PERTEMUAN 1

Bussiness, Financial Statement and Fundamental

Analysis

Dr. Dadan Ramdhani, S.E.,M.Si., Akt.,CA.

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 Learning objectives
 Identify the ways that firms obtain and use cash
as reported in the Cash Flow Statement.
 Calculate and interpret key financial ratios.
 Discuss the Du Pont identity as a method of
financial analysis.
 Understand the use of financial information for
comparative purposes.
 Outline the problems associated with using
financial ratios.
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 Sources and Uses of Cash
 At the most fundamental level, firms do
two things: generate cash and spend cash.
 Cash is generated by selling a product or
service, asset or security.
 Cash is spent by paying for materials and
labor to produce a product or service and
by purchasing assets.

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 Sources and Uses of Cash
 Activities that bring in cash are called
sources of cash.
 Activities that involve spending cash are
called uses (or applications) of cash.
 An increase in an asset account or a decrease
in a liability or equity account is a use of
cash.
 A decrease in an asset account or an increase
in a liability or equity account is a source of
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cash.
 Financial Ratio Analysis
 A Financial ratios is an index that relates two
accounting numbers and is obtained by dividing one
number by the other.
 Used to compare and investigate relationships
between different pieces of financial information,
either over time or between companies. Types of
Comparisons: Internal Comparisons and External
Comparisons
 Ratios eliminate the size problem.

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 Ratio Analysis: Questions
to Consider for Each Ratio
 How is it computed?
 What is it intended to measure, and why
might we be interested?
 What is the unit of measurement?
 What might a high or low value be telling
us? How might such values be misleading?
 How could this measure be improved?

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 Categories of Financial
Ratios
 Liquidity Ratios
 Leverage ratios (Capital Structure
Ratios)
 Profitability ratios
 Valuation ratios
 Turnover Ratios
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 Liquidity Ratios
 Current Ratio
 Quick Ratio
 Profit before depreciation and amortization to
current liabilities (PDACL)
 Operating cash flow to current liabilities
(OCFCL)
 Cash balance to total liabilities (CBTL)

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 Liquidity Ratios
 Current Ratio: The ratio is mainly used to
give an idea of the company's ability to pay
back its short-term liabilities (debt and
payables) with its short-term assets (cash,
inventory, receivables).
Current assets
Current ratio 
Current liabilities

Example: in 2006 = 1250/640 = 1.15

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 Liquidity Ratios
 Quick Ratio: The quick ratio measures the
dollar amount of liquid assets available for
each dollar of current liabilities.
Cash in hand + Cash at Bank + Receivables +
Quick Ratio = Marketable Securities
Current Liabilities

= (current assets – inventory)/ Current liabilities

Example:
in 2006 quick ratio = 1.50
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 Liquidity Ratios
 Profit before depreciation and amortization
to current liabilities (PDACL): Measures
how many times company’s net operating
profit (before tax and interest) covers
current liabilities.
Profit before depreciati on and amortization
PDACL 
Current Liabilities

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Example:
in 2006 PDACL = 0.40
 Liquidity Ratios
 Operating cash flow to current liabilities
(OCFCL): Refers to the cash generated
from the operations of a company
(revenues less all operating expenses, plus
depreciation), in relation to short-term debt
obligations. .
Operating Cash Flow
OCFCL 
Current Liabilities

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Example:
In 2006 PDACL = 0.40
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 Liquidity Ratios
 Cash balance to total liabilities (CBTL):
Refers to the company’s cash balance in
relation to its total liabilities.

Cash Balance
CBTL 
Total Liabilities
In 2006 CBTL = 0.40
Example:

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 Leverage (Capital
Structure) Ratios
 Debt to equity ratio (DE ratio)
 Total liabilities to total tangible assets
(TLTAI)
 Interest cover ratio
 Net debt to equity ratio
 Equity multiplier

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 Leverage (Capital
Structure) Ratios
 Debt to equity ratio (DE ratio): It refers a
company’s capital structure and whether the
company is more reliant on borrowings (debt)
or shareholder capital (equity) to fund assets
and activities.
Total debt
Debt/equity ratio 
Total equity

 Example: Debt/Equity ratio = 1.14

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 Leverage (Capital
Structure) Ratios
 Total liabilities to total tangible assets
(TLTAI): This ratio provides the relationship
between a company’s liabilities and tangible
assets. Tangible assets are defined as
physical assets, such as property, cash,
inventory and receivables.
Total liabilities
TLTAI 
Total tangible assets


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Example: TLTAI = 1.60
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 Leverage (Capital
Structure) Ratios
 Interest cover ratio: measures company’s
ability to meet interest expenses on debt using
profits.
EBIT (Earnings before interest and taxes)
Interest cover ratio 
Interest

 Example: ICR = 3

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 Leverage (Capital
Structure) Ratios
 Net debt to equity ratio: This represents the
level of risk associated with the company’s
funding source. It is a useful internal measure
to review the balance between interest
bearing debt and shareholders’ equity for the
purpose of improving company capacity to
meet debt repayments and/or return on
equity.  Net debt/equity ratio  Interest bearing debt  Cash
Net ordinary share equity

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 Leverage (Capital
Structure) Ratios
 Equity multiplier: It is a measurement of a
company's financial leverage. It measures the
amount of a firm's assets that are financed
either through equity or debt.
Total assets
Equity multiplier 
Total equity

 Example: EM = 1.11

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 Profitability Ratios
 Earnings per share (EPS )
 Gross profit margin
 Net profit margin
 Return on assets (ROA )
 Return on equity (ROE )

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