1
CHAPTER
Overview of Financial
Statement Analysis
Business Analysis
Evaluate Prospects Evaluate Risks
Business Decision Makers
? Equity investors
? Creditors
? Managers
? Merger and Acquisition Analysts
? External Auditors
? Directors
? Regulators
? Employees & Unions
? Lawyers
Information Sources for
Business Analysis
Quantitative
? Financial
Statements
? Industry Statistics
? Economic
Indicators
? Regulatory filings
? Trade reports
Qualitative
? Management
Discussion &
Analysis
? Chairperson’s Letter
? Vision/Mission
Statement
? Financial Press
? Press Releases
? Web sites
Types of
Business
Analysis
Credit Analysis Equity Analysis
Management &
Control
Mergers,Acquisitions
& Divestitures
Director Oversight Regulation
External Auditing
Labor Negotiations
Financial
Management
Credit Analysis
Trade Creditors
? Provide goods or
services
? Most short-term
? Usually implicit
interest
? Bear risk of
default
Non-trade Creditors
? Provide major
financing
? Most long-term
? Usually explicit
interest
? Bear risk of default
Creditors
Credit Analysis
Liquidity
Ability to meet short-
term obligations
Focus,
? Current Financial
conditions
? Current cash flows
? Liquidity of assets
Solvency
Ability to meet long-
term obligations
Focus,
? Long-term financial
conditions
? Long-term cash flows
? Extended profitability
Credit worthiness,Ability to honor credit obligations
(downside risk)
Credit Analysis
? Seniority - order claims are paid
? Collateral - asset earmarked for claims
? Covenants - constraints on
debtholders to protect creditors
? Other provisions - sinking fund
requirements,etc,
Debt Characteristics
Credit Analysis
Passive Investing
(beta strategies)
Aim,
? Diversification based
on risk propensity &
investment horizon
Example,Indexing
Active Investing
(alpha strategies)
Aim,
? Beat the market --
earn above normal
stock returns
Examples,Technical
analysis & Fundamental
analysis
Intrinsic Value
(or Fundamental Value)
Intrinsic value > Market value Buy
Intrinsic value < Market value Sell
Intrinsic value = Market value Hold
Value of Company (or stock) without
reference to market value (or stock price)
St
ra
teg
y
Prospective
Analysis
Accounting
Analysis
Business
Environment &
Strategy Analysis
Industry
Analysis
Strategy
Analysis
Financial
Analysis
Analysis
of Sources
&Uses of
Funds Profitability Analysis
Risk
Analysis
Cost of Capital Estimate Intrinsic Value
Accounting Analysis
Comparability problems — across firms and across time
Manager estimation error
Distortion problems Earnings management
Distortion of business
Accounting
Risk
Process to evaluate and adjust financial
statements to better reflect economic reality
Financial Analysis
Profitability analysis — Evaluate return
on investments
Risk analysis ——— Evaluate riskiness
& creditworthiness
Sources and uses — Evaluate source &
of funds analysis deployment of funds
Common tools
Ratio
analysis
Cash
flow
analysis
Process to evaluate financial position and
performance using financial statements
Prospective Analysis
Intrinsic Value
Business Environment
& Strategy Analysis
Accounting Analysis
Financial Analysis
Process to forecast future payoffs
Dynamics of Business Activities
Investing
Operating
Financing
End of period
Beginning of period
Business Activities Time
Planning
Planning
Financing Investing
Planning
Activities,
Goals
& Objectives
Competition Pricing
Market demands Tactics
Promotion
Managerial performance
Opportunities
Projections
Distribution
Business Activities
Obstacles
Business Activities
Financing
Financing activities
? Owner (equity)
? Nonowner (liabilities)
Investing Financing
Investing activities
? Buying resources
? Selling resources
Investing = Financing
Business Activities
Planning
Activities Investing
Activities
Financial
Activities
Operating Activities
Revenues and expenses from providing
goods and services
Business Activities
Financial Statements Reflect Business Activities
Planning
Investing
Current,
? Cash
? Accounts Receivable
? Inventories
? Marketable Securities
Noncurrent,
? Land,Buildings,&
Equipment
? Patents
? Investments
Assets
Balance Sheet
Financing
Current,
? Notes Payable
? Accounts Payable
? Salaries Payable
? Income Tax Payable
Noncurrent,
? Bonds Payable
? Common Stock
? Retained Earnings
Liabilities & Equity
Balance Sheet
Statement of
Shareholders’ Equity
Operating
? Sales
? Cost of Goods Sold
? Selling Expense
? Administrative Expense
? Interest Expense
? Income Tax Expense
Net Income
Income statement
Cash Flow
Statement of
Cash Flows
Financial Statements
? Balance Sheet
? Income Statement
? Statement of
Shareholders’ Equity
? Statement of Cash Flows
Kodak
Dec 31,1998 (In millions,except per share data)
Liabilities and Assets
Shareholders’ Equity
Current Assets Current Liabilities
Cash and cash equivalents $ 457 Payables $ 3,906
Marketable securities 43 Short-term borrowings 1,518
Receivables 2,527 Taxes - income and other 593
Inventories 1,424 Dividends payable 142
Deferred income tax charges 855 Deferred income tax credits 19
Other 293 Total current liabilities 6,178
Total current assets 5,599 Other Liabilities
Properties Long-term borrowings 504
Land,buildings and equipment at cost 13,482 Post-employment liabilities 2,962
Less,Accumulated depreciation 7,568 Other long-term liabilities 1,032
Net properties 5,914 Deferred income tax credits 69
Other Assets Total liabilities 10,745
Goodwill (net of accumulated
amortization of $534) 1,232 Shareholders' Equity
Long-term receivables and
other non-current assets 1,705 Common stock,par value $2.50 per share,
Deferred income tax charges 950,000,000 shares authorized; issued
Total Assets 391,292,760 shares Additional paid in capital 978
Retained earnings
902
Accumulated other comprehensive loss
6,163
(111)
Treasury stock,as cost,68,494,402 shares
7,932
Total shareholders' equity
3,944
Total liabilities and equity
3,988
$
14,733
283
$ 14,733
Balance Sheet
Total Investing = Total Financing
= Creditor Financing + Owner Financing
Kodak Financing
$14,733 = $10,745 + $3,988
Income Statement
Kodak
For Year Ended Dec,31,1998 (In millions,except per share data)
Sales $13,406
Cost of goods sold 7,293
Gross profit 6,113
Selling,general and administrative expenses 3,303
Research and development costs 880
Purchased research and development 42
Restructuring costs and asset impairments -
EARNINGS FROM OPERATIONS 1,888
Interest expense 110
Other income (charges) 328
Earnings before income taxes 2,106
Provision for income taxes 716
Earnings from continuing operations 1,390
Gain on sale of discontinued operations -
NET EARNINGS $
1,390
Statement of Shareholders’ Equity
Kodak
For year ended Dec,31,1998
Accumulated
Additional Other
Common Pail In Retained Comprehensive Treasury
(In millions,except number of shares) Stock Capital Earnings Income (Loss) Stock Total
Shareholders’ Equity Dec 31,1997 978 914 5,343 (202) (3,872) 3,161
Net earnings - - 1,390 - - 1,390
Other comprehensive income (loss),
Unrealized holding gains arising during
period ($122 million pre-tax) - - - - - 80
Reclassification adjustment for gains included
in net earnings ($66 million pre-tax) - - - - -
(44) Currency translation adjustment - - - - - 59
Minimum pension liability adjustment
($7 million pre-tax) - - - - - (4)
Other comprehensive income - - - 91 - 91
Comprehensive income - - - - - 1,481
Cash dividends declared - - (570) - -
(570) Treasury stock repurchased (3,541,295 shares) - - - - (258)
(258) Treasury stock issued under employee plans
(3,272,713 shares) - (58) - - 186
128 Tax reductions - employee plans - 46 - - -
46 Shareholders’ Equity Dec 31,1998 $978 $902 $6,163 ($111) ($3,944) $3,988
Statement of Cash Flows
Cash flows from operating activities,
Earnings from continuing operations $ 1,390
Adjustments to reconcile to net cash provided by operating activities,
Depreciation and amortization
Purchased research and development
Provisions (benefit) for deferred income taxes
(Gain) loss on sale/retirement of assets
(Increase) decrease in receivables (1)
(Increase) decrease in inventories
(Decrease) increase in liabilities excluding borrowings (516)
Other items,net (278)
Total adjustments 93
1,483
Cash flow from Investing activities,
Additions to properties
(1,108) Proceeds from sale of assets
Cash flows related to sales of businesses (59)
Acquisitions,net of cash acquired (949)
Marketable securities - sales
162 Marketable securities - purchases (182)
Net cash used in investing activities (1,839)
Cash flows from financing activities,
Net increase (decrease) in borrowings with original maturities of 90 days or less 894
Proceeds from other borrowings 1,133
Repayment of other borrowings (1,251)
Dividends to shareholders (569)
Exercise of employee stock options 128
Stock repurchase programs (258)
Net cash provided by (used in) financing
activities
77 Effect of exchange rate changes on cash 8
Net (decrease) increase in cash and cash equivalents (271)
Kodak
For year Ended Dec,31,1998 (In millions)
Net cash provided by operating activities
(166)
42
853
202
(43)
297
Financial
Statement
Links -
Kodak
Statement of Cash Flows
for Year Ended Dec,31,1998
Operating Cash flows $ 1,483
Investing Cash flows (1,839)
Financing Cash flows 77
Exchange rate changes on cash 8
Net Change in Cash $ (271)
Cash Balance,Dec,31,1997 728
Cash Balance,Dec,31,1998 $ 457
Statement of Shareholders’ Equity
for Year Ended Dec,31,1998
Share Capital,Dec,31,1997 $ 1,892
Adjustments/Stock Issue (12)
Share Capital,Dec,31,1998 $ 1,880
Retained Earnings,Dec,31,1997 $ 5,141
Add,Comprehensive Income 1,481
Less,Dividends (570)
Retained Earnings,Dec,31,1998 $ 6,052
Treasury Stock,Dec,31,1997 $ 3,872
Treasury Stock Issued 186
Treasury Stock Repurchased (258)
Treasury Stock,Dec,31,1998 $ 3,944
Income Statement
for Year Ended Dec,31,1998
Sales $13,406
Expenses 12,016
Net Earnings $ 1,390
Other Comprehensive Income 91
Comprehensive Income $ 1,481
Balance Sheet
Dec,31,1997
Assets
Cash $ 728
Non-Cash Assets 12,417
Total Assets $13,145
Liabilities & Equity
Total liabilities $ 9,984
Equity,
Share Capital 1,892
Retained Earnings 5,141
Treasury Stock (3,872)
Total equity $ 3,161
Liabilities & Equity $13,145
Balance Sheet
Dec,31,1998
Assets
Cash $ 457
Non-Cash Assets 14,276
Total Assets $14,733
Liabilities & Equity
Total liabilities $10,745
Equity,
Share Capital 1,880
Retained Earnings 6,052
Treasury Stock (3,944)
Total equity $ 3,988
Liabilities & Equity $14,733
(Period of time)
(Pe
riod
of
tim
e) (Pe
riod
of
tim
e)
Additional Information
(Beyond Financial Statements)
?Management Discussion & Analysis (MD&A)
?Management Report
?Auditor Report
?Notes to Financial Statements
?Supplementary Information (10-K,10-Q,8-K,20-F)
?Proxy Statement
?Social Responsibility Report
Analysis Preview
Purpose,Evaluation of consecutive
financial statements
Output,Direction,speed,& extent of any
trend(s)
Types,? Year-to-year Change Analysis
? Index-Number Trend Analysis
Comparative Analysis
Yr2 Yr1 Yr3
Analysis Preview
Year-to-Year
Analysis Kodak's Comparative Income Statements
1998
1997
Change Change
(in mil.) %
Sales $
13,406
$14,538
($ 1,132) (7.8)%
Cost of goods sold 7,293 7,976 (683) (8.5)
Gross profit $
6,113
$
6,562
($
449)
(6.8)
Operating Expenses,
Selling,general and admin,3,303 3,912 (609) (15.6)
Research and development 922 1,230 (308) (25.0)
Restructuring costs - 1,290 (1,290) (100)
Earnings from operations $ 1,888 $
130
$
1,758
1,352
Interest Expense 110 98 12 (12.2)
Other income (charges) 328 21 307 1,461
Earnings before income taxes $
2,106
$
53
$
2,053
3,873
Provision for income taxes 716 668 1,391
Net earnings $ 1,390 $
1,385
27,700
48 $
5
Analysis Preview
Index-Number Trend Analysis
Kodak's Index - Number Trend Series (base year 1994)
1998 1997 1996 1995 1994
Sales 99 107 117 110 100
Total operating expenses 94 118 115 106 100
Earnings from operations 144 10 141 148 100
Net earnings 249 1 182 224 100
Total assets 98 88 96 97 100
Shareholders' equity 99 79 118 127 100
Analysis Preview
Purpose, ? Evaluation of internal makeup
of financial statements
? Evaluation of financial statement
accounts across companies
Output,Proportionate size of assets,
liabilities,equity,revenues,&
expenses
Common-Size Analysis
Analysis Preview
Common-Size Analysis
Kodak's Common-Size Income Statements
1998 1997
Sales 100.0% 100.0%
Cost of goods sold 54.4 54.9
Gross profit
10.4%
Selling,general and administrative expenses 24.6 26.9
Research and development costs 6.9 8.5
Restructuring Costs 0 8.9
Earnings from operations
Interest expense 0.8 0.7
Other income 2.4 0.1
Earnings before income taxes
Provision for income taxes 5.3 0.3
Net earnings
45.6%
15.7%
14.1% 0.9%
45.1%
0.3%
0.0%
Analysis Preview
Purpose, Evaluate relation between two or more
economically important items (one
starting point for further analysis)
Output,Mathematical expression of relation
between two or more items
Cautions,? Prior Accounting analysis is important
? Interpretation is key -- long vs short
term & benchmarking
Ratio Analysis
Analysis Preview
Purpose,Estimate intrinsic value of a
company (or stock)
Basis,Present value theory (time value of
money)
Valuation
Valuation - an important goal of many types
of business analysis
Analysis Preview
Debt (Bond) Valuation
Bt = It +1 + It +2 + It +3 +,.,+ It +n + F
(1+r)1 (1+r)2 (1+r)3 (1+r)n (1+r)n
Bt is the value of the bond at time t
It +n is the interest payment in period t+n
F is the principal payment (usually the debt’s face value)
r is the interest rate (yield to maturity)
Analysis Preview
Equity Valuation
Vt = E(Dt +1) + E(Dt +2) + E(Dt +3) +,.,+ E(Dt +n) +,.,
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Vt is the value of an equity security at time t
Dt +n is the dividend in period t+n
k is the cost of capital
E(?) refers to expected dividends
Analysis Preview
Equity Valuation - Free Cash Flow Model
FCFt+n is the free cash flow in the period t + n [often
defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E(?) refers to an expectation
Vt = E(FCFt +1) + E(FCFt +2) + E(FCFt +3) +,.,+ E(FCFt +n) +,.,
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Analysis Preview
Equity Valuation - Residual Income Model
Rit+n is the residual income in period t + n [defined as
net income,NI,minus a charge on beginning
book value,BV,or RIt = NIt - (k x BVt-1)]
k is the cost of capital
E(?) refers to an expectation
Vt = BVt + E(RIt +1) + E(RIt +2) + E(RIt +3) +,.,+ E(RIt +n) +,.,
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Analysis in an Efficient Market
Three assumed forms of market efficiency
Weak Form - prices reflect information in
past prices
Semi-strong Form - prices reflect all public
information
Strong Form - prices reflect all public and
private information
Analysis in an Efficient Market
? Market Efficiency
? assumes competent and informed analysis
? distinguish aggregate from individual behavior
? reflects information (both reliable and unreliable)
? cross-country differences in rewards to analysis
? Financial statement analysis relevant to
more than just market analysis,e.g.,
? credit and lending
? auditing
? valuation of nonpublicly traded firms
? mergers and acquisitions
? etc..,
Book Organization
Financial Statement Analysis
Part I
Introduction and Overview
Part III
Financial Analysis
Part II
Accounting Analysis
Chapter 1,Overview of
Financial Statement
Analysis
Chapter 2,Financial
Reporting and
Analysis
Chapter 3,Analyzing
Financial Activities
Chapter 4,Analyzing
Investing Activities
Chapter 5,Analyzing
Investing Activities,
Special topic
Chapter 6,Analyzing
Operating Activities
Chapter 7,Cash Flow
Analysis
Chapter 8,Return on
Invested Capital
Chapter 9,Profitability
Analysis
Chapter 10,Prospective
Analysis
Chapter 11,Credit
Analysis
Chapter 12,Equity
Analysis and Valuation
CHAPTER
Overview of Financial
Statement Analysis
Business Analysis
Evaluate Prospects Evaluate Risks
Business Decision Makers
? Equity investors
? Creditors
? Managers
? Merger and Acquisition Analysts
? External Auditors
? Directors
? Regulators
? Employees & Unions
? Lawyers
Information Sources for
Business Analysis
Quantitative
? Financial
Statements
? Industry Statistics
? Economic
Indicators
? Regulatory filings
? Trade reports
Qualitative
? Management
Discussion &
Analysis
? Chairperson’s Letter
? Vision/Mission
Statement
? Financial Press
? Press Releases
? Web sites
Types of
Business
Analysis
Credit Analysis Equity Analysis
Management &
Control
Mergers,Acquisitions
& Divestitures
Director Oversight Regulation
External Auditing
Labor Negotiations
Financial
Management
Credit Analysis
Trade Creditors
? Provide goods or
services
? Most short-term
? Usually implicit
interest
? Bear risk of
default
Non-trade Creditors
? Provide major
financing
? Most long-term
? Usually explicit
interest
? Bear risk of default
Creditors
Credit Analysis
Liquidity
Ability to meet short-
term obligations
Focus,
? Current Financial
conditions
? Current cash flows
? Liquidity of assets
Solvency
Ability to meet long-
term obligations
Focus,
? Long-term financial
conditions
? Long-term cash flows
? Extended profitability
Credit worthiness,Ability to honor credit obligations
(downside risk)
Credit Analysis
? Seniority - order claims are paid
? Collateral - asset earmarked for claims
? Covenants - constraints on
debtholders to protect creditors
? Other provisions - sinking fund
requirements,etc,
Debt Characteristics
Credit Analysis
Passive Investing
(beta strategies)
Aim,
? Diversification based
on risk propensity &
investment horizon
Example,Indexing
Active Investing
(alpha strategies)
Aim,
? Beat the market --
earn above normal
stock returns
Examples,Technical
analysis & Fundamental
analysis
Intrinsic Value
(or Fundamental Value)
Intrinsic value > Market value Buy
Intrinsic value < Market value Sell
Intrinsic value = Market value Hold
Value of Company (or stock) without
reference to market value (or stock price)
St
ra
teg
y
Prospective
Analysis
Accounting
Analysis
Business
Environment &
Strategy Analysis
Industry
Analysis
Strategy
Analysis
Financial
Analysis
Analysis
of Sources
&Uses of
Funds Profitability Analysis
Risk
Analysis
Cost of Capital Estimate Intrinsic Value
Accounting Analysis
Comparability problems — across firms and across time
Manager estimation error
Distortion problems Earnings management
Distortion of business
Accounting
Risk
Process to evaluate and adjust financial
statements to better reflect economic reality
Financial Analysis
Profitability analysis — Evaluate return
on investments
Risk analysis ——— Evaluate riskiness
& creditworthiness
Sources and uses — Evaluate source &
of funds analysis deployment of funds
Common tools
Ratio
analysis
Cash
flow
analysis
Process to evaluate financial position and
performance using financial statements
Prospective Analysis
Intrinsic Value
Business Environment
& Strategy Analysis
Accounting Analysis
Financial Analysis
Process to forecast future payoffs
Dynamics of Business Activities
Investing
Operating
Financing
End of period
Beginning of period
Business Activities Time
Planning
Planning
Financing Investing
Planning
Activities,
Goals
& Objectives
Competition Pricing
Market demands Tactics
Promotion
Managerial performance
Opportunities
Projections
Distribution
Business Activities
Obstacles
Business Activities
Financing
Financing activities
? Owner (equity)
? Nonowner (liabilities)
Investing Financing
Investing activities
? Buying resources
? Selling resources
Investing = Financing
Business Activities
Planning
Activities Investing
Activities
Financial
Activities
Operating Activities
Revenues and expenses from providing
goods and services
Business Activities
Financial Statements Reflect Business Activities
Planning
Investing
Current,
? Cash
? Accounts Receivable
? Inventories
? Marketable Securities
Noncurrent,
? Land,Buildings,&
Equipment
? Patents
? Investments
Assets
Balance Sheet
Financing
Current,
? Notes Payable
? Accounts Payable
? Salaries Payable
? Income Tax Payable
Noncurrent,
? Bonds Payable
? Common Stock
? Retained Earnings
Liabilities & Equity
Balance Sheet
Statement of
Shareholders’ Equity
Operating
? Sales
? Cost of Goods Sold
? Selling Expense
? Administrative Expense
? Interest Expense
? Income Tax Expense
Net Income
Income statement
Cash Flow
Statement of
Cash Flows
Financial Statements
? Balance Sheet
? Income Statement
? Statement of
Shareholders’ Equity
? Statement of Cash Flows
Kodak
Dec 31,1998 (In millions,except per share data)
Liabilities and Assets
Shareholders’ Equity
Current Assets Current Liabilities
Cash and cash equivalents $ 457 Payables $ 3,906
Marketable securities 43 Short-term borrowings 1,518
Receivables 2,527 Taxes - income and other 593
Inventories 1,424 Dividends payable 142
Deferred income tax charges 855 Deferred income tax credits 19
Other 293 Total current liabilities 6,178
Total current assets 5,599 Other Liabilities
Properties Long-term borrowings 504
Land,buildings and equipment at cost 13,482 Post-employment liabilities 2,962
Less,Accumulated depreciation 7,568 Other long-term liabilities 1,032
Net properties 5,914 Deferred income tax credits 69
Other Assets Total liabilities 10,745
Goodwill (net of accumulated
amortization of $534) 1,232 Shareholders' Equity
Long-term receivables and
other non-current assets 1,705 Common stock,par value $2.50 per share,
Deferred income tax charges 950,000,000 shares authorized; issued
Total Assets 391,292,760 shares Additional paid in capital 978
Retained earnings
902
Accumulated other comprehensive loss
6,163
(111)
Treasury stock,as cost,68,494,402 shares
7,932
Total shareholders' equity
3,944
Total liabilities and equity
3,988
$
14,733
283
$ 14,733
Balance Sheet
Total Investing = Total Financing
= Creditor Financing + Owner Financing
Kodak Financing
$14,733 = $10,745 + $3,988
Income Statement
Kodak
For Year Ended Dec,31,1998 (In millions,except per share data)
Sales $13,406
Cost of goods sold 7,293
Gross profit 6,113
Selling,general and administrative expenses 3,303
Research and development costs 880
Purchased research and development 42
Restructuring costs and asset impairments -
EARNINGS FROM OPERATIONS 1,888
Interest expense 110
Other income (charges) 328
Earnings before income taxes 2,106
Provision for income taxes 716
Earnings from continuing operations 1,390
Gain on sale of discontinued operations -
NET EARNINGS $
1,390
Statement of Shareholders’ Equity
Kodak
For year ended Dec,31,1998
Accumulated
Additional Other
Common Pail In Retained Comprehensive Treasury
(In millions,except number of shares) Stock Capital Earnings Income (Loss) Stock Total
Shareholders’ Equity Dec 31,1997 978 914 5,343 (202) (3,872) 3,161
Net earnings - - 1,390 - - 1,390
Other comprehensive income (loss),
Unrealized holding gains arising during
period ($122 million pre-tax) - - - - - 80
Reclassification adjustment for gains included
in net earnings ($66 million pre-tax) - - - - -
(44) Currency translation adjustment - - - - - 59
Minimum pension liability adjustment
($7 million pre-tax) - - - - - (4)
Other comprehensive income - - - 91 - 91
Comprehensive income - - - - - 1,481
Cash dividends declared - - (570) - -
(570) Treasury stock repurchased (3,541,295 shares) - - - - (258)
(258) Treasury stock issued under employee plans
(3,272,713 shares) - (58) - - 186
128 Tax reductions - employee plans - 46 - - -
46 Shareholders’ Equity Dec 31,1998 $978 $902 $6,163 ($111) ($3,944) $3,988
Statement of Cash Flows
Cash flows from operating activities,
Earnings from continuing operations $ 1,390
Adjustments to reconcile to net cash provided by operating activities,
Depreciation and amortization
Purchased research and development
Provisions (benefit) for deferred income taxes
(Gain) loss on sale/retirement of assets
(Increase) decrease in receivables (1)
(Increase) decrease in inventories
(Decrease) increase in liabilities excluding borrowings (516)
Other items,net (278)
Total adjustments 93
1,483
Cash flow from Investing activities,
Additions to properties
(1,108) Proceeds from sale of assets
Cash flows related to sales of businesses (59)
Acquisitions,net of cash acquired (949)
Marketable securities - sales
162 Marketable securities - purchases (182)
Net cash used in investing activities (1,839)
Cash flows from financing activities,
Net increase (decrease) in borrowings with original maturities of 90 days or less 894
Proceeds from other borrowings 1,133
Repayment of other borrowings (1,251)
Dividends to shareholders (569)
Exercise of employee stock options 128
Stock repurchase programs (258)
Net cash provided by (used in) financing
activities
77 Effect of exchange rate changes on cash 8
Net (decrease) increase in cash and cash equivalents (271)
Kodak
For year Ended Dec,31,1998 (In millions)
Net cash provided by operating activities
(166)
42
853
202
(43)
297
Financial
Statement
Links -
Kodak
Statement of Cash Flows
for Year Ended Dec,31,1998
Operating Cash flows $ 1,483
Investing Cash flows (1,839)
Financing Cash flows 77
Exchange rate changes on cash 8
Net Change in Cash $ (271)
Cash Balance,Dec,31,1997 728
Cash Balance,Dec,31,1998 $ 457
Statement of Shareholders’ Equity
for Year Ended Dec,31,1998
Share Capital,Dec,31,1997 $ 1,892
Adjustments/Stock Issue (12)
Share Capital,Dec,31,1998 $ 1,880
Retained Earnings,Dec,31,1997 $ 5,141
Add,Comprehensive Income 1,481
Less,Dividends (570)
Retained Earnings,Dec,31,1998 $ 6,052
Treasury Stock,Dec,31,1997 $ 3,872
Treasury Stock Issued 186
Treasury Stock Repurchased (258)
Treasury Stock,Dec,31,1998 $ 3,944
Income Statement
for Year Ended Dec,31,1998
Sales $13,406
Expenses 12,016
Net Earnings $ 1,390
Other Comprehensive Income 91
Comprehensive Income $ 1,481
Balance Sheet
Dec,31,1997
Assets
Cash $ 728
Non-Cash Assets 12,417
Total Assets $13,145
Liabilities & Equity
Total liabilities $ 9,984
Equity,
Share Capital 1,892
Retained Earnings 5,141
Treasury Stock (3,872)
Total equity $ 3,161
Liabilities & Equity $13,145
Balance Sheet
Dec,31,1998
Assets
Cash $ 457
Non-Cash Assets 14,276
Total Assets $14,733
Liabilities & Equity
Total liabilities $10,745
Equity,
Share Capital 1,880
Retained Earnings 6,052
Treasury Stock (3,944)
Total equity $ 3,988
Liabilities & Equity $14,733
(Period of time)
(Pe
riod
of
tim
e) (Pe
riod
of
tim
e)
Additional Information
(Beyond Financial Statements)
?Management Discussion & Analysis (MD&A)
?Management Report
?Auditor Report
?Notes to Financial Statements
?Supplementary Information (10-K,10-Q,8-K,20-F)
?Proxy Statement
?Social Responsibility Report
Analysis Preview
Purpose,Evaluation of consecutive
financial statements
Output,Direction,speed,& extent of any
trend(s)
Types,? Year-to-year Change Analysis
? Index-Number Trend Analysis
Comparative Analysis
Yr2 Yr1 Yr3
Analysis Preview
Year-to-Year
Analysis Kodak's Comparative Income Statements
1998
1997
Change Change
(in mil.) %
Sales $
13,406
$14,538
($ 1,132) (7.8)%
Cost of goods sold 7,293 7,976 (683) (8.5)
Gross profit $
6,113
$
6,562
($
449)
(6.8)
Operating Expenses,
Selling,general and admin,3,303 3,912 (609) (15.6)
Research and development 922 1,230 (308) (25.0)
Restructuring costs - 1,290 (1,290) (100)
Earnings from operations $ 1,888 $
130
$
1,758
1,352
Interest Expense 110 98 12 (12.2)
Other income (charges) 328 21 307 1,461
Earnings before income taxes $
2,106
$
53
$
2,053
3,873
Provision for income taxes 716 668 1,391
Net earnings $ 1,390 $
1,385
27,700
48 $
5
Analysis Preview
Index-Number Trend Analysis
Kodak's Index - Number Trend Series (base year 1994)
1998 1997 1996 1995 1994
Sales 99 107 117 110 100
Total operating expenses 94 118 115 106 100
Earnings from operations 144 10 141 148 100
Net earnings 249 1 182 224 100
Total assets 98 88 96 97 100
Shareholders' equity 99 79 118 127 100
Analysis Preview
Purpose, ? Evaluation of internal makeup
of financial statements
? Evaluation of financial statement
accounts across companies
Output,Proportionate size of assets,
liabilities,equity,revenues,&
expenses
Common-Size Analysis
Analysis Preview
Common-Size Analysis
Kodak's Common-Size Income Statements
1998 1997
Sales 100.0% 100.0%
Cost of goods sold 54.4 54.9
Gross profit
10.4%
Selling,general and administrative expenses 24.6 26.9
Research and development costs 6.9 8.5
Restructuring Costs 0 8.9
Earnings from operations
Interest expense 0.8 0.7
Other income 2.4 0.1
Earnings before income taxes
Provision for income taxes 5.3 0.3
Net earnings
45.6%
15.7%
14.1% 0.9%
45.1%
0.3%
0.0%
Analysis Preview
Purpose, Evaluate relation between two or more
economically important items (one
starting point for further analysis)
Output,Mathematical expression of relation
between two or more items
Cautions,? Prior Accounting analysis is important
? Interpretation is key -- long vs short
term & benchmarking
Ratio Analysis
Analysis Preview
Purpose,Estimate intrinsic value of a
company (or stock)
Basis,Present value theory (time value of
money)
Valuation
Valuation - an important goal of many types
of business analysis
Analysis Preview
Debt (Bond) Valuation
Bt = It +1 + It +2 + It +3 +,.,+ It +n + F
(1+r)1 (1+r)2 (1+r)3 (1+r)n (1+r)n
Bt is the value of the bond at time t
It +n is the interest payment in period t+n
F is the principal payment (usually the debt’s face value)
r is the interest rate (yield to maturity)
Analysis Preview
Equity Valuation
Vt = E(Dt +1) + E(Dt +2) + E(Dt +3) +,.,+ E(Dt +n) +,.,
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Vt is the value of an equity security at time t
Dt +n is the dividend in period t+n
k is the cost of capital
E(?) refers to expected dividends
Analysis Preview
Equity Valuation - Free Cash Flow Model
FCFt+n is the free cash flow in the period t + n [often
defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E(?) refers to an expectation
Vt = E(FCFt +1) + E(FCFt +2) + E(FCFt +3) +,.,+ E(FCFt +n) +,.,
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Analysis Preview
Equity Valuation - Residual Income Model
Rit+n is the residual income in period t + n [defined as
net income,NI,minus a charge on beginning
book value,BV,or RIt = NIt - (k x BVt-1)]
k is the cost of capital
E(?) refers to an expectation
Vt = BVt + E(RIt +1) + E(RIt +2) + E(RIt +3) +,.,+ E(RIt +n) +,.,
(1+k)1 (1+k)2 (1+k)3 (1+k)n
Analysis in an Efficient Market
Three assumed forms of market efficiency
Weak Form - prices reflect information in
past prices
Semi-strong Form - prices reflect all public
information
Strong Form - prices reflect all public and
private information
Analysis in an Efficient Market
? Market Efficiency
? assumes competent and informed analysis
? distinguish aggregate from individual behavior
? reflects information (both reliable and unreliable)
? cross-country differences in rewards to analysis
? Financial statement analysis relevant to
more than just market analysis,e.g.,
? credit and lending
? auditing
? valuation of nonpublicly traded firms
? mergers and acquisitions
? etc..,
Book Organization
Financial Statement Analysis
Part I
Introduction and Overview
Part III
Financial Analysis
Part II
Accounting Analysis
Chapter 1,Overview of
Financial Statement
Analysis
Chapter 2,Financial
Reporting and
Analysis
Chapter 3,Analyzing
Financial Activities
Chapter 4,Analyzing
Investing Activities
Chapter 5,Analyzing
Investing Activities,
Special topic
Chapter 6,Analyzing
Operating Activities
Chapter 7,Cash Flow
Analysis
Chapter 8,Return on
Invested Capital
Chapter 9,Profitability
Analysis
Chapter 10,Prospective
Analysis
Chapter 11,Credit
Analysis
Chapter 12,Equity
Analysis and Valuation
