Corporate Finance and Financial Statements Notes

Evolving Role of a CFO in Today's Business Arena

• Core traditional tasks and duties:
  • Cash Flow
  • Company Performance
  • Budgeting and Expense Control
  • Raising Capital
  • Record Control
  • Department Supervision
  • Shareholder Relations
• Reporting:
  • Chief Executive Officer
  • Supervisory Board
• Department Supervision:
  • Accounting
  • Finance
  • Procurement
• Contemporary Expectations:
  • Strategic partner and advisor to the CEO
  • Big picture thinker not just detail oriented
  • Emphasize what gets done rather than how things are done
  • Not just doing finance but talking finance
  • Key organizational leader
• CFO operational principles:
  • creating value (developing strategies for sustainable value creation)
  • enabling value (supporting the senior management in making decisions and facilitating the understanding of performance of organizational functions or units)
  • preserving value (asset and liability management, managing risk in relation to setting and achieving the organization’s objectives)
  • reporting value (ensuring relevant and useful internal and external business reporting)

Introduction to Corporate Finance

• Brief Summary:
  • Part I: What is a Company?
  • Part II: What are the Financial Statements?
  • Part III: What is Finance and Investment?

What is a company?

• Forms of Business Organization:
  • Sole proprietorship
  • Partnership
  • Corporation
    • Most large firms are organized as corporations.
    • Advantages: unlimited life, easy transfer of ownership (stock), limited liability for owners, relative ease of raising capital, and can use stock for acquisitions
    • Disadvantages: Double taxation of earnings, cost of set-up and report filing, and issues relating to the separation of ownership and control
  • Hybrid forms; Limited Liability Corporations (LLC), etc., firms having characteristics of the three forms above.
• The Goal of a Corporation
  • Market Recognition
  • Customer Satisfaction
  • Minimizing Expenses
  • Market Share
  • Profit
  • Maximizing the shareholders value
• Managerial Goals
  • Managerial goals may be different from shareholder goals
    • Expensive perquisites
    • Survival
    • Independence
  • Increased growth and size are not necessarily the same thing as increased shareholder wealth.

What are Financial Statements?

• Income Statement
  • Revenues: Products, Services, Financial Income
  • Expenses 1: Salaries, Marketing, Administration, Taxes
  • Expenses 2: Production Cost of Goods Sold, Transportation, Extraordinary expenses, Financial expenses
  • Net Income = Revenues - Expenses
  • Expenses, which are not planned, can increase the overall expenses, and could lead to a net loss!
• Balance Sheet
  • Assets: Real Estate, Equipment, Raw Materials, Cash, Receivables, Investments, Patents
  • Liabilities: Payables, Loans, Salaries, Taxes Payable
  • Equity: Reserves, Retained earnings
  • Assets = Liabilities + Equity
  • Inability to service obligations, taking on too many loans, inability to collect on receivables, etc. could cause illiquidity and prevent further growth; Insolvency
• Cash-flow Statement – the wallet
  • Cash inflows (+) from operating activities: Revenues from selling goods and services (and collecting receivables), Dividends
  • Cash inflows (+) from investing activities: Selling equipment, Selling real estate
  • Cash inflows (+) from financing activities: Recapitalization, Debt financing
  • Cash outflows (-) from operating activities: Paying suppliers, Paying salaries, Paying taxes and other duties
  • Cash outflow (-) from investing activities: Buying equipment, Buying real estate, Providing loans to other parties
  • Cash outflow (-) from financing activities: Repaying debt, Paying dividends

What is Finance and Investment?

• Finance and Investment – The Goal
  • Financial decisions
  • Investment decisions
  • Dividend decisions
• Financial Manager
  • To create value, the financial manager should:
    1. Try to make smart investment decisions!
    2. Try to make smart financing decisions!
    3. Try to make smart dividend decisions!
  • The top financial manager within a firm is usually the Chief Financial Officer (CFO)
    • Treasurer: oversees cash management, credit management, capital expenditures, and financial planning
    • Controller: oversees taxes, cost accounting, financial accounting and data processing
• Organizational Chart
  • Chairman of the Board and Chief Executive Officer (CEO)
  • Board of Directors
  • President and Chief Operations Officer (COO)
  • Vice President Marketing, Finance (CFO), Production
  • Treasurer: Cash Manager, Credit Manager, Capital Expenditures, Financial Planning
  • Controller: Tax Manager, Cost Accounting Manager, Financial Accounting Manager, Data Processing Manager
• The Agency Problem
  • Agency relationship: Principal hires an agent to represent his/her interests; Stockholders (principals) hire managers (agents) to run the company
  • Agency problem: Conflict of interest between principal and agent
    • Management goals and agency costs
• Financial Markets and the Corporation
  • A. Firm issues securities to raise cash.
  • B. Firm invests in assets.
  • C. Firm's operations generate cash flow.
  • D. Cash is paid to government as taxes. Other stakeholders may receive cash.
  • E. Reinvested cash flows are plowed back into firm.
  • F. Cash is paid out to investors in the form of interest and dividends.
• Financial Markets
  • Financial markets - brings buyers and sellers of debt and equity securities together
  • How do financial markets differ?
    • Type of securities traded/how trading is conducted and who the buyers and sellers are
    • Money markets and capital markets
      • Money market - short term debt securities
      • Capital market - long term debt and equity
  • Primary Market
    • When a corporation issues securities, cash flows from investors to the firm.
    • Usually an underwriter is involved.
  • Secondary Markets
    • Involve the sale of “used” securities from one investor to another.
    • Securities may be exchange traded or trade over-the- counter in a dealer market.

Module 1 - Introduction to Business Finance

• Role of finance in business
• Financial goals of the firm
• Functions of a financial manager
• Agency theory and corporate governance

Module 2 - Financial Statements and Analysis

• Overview of key financial statements
• Ratio analysis: liquidity, profitability, efficiency, and solvency
• Common-size and trend analysis
• Limitations of financial statement analysis

Module 3 - Risk and Return

• Concept of risk and return
• Diversification and portfolio theory
• Capital Asset Pricing Model (CAPM)
• Risk vs. systematic risk

Module 4 - Time Value of Money

• Present and future value concepts
• Annuities and perpetuities
• Compounding and discounting techniques
• Applications in investment decisions

Module 5 - Capital Budgeting

• Overview of investment appraisal
• Payback period, NPV, IRR, and profitability index
• Capital rationing and project selection
• Dealing with risk in capital budgeting

Module 6 - Cost of Capital

• Components of cost of capital
• Weighted Average Cost of Capital (WACC)
• Marginal cost of capital

Module 7 - Capital Structure and Leverage

• Financial and operating leverage
• Capital structure theories
• Factors affecting capital structure decisions

Module 8 - Working Capital Management

• Importance of working capital
• Cash, inventory, and receivables management
• Short-term financing strategies

Module 9 - Dividend Policy and Internal Financing

• Types of dividends and dividend policies
• Dividend theories
• Retained earnings and reinvestment strategies

Financial and Management Accounting

• The 3 Basic Activities Involved in Conducting a Business
  • Financing activities:
    • Owners contribute cash and receive equity shares in return.
    • Creditors loan cash in return for the promise of interest and principal payments.
  • Investing activities:
    • Once the capital is collected it is invested in producing assets, like buildings, equipment, machinery and vehicles.
  • Operating activities:
    • The assets are operated to produce goods & services which are sold to customers.
  • The Net Income of these sales can be used in three ways:
    1. Reinvested in the producing assets!
    2. Returned to the creditors in the form of debt payments!
    3. Returned to the owners in the form of dividends!
• The Nature of Accounting
  • The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements.
  • Accounting systems are designed to meet the needs of the decisions makers who use the financial information.
  • Every business has some sort of accounting system. These accounting systems may be very complex or very simple, but the real value of any accounting system lies in the information that the system provides.
• Accounting as an Aid to Decision Making
  • Accounting information is useful to anyone who makes decisions that have economic results.
    • Managers want to know if a new product will be profitable.
    • Owners want to know which employees are productive.
    • Investors want to know if a company is a good investment.
    • Creditors want to know if they should extend credit, how much to extend, and for how long.
    • Government regulators want to know if financial statements conform to requirements.
  • Fundamental relationships in the decision-making process: Event -> Accountant’s Analysis & Recording -> Financial Statements -> Users
• Financial and Management Accounting
  • The major distinction between financial and management accounting is the users of the information.
    • Financial accounting serves external users.
    • Management accounting serves internal users, such as top executives, management, and administrators within organizations.
  • The primary questions about an organization’s success that decision makers want to know are:
    1. What is the financial picture of the organization on a given day?
    2. How well did the organization do during a given period?
  • Accountants answer these primary questions with four major financial statements:
    • Balance Sheet - financial picture on a given day;
    • Income Statement - performance over a given period;
    • Statement of Cash Flows - performance over a given period;
    • Statement of Owner’s Equity - change in equity from the end of one fiscal year to the end of the next.
  • Annual report - a document prepared by management and distributed to current and potential investors to inform them about the company’s past performance and future prospects. The annual report is one of the most common sources of financial information used by investors and managers.
    • The annual report usually includes:
      • A letter from corporate management;
      • A discussion and analysis of recent economic events by management;
      • Footnotes that explain many elements of the financial statements in more detail;
      • The report of the independent auditors;
      • A statement of management’s responsibility for preparation of the financial statements;
      • Other corporate information.

Balance Sheet

• Sections of the balance sheet:
  • Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns).
  • Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm).
  • Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners).
• The balance sheet equation:
  • Assets = Liabilities + Owners’ Equity
  • Owners’ Equity = Assets - Liabilities
• Balance Sheet Transactions
  • The balance sheet is affected by every transaction that an entity encounters.
  • Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity, i.e., the balance sheet equation must always be balanced.
  • Just as the balance sheet equation must always balance, the balance sheet must also always balance.
  • A balance sheet could be prepared after every transaction, but this practice would be awkward and unnecessary. Therefore, balance sheets are usually prepared monthly or on some other periodic schedule.

Income Statement

• An income statement is a summary of the revenues and expenses of a business over a period of time, usually either one month, three months, or one year.
• Summarizes the results of the firm’s operating and financing decisions during that time.
• Operating decisions of the company apply to production and marketing such as sales/revenues, cost of goods sold, administrative and general expenses (advertising, office salaries).

Statement of Cash Flows

• Statement of cash flows (SCF) reports cash inflows and outflows
• Cash flows are reported based on the three business activities of a company:
  1. Operating activities: transactions related to the operations of the business.
  2. Investing activities: acquisitions and divestitures of long-term assets
  3. Financing activities: issuances and payments toward equity, borrowings, and long-term liabilities.
• The statement is designed to show how the firm’s operations have affected its cash position and to help answer questions such as these:
  • Is the firm generating the cash needed to purchase additional fixed assets for growth?
  • Is the growth so rapid that external financing is required both to maintain operations and for investment in new fixed assets?
  • Does the firm have excess cash flows that can be used to repay debt or to invest in new products?
• Cash flow is ultimately what matters to a firm and its investors; therefore, it is not really necessary to worry about the definition of earnings used in the preparation of the income statement. Rather, one need only consider the sources and uses of cash as reflected on the firm’s statement of cash flows.

Statement of Owner's Equity

• Statement of Owner’s Equity - is designed to show the components of the change in equity from the end of one fiscal year to the end of the next.
• Begins with the amount of equity shown on the balance sheet.
• Net income is added, and cash dividends paid to owners are subtracted.

Financial Statements: Review

• Simplified Relationships between the Financial Statements:
  • Balance Sheet
  • Statement of Cash Flows
  • Income Statement
  • Statement of Retained Earnings
• Financial statements that are produced are the result of one possible set of rules that have resulted from a political process!
• Users need to be aware of these limitations!
• Users should read the notes to the financial statements since these contain a lot of useful guidance to interpreting the statements!
• Financial Statement Limitations
  • Assets are valued at historical cost less an estimated depreciation
    • Other possibilities include cost, net realizable value, replacement cost, price level adjusted
  • Not all assets appear
    • Human capital, internally generated goodwill
      • Could be argued that approach is more conservative
  • Not all liabilities appear
    • Contingencies appear only in the footnotes
    • Off balance sheet financing
  • Other limitations include management biases and a lack of timeliness
• Financial Accounting: Not an Exact Science
  • IFRS allows companies choices in preparing financial statements (inventories, property, and equipment).
  • Financial statements also depend on countless estimates.
• Financial Accounting in Context
  • A company’s financial statements only tell part of the story.
  • You must continually keep in mind the world in which the company operates.
  • Financial statement analysis must be conducted within the framework of a thorough understanding of the broader forces which impact company performance.

Ratio Analysis

• Ratio Analysis looks at the pairing of financial data in order to get a picture of the performance of the organization.
• Ratios allow a business to identify aspects of their performance to help decision-making.
• Financial ratios are used as a relative measure that facilitates the evaluation of efficiency or condition of a particular aspect of a firm's operations and status.
• Ratio analysis involves methods of calculating and interpreting financial ratios in order to assess a firm's performance and status
• Interested Parties in Ratio Analysis:
  • Shareholders
  • Creditors
  • Management
• Words of Caution
  • A single ratio rarely tells enough to make a sound judgment.
  • Financial statements used in ratio analysis must be from similar points in time.
  • Audited financial statements are more reliable than unaudited statements.
  • The financial data used to compute ratios must be developed in the same manner.
  • Inflation can distort comparisons.
• Different Types of Ratios
  • Liquidity
  • Activity
  • Debt (i.e. gearing)
  • Profitability
• Liquidity refers to the solvency of the firm's overall financial position, i.e. a "liquid firm" is one that can easily meet its short-term obligations as they come due.
• A second meaning includes the concept of converting an asset into cash with little or no loss in value.
• Three Important Liquidity Measures:
  • Net Working Capital (NWC)
    • NWC = Current Assets - Current Liabilities
  • Current Ratio (CR)
    • CR = {Current Assets } / {Current Liabilities }
  • Quick (Acid-Test) Ratio (QR)
    • QR = {Current Assets - Inventory} / {Current Liabilities}
• Activity is a more sophisticated analysis of a firm's liquidity, evaluating the speed with which certain accounts are converted into sales or cash; also measures a firm's efficiency.
• Five Important Activity Measures:
  • Inventory Turnover (IT)
    • IT = {Cost of Goods Sold} / {Avarage Inventory}
  • Average Collection Period (ACP)
    • ACP = {Accounts Receivable} / {Annual Sales/360}
  • Average Payment Period (APP)
    • APP= {Accounts Payable} / {Annual Purchases/360}
  • Fixed Asset Turnover (FAT)
    • FAT = {Sales} / {Net Fixed Assets}
  • Total Asset Turnover (TAT)
    • TAT = {Sales} / {Total Assets}
• Debt is a true "double-edged" sword as it allows for the generation of profits with the use of other people's (creditors) money, but creates claims on earnings with a higher priority than those of the firm's owners.
• Financial Leverage is a term used to describe the magnification of risk and return resulting from the use of fixed-cost financing such as debt and preferred stock.
• Four Important Debt Measures:
  • Debt Ratio (DR)
    • DR= {Total Liabilities} / {Total Assets}
  • Debt-Equity Ratio (DER)
    • DER= {Long-Term Debt} / {Stockholders’ Equity}
  • Times Interest Earned Ratio (TIE)
    • TIE= {Earnings Before Interest & Taxes (EBIT)} / {Interest}
  • Fixed Payment Coverage Ratio (FPC)
    • FPC= {Earnings Before Interest & Taxes + Lease Payments} / {Interest + Lease Payments + ((Principal Payments + Preferred Stock Dividends) X [1 / (1 -T)])}
• Profitability Measures assess the firm's ability to operate efficiently and are of concern to owners, creditors, and management-
• A Common-Size Income Statement, which expresses each income statement item as a percentage of sales, allows for easy evaluation of the firm’s profitability relative to sales.
• Seven Basic Profitability Measures:
  • Gross Profit Margin (GPM)
    • GPM= {Gross Profits} / {Sales}
  • Operating Profit Margin (OPM)
    • OPM = {Operating Profits (EBIT)} / {Sales}
  • Net Profit Margin (NPM)
    • NPM= {Net Profit After Taxes} / {Sales}
  • Return on Total Assets (ROA)
    • ROA= {Net Profit After Taxes} / {Total Assets}
  • Return On Equity (ROE)
    • ROE= {Net Profit After Taxes} / {Stockholders’ Equity}
  • Earnings Per Share (EPS)
    • EPS = {Earnings Available for Common Stockholder’s} / {Number of of Common Stock Outstanding}
  • Price/Earnings (P/E) Ratio
    • P/E = {Market Price Per Share of Common Stock} / {Earnings Per Share}
• DuPont System of Analysis
  • DuPont System of Analysis is an integrative approach used to dissect a firm's financial statements and assess its financial condition
  • It ties together the income statement and balance sheet to determine two summary measures of profitability, namely ROA and ROE
• The firm's return is broken into three components:
  • A profitability measure (net profit margin)
  • An efficiency measure(total asset turnover)
  • A leverage measure (financial leverage multiplier)
• Summarizing the Ratios
  • An approach that views all aspects of the firm's activities to isolate key areas of concern
  • Comparisons are made to industry standards (cross-sectional analysis)
  • Comparisons to the firm itself over time are also made (time-series analysis)

Risk and Return

• Sources of Risk
  • Business Risk
    • Uncertainty associated with and investment earnings
  • Financial Risk
    • Attributable to the mix of debt and equity
  • Purchasing Power Risk
    • Changing price levels (inflation/deflation)
  • Interest Rate Risk
    • How changes in interest rates affect a security’s value
  • Liquidity Risk
    • Not being able to liquidate an investment
  • Tax Risk
    • Unfavorable changes in tax laws
  • Market Risk
    • Market factors independent of the given investment
  • Event Risk
    • Unexpected events
• Risk Preferences
  • Risk-averse
  • Risk-indifferent
  • Risk-seeking

Sources of Financing

• Internal Sources of Finance and Growth
  • ‘Organic growth’ - growth generated through the development and expansion of the business itself. Can be achieved through:
    • Generating increasing sales - increasing revenue to impact on overall profit levels
    • Use of retained profit - used to reinvest in the business
    • Sale of assets - can be a double edged sword - reduces capacity?
• External Sources of Finance and Growth
  • Short Term - used to cover fluctuations in cash flow!
  • Long Term - may be paid back after many years!
  • ‘Inorganic Growth’ - growth generated by acquisition! The existence of capital markets enable firms to raise long term loans and share capital.
• Short Term
  • Bank loans - necessity of paying interest on the payment, repayment periods
  • Overdraft facilities - the right to be able to withdraw funds you do not currently have
    • Provides flexibility for a firm
    • Interest only paid on the amount overdrawn
    • Overdraft limit – the maximum amount allowed to be drawn - the firm does not have to use all of this limit
  • Trade credit - Careful management of trade credit can help ease cash flow – usually between 28 and 90 days to pay
  • Factoring - the sale of debt to a specialist firm who secures payment and charges a commission for the service.
  • Leasing - provides the opportunity to secure the use of capital without ownership - effectively a hire agreement
• Long Term
  • Shares (shareholders are part owners of a company)
    • Ordinary Shares (Equities):
      • Ordinary shareholders have voting rights
      • Dividend can vary
      • Last to be paid back in event of collapse
      • Share price varies with trade on stock exchange
    • Preference Shares:
      • Paid before ordinary shareholders
      • Fixed rate of return
      • Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment
    • New Share Issues - arranged by merchant or investment banks
    • Rights Issue - existing shareholders given right to buy new shares at discounted rate
    • Bonus or Scrip Issue - change to the share structure - increases number of shares and reduces value but market capitalization stays the same.
  • Loans (Represent creditors to the company - not owners)
    • Debentures (Bond) - fixed rate of return, first to be paid
    • Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan
    • Merchant or Investment Banks – act on behalf of clients to organize and underwrite raising finance
    • Government/EU – may offer loans in certain circumstances
      • Grants
• Equity Capital
  • Represents the personal investment of the owner(s) in the business.
  • Is called risk capital because investors assume the risk of losing their money if the business fails.
  • Does not have to be repaid with interest like a loan does.
  • Means that an entrepreneur must give up some ownership in the company to outside investors.
• Debt Capital
  • Must be repaid with interest.
  • Is carried as a liability on the company’s balance sheet.
  • Can be just as difficult to secure as equity financing, even though sources of debt financing are more numerous.
  • Can be expensive, especially for small companies, because of the risk/return tradeoff.
• 'Inorganic Growth'
  • Acquisitions
  • The necessity of financing external inorganic growth
    • Merger: firms agree to join together – both may retain some form of identity
    • Takeover: One firm secures control of the other, the firm taken over may lose its identity
• Sources of Equity Financing
  1. Personal savings
  2. Friends and family members
  3. Angels
  4. Partners/Corporations
  5. Venture capital companies
  6. Public stock sale
• Personal Savings
  • The first place an entrepreneur should look for money.
  • The most common source of equity capital for starting a business.
  • Outside investors and lenders expect entrepreneurs to put some of their own capital into the business before investing theirs.
• Friends and Family Members
  • After emptying their own pockets, entrepreneurs should turn to those most likely to invest in the business: friends and family members.
  • Careful! Inherent dangers lurk in family/friendly business deals, especially those that flop.
    • Consider the impact of the investment on everyone involved.
    • Keep the arrangement “strictly business.”
    • Settle the details up front.
    • Never accept more than investors can afford to lose.
    • Create a written contract.
    • Treat the money as “bridge financing.”
    • Develop a payment schedule that suits both parties.
    • Have an exit plan.
• Business Angels
  • Private investors who invest in emerging entrepreneurial companies.
  • Fastest growing segment of the small business capital market.
  • An excellent source of “patient money” for investors needing relatively small amounts of capital ranging from $10,000 (sometimes less) to as much as $5 million.
  • The typical angel:
    • Invests in companies at the seed or startup stages.
    • Accepts 1 percent of the proposals presented to him/her
    • Makes an average of two investments every three years.
    • Has invested an average of $80,000 in 3.5 businesses.
    • 90 percent are satisfied with their investments.
• Corporate Venture Capital
  • 20 percent of all venture capital investments come from corporations.
  • About 300 large corporations across the globe invest in start-up companies.
  • Capital infusions are just one benefit; corporate partners may share marketing and technical expertise.
• Venture Capital Companies
  • Most venture capitalists seek investments in companies with high-growth and high-profit potential.
  • Business plans are subjected to an extremely rigorous review - less than 1 percent accepted.
  • Most venture capitalists take an active role in managing the companies in which they invest.
  • Many venture capitalists focus their investments in specific industries with which they are familiar.
  • Venture capitalists typically purchase between 20 percent and 40 percent of a company but in some cases will buy 70 percent or more.
  • Most often, venture capitalists invest in a company across several stages.
  • On average, 98 percent of venture capital goes to:
    • Early stage investments (companies in the early stages of development).
    • Expansion stage investments (companies in the rapid growth phase).
  • Only 2 percent of venture capital goes to businesses in the startup or seed phase.
  • What do Venture Capital Companies Look For?
    • Competent management
    • Competitive edge
    • Growth industry
    • Viable exit strategy
    • Intangibles factors
• Going Public
  • Initial public offering (IPO) - when a company raises capital by selling shares of its stock to the public for the first time.
  • Advantages of “Going Public”::
    • Ability to raise large amounts of capital
    • Improved corporate image
    • Improved access to future financing
    • Attracting and retaining key employees
    • Using stock for acquisitions
    • Listing on a stock exchange
  • Disadvantages of “Going Public”
    • Dilution of founder’s ownership
    • Loss of control
    • Loss of privacy
    • Reporting
    • Filing expenses
    • Accountability to shareholders
    • Pressure for short-term performance
    • Timing
• Efficient Capital Markets
  • Efficient Market Hypothesis (EMH)
    • Weak Form EMH: Historical market information
    • Semi-strong Form EMH: All public information
    • Strong Form EMH: All public and private information
• Investment Banks
  • Investment banks help companies and governments and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets (both equity and debt), as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.
  • Investment banks also act as intermediaries in trading for clients. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans.

Investment Analysis

• Security Analysis
  • Bottom-Up Approach
  • Top-down Approach
    • Economic analysis
    • Industry analysis
    • Fundamental analysis
    • Portfolio analysis
• Economic Analysis
  • Business Cycle
    • Changes in total economic activity
  • Key Economic Factors
    • Government fiscal policy
      • Taxes
      • Government spending
      • Debt management
    • Monetary policy
      • Money supply
      • Interest rates
    • Other Factors
      • Inflation
      • Consumer spending
      • Business investments
      • Foreign trade and exchange rates
    • Developing an Economic Outlook
• Industry Analysis
  • Key Issues
    • What is the nature of the industry?
    • To what extent is the industry regulated?
    • How important are technological developments?
    • Which economic forces are especially important to the industry?
    • What are the important financial and operating considerations?
    • Developing an Industry Outlook
• Fundamental Analysis
  • The competitive position of the company
  • Its composition and growth in sales
  • Profit margin and the dynamics of company earnings
  • The composition and liquidity of corporate resources (the company’s asset mix)
  • The company’s capital structure (its financing mix)
  • Financial Statements
    • Balance Sheet: Assets, liabilities, and stockholders equity
    • Income Statement: Operating results of the firm
    • Statement of Cash Flow: Summary of the firm’s cash flow
    • Key Financial Ratios
      • Measuring liquidity: Ability to meet its day-to-day operating expenses
      • Measuring leverage: Amount of debt being used
      • Measuring profitability: Firm’s returns
      • Activity Ratios: How well a firm is measuring its assets