A Manager's Guide to Financial Analysis: Powerful Tools for Analyzing the Numbers and Making the Best Decisions for Your Business

252 Pages·2015·3.63 MB·English

by  Eliot H. Sherman

A Manager’s Guide to
Financial Analysis
Sixth Edition
Powerful Tools for Analyzing the Numbers and
Making the Best Decisions for Your Business
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A Manager’s Guide to
Financial Analysis
Sixth Edition
Powerful Tools for Analyzing the Numbers and
Making the Best Decisions for Your Business
Eliot H. Sherman
A Manager’s Guide to Financial Analysis, Sixth Edition
Powerful Tools for Analyzing the Numbers and Making the Best Decisions for Your Business
© 2015 American Management Association. All rights reserved. This material may not be reproduced, stored in a retrieval system,
or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise,
without the prior written permission of the publisher.
ISBN 13: 978-0-7612-1561-5
ISBN 10: 0-7612-1561-1
AMACOM Self-Study Program
http://www.amaselfstudy.org
AMERICAN MANAGEMENT ASSOCIATION
http://www.amanet.org
Contents
About This Course xi
How to Take This Course xiii
Pre-Test xv
Introduction xxi
1 Financial Decision Making and the 1
Techniques Used in Financial Analysis
Financial Analysis
The Role of the Financial Analyst
Definition of the Analyst’s Job
Typical Assignments
The Analyst’s Position in the Corporate Structure
Financial Management and Financial Analysis
Activities and Financial Statements
Business Strategy
Competitive Environment
The Application of Analytical Techniques for Specific Problems
Investment Decisions
Financing Decisions
Dividend Policy
Primary Goal of Financial Analysis
Long-Range versus Short-Range Goals
The Balanced Scorecard
Techniques Presented in This Course
Recap
Review Questions
2 Financial Statement Analysis 17
Differing Viewpoints
The Basic Structure of Financial Statements
The Balance Sheet
The Income Statement
The Statement of Stockholders’ Equity
The Statement of Cash Flows
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vi A MANAGER’S GUIDE TO FINANCIAL ANALYSIS
Financial Statement Analysis
Limitations of Financial Statement Analysis
Horizontal Analysis
Vertical Analysis
Recap
Review Questions
3 Ratio Analysis for Financial Statements 39
Ratio Analysis
Profitability Ratios
Net Profit Margin
Operating Profit Margin
Return on Assets(ROA)
Return on Equity (ROE)
Analyzing Return on Equity (ROE) Using the DuPont Analysis
Earnings per Share (EPS)
Price Earnings Ratio (P/E)
Dividend Yield and Payout
Economic Value Added (EVA)
Liquidity Ratios
Current Ratio
Quick Ratio
Net Liquid Balance
Activity Ratios
Average Collection Period
Inventory Turnover
Total Asset Turnover
Operating Cycle Working Capital Requirements
Free Cash Flow
Debt and Equity Ratios
Leverage
Debt-to-Equity Ratio
Times-Interest-Earned Ratio (TIE)
Book Value per Share of Common Stock
Using Financial Ratios
Intracompany Analysis
Trend Analysis
Industry Comparison
Predicting Financial Problems
Using Financial Ratios in Analysis
An Example of Intracompany Analysis
An Example of Industry Comparison
Other Commonly Used Analytical Ratios
Important Considerations Concerning Financial Statement
Information
Alternative Asset Management Treatments
Cash and Marketable Securities
Accounts Receivable
Inventory
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CONTENTS vii
Fixed Assets
Goodwill and Intangible Assets
Alternative Liability and Equity Treatments
Current Liabilities
Leasing Assets Rather Than Buying Them
Pensions and Other Post-Retirement Benefits
Stockholders’ Equity
Recap
Review Questions
4 Analyzing Current Asset Management 85
Cash Management
Motives for Holding Cash
Collection and Disbursement Techniques
Other Aspects of Cash Management
Accounts Receivable: Credit and Collection Policies
Credit Quality Standards
Credit Terms
Collection Efforts
Inventory Management Considerations
Raw Material
Work in Process
Finished Goods
Recap
Review Questions
5 Evaluating Capital Investment Proposals 105
The Capital Budgeting Process
Determining the Cost of Capital or Discount Rate
The Cash Flow from an Investment
Risk and Capital Investments
Types of Risk
The Cost of Capital
Risk Measurement and Cash Flow Uncertainty
Alternative Ways to Measure Risk and Cash Flow Uncertainty
The Level of Risk and the Project’s Discount Rate
Evaluating Capital Investments
Evaluation Methods Excluding the Time Value of Money
Evaluation Methods Recognizing the Time Value of Money
The Post-Audit
Recap
Review Questions
6 Forecasting and Valuation 143
Forecasting the Future
The Financial Forecast
Calculating the Forecast
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viii A MANAGER’S GUIDE TO FINANCIAL ANALYSIS
Constructing a Valuation Model
Defining the Valuation Theory
Recap
Review Questions
7 Capital Structure and Dividend Policy 155
Issues in Capital Structure and Dividend Policy
Business and Financial Risk
Business Risk
Financial Risk
Optimal Capital Structure
Dividend Policy
Preferences of Stockholders
Factors Affecting Dividend Policy
Stock Dividends and Stock Splits
Stock Repurchases
Recap
Review Questions
8 Mergers and Acquisitions 171
Motives for Mergers
Search and Screening
Screening Criteria
Qualitative Criteria
Risk Assessment
Price Assessment
Management Defenses
Measuring the Financial Impact of an Acquisition
The Exchange Ratio
Purchase with Cash
Purchase with Acquiring Company’s Stock
An Analysis of the Bargaining Position of Both Companies
The Impact on Earnings per Share
The Level of Earnings per Share
The Growth in Earnings per Share
The Impact on the Price-Earnings Ratio
Valid and Invalid Motives for Merging
Expected Return from an Acquisition or Merger
Establishing a Valuation from the Acquiree’s Perspective
Recap
Review Questions
© American Management Association. All rights reserved.
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CONTENTS ix
Answers to Quick Quiz Questions 191
Bibliography 197
Additional Resources 199
Glossary 201
Post-Test 213
Index 219
FOR QUESTIONS AND COMMENTS:
Please contact Self Study at 1-800-225-3215 or email