Lecture 5&6
1. What is the objective of ratio analysis? Why is cash flow analysis
useful?
Financial analysis = assess the performance of a firm in context of its stated goals and strategy
important for the valuation of a company
Ratio analysis= how various line items in a firm’s financial statements relate to one another
o Foundation for making forecasts of future performance
o Evaluate effectiveness of a firms’ policies in each of their areas
Cash flow analysis= examine firm’s liquidity and how the firm is managing its operating,
investment and financing CF
Value of a firm=
Growth + profitability
Return on equity (ROE)=
profit ∨loss after tax
ROE=
shareholder s' equity
ROE indicator of profitability company
2. Why is it useful to decompose the return on equity (ROE), i.e. the
measure of the
overall profitability of the firm?
ROE=ROA X equity multiplier
ROE=net profit margin ( ROR ) X asset turnover X equity multiplier
profit ∨loss
ROA=
total assets
TA
Equity multiplier=
equity
profit∨loss
ROR=
revenue
Revenue
Asset turnover=
total assets
ROE affected by 2 factors
ROA: how profitable does a company uses its assets to generate profits
Equity multiplier: to what extend are your assets financed with equity and debt
ROE is determined by how the company is financed ( equity or debt), but if you want to assess the
performance of the company and value the company ROA Is a better measure
You can boost your ROE by having another the finance strategy (higher debt higher ROE, but a lot
more risk)
1. What is the objective of ratio analysis? Why is cash flow analysis
useful?
Financial analysis = assess the performance of a firm in context of its stated goals and strategy
important for the valuation of a company
Ratio analysis= how various line items in a firm’s financial statements relate to one another
o Foundation for making forecasts of future performance
o Evaluate effectiveness of a firms’ policies in each of their areas
Cash flow analysis= examine firm’s liquidity and how the firm is managing its operating,
investment and financing CF
Value of a firm=
Growth + profitability
Return on equity (ROE)=
profit ∨loss after tax
ROE=
shareholder s' equity
ROE indicator of profitability company
2. Why is it useful to decompose the return on equity (ROE), i.e. the
measure of the
overall profitability of the firm?
ROE=ROA X equity multiplier
ROE=net profit margin ( ROR ) X asset turnover X equity multiplier
profit ∨loss
ROA=
total assets
TA
Equity multiplier=
equity
profit∨loss
ROR=
revenue
Revenue
Asset turnover=
total assets
ROE affected by 2 factors
ROA: how profitable does a company uses its assets to generate profits
Equity multiplier: to what extend are your assets financed with equity and debt
ROE is determined by how the company is financed ( equity or debt), but if you want to assess the
performance of the company and value the company ROA Is a better measure
You can boost your ROE by having another the finance strategy (higher debt higher ROE, but a lot
more risk)
