Basic Fin Analysis

8/2/2019 Basic Fin Analysis

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Alix Mandron - Financial analysis53-251-02 1

A REVIEW OF BASICFINANCIAL ANALYSIS


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Overview

1. A very quick review of classical financialanalysis

2. The Fletcher Leisure Group: casediscussion

3. The Cash Flow Statement (CFS), a review

structure

meaning


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1. Classical ratios

You can invent as many ratios as you like,provided they make sense to you

No ratio, or system of ratios, is perfect; some

classical ratios are of doubtful interest (more onthis in later sessions);

therefore, you do not have to compute an ocean ofratios; a selected few will do

Be fastidious regarding definitions: the samename often covers different computations(e.g.: debt ratio, profitability margin, etc.)


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Be extra-careful when comparing with

benchmarks Check the definitions and use the same

Make sure you compare comparablescompanies in the same industry may not be comparable

they may not have the same FY = a problem in seasonalindustries

Etc

Never forget that the others do not own the

truth nor that average is often synonymous with

mediocre.



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A review of the DuPont system (see thesummary included in the CP and/or anytextbook)

I prefer to modify it slightly: operations include accounts receivable, inventory and

accounts payable management (these are in no wayinvestments)

operations do not include interest payments, whichbelong to financing


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2. The Fletcher Leisure Group

Assume that you are at the end of 1990. Onthe basis of traditional ratios and commonsense only, answer these questions:

Is Fletcher a profitable company? I expect astraight answer: yes or no.

Position Fletcher on the classification grid

Would you recommend it as an investment?What advice, if any, would you give itsmanagers? Justify.


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3. The Cash Flow Statement

Its objective

Three sections covering the three areas of

business management: operations,investments, financing.

The last section (change in cash) is onlythere to make sure that nothing wasforgotten. Increasing cash reserves isnot a valid objective in and of itself.


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Cash flows from operations - Two alternativemethods of presentation: direct, indirect

The direct method of presentation (follows thecomputation method, i.e. from the electronic cash ledgers)

The indirect method of presentation (it is only apresentation method; it does not follow the actual computation

method: accounting software still uses the electronic cashledgers)

A look at Fletcher The indirect method

undoes non-cash entries

gets rid of pollutants (items unrelated tooperations)

adds forgotten cash transactions


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In the indirect approach to CFFOs,individual items are not sources of $;

they are mere corrections to a wrongfigure, namely Net Income

Net income is an accounting construct, not a

measurement of cash earned N.I. is wrong when what matters is

spendable money, i.e. when the focus is ontreasury/cash management

Never tell me that Net income or Depreciationetc. are sources of cash; it does not makesense.



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Beware: whatever its presentation, the CFS

is always built from the cash transactions. Itis NOT computed from 2 adjacent BalanceSheets, even though, in simple cases, youcan reconstruct it in this way

it works for Fletcher in 1990, for example (tryit)

but, in more complex cases, in particular if

several currencies are involved and if therewere acquisitions, the difference approach willnot work



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Try to reconstructFletchers change innon-cash operational working cap. for1989 using the 1989 and 1988 BSs. Doesit work?


Basic Fin Analysis

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