash flows

Chapter: 05
Lenders prefer that the firm generates sufficient cash flows to pay interest
and repay principal on a loan rather than selling the collateral.
Collateral

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Capacity for debt
Contingencies
Character of Management
Communication
Conditions or covenants
Analyzing Bankruptcy
Risk
Models for bankruptcy prediction

Chapter: 05
Univariate bankruptcy prediction models: Error types
Examines the relation between a particular financial statement ratio and
bankruptcy.

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Analyzing Bankruptcy Risk
(Contd.)
Bankruptcy prediction models using multiple discriminant analysis

Chapter: 05
(MDA):
Altmans Z-score
Z less than 1.81 indicates high probability of bankruptcy.
Z greater than 3.00 indicates low probability of bankruptcy.

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Scores between 1.81 and 3.00 are in the gray area.
Bankruptcy prediction models using Logit Analysis:

1
Probability of Bankruptcy for a firm
1 e y
Bankruptcy Prediction Research
It summarizes the factors for bankruptcy most consistently across

Chapter: 05
various studies.
Investment Factors:
Relative Liquidity of a firms Assets

60
Rate of Asset Turnover
Bankruptcy Prediction Research (Contd.)
Financing Factors:

Chapter: 05
Relative Proportion of Debt
Relative Proportion of Short-term Debt
Operating Factors:

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Relative level of profitability
Variability of operations
Other possible explanatory variables:
Size
Growth
Qualified Audit Opinion
Market Equity Beta Risk
Beta coefficient measures the covariability of a firms return with

Chapter: 05
the returns of a diversified portfolio of all shares traded on the
market.
Beta is a measure of the Systematic risk of the firm.

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Capital Asset Pricing Model
Market Equity Beta Risk
(Contd.)
Studies of the determinants have identified three principal

Chapter: 05
explanatory variables:
Degree of operating leverage
Degree of financial leverage

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Variability of sales
Financial reporting
manipulation risk
Earnings manipulation- Refers to reporting amounts outside the

Chapter: 05
limits of U.S. GAAP or IFRS, i.e. fraudulent reporting.
Focus on more flagrant violations of accounting standards and
oversight bodies such as FASB, IASB, and SEC.

64
Financial reporting
manipulation risk
Motivations for financial statement manipulation:

Chapter: 05
Influence stock prices positively.
Increase management bonuses.
Lower cost debt financing.

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Avoid violation of debt covenants (or technical default).
Influence corporate control transactions.
Avoid regulatory or political consequences.