Contents

Foreword

Acknowlegements

Key for symbols

PART ONE Foundations

1 Background

Why do you need this book?

The form and logic

Method

The philosophy

Excitement

Data that make sense

2 Financial statements

Introduction

The balance sheet

Balance sheet structure – fixed assets

Balance sheet structure – liabilities

Summary

3 Balance sheet terms

Introduction

The terms used

4 Profit and loss account

Introduction

Working data

PART TWO Operating performance

5 Measures of performance

Relationships between the balance sheet and profit and loss account

The ratios ‘return on total assets’ and ‘return on equity’

Balance sheet layouts

6 Operating performance

Return on investment (ROI)

Return on equity (ROE)

Return on total assets (ROTA)

Standards of operating performance

7 Performance drivers

Operating performance

Operating profit model

PART THREE Corporate liquidity

8 Cash flow cycle

Corporate liquidity

The cash cycle

Measures of liquidity – long and short analysis

9 Liquidity

Short-term liquidity measures

Current ratio

Quick ratio

Working capital to sales ratio

Working capital days

10 Financial strength

Interest cover

‘Debt to equity’ ratio (D/E)

Leverage

Summary

11 Cash flow

The cash flow statement

Sources and uses of funds – method

Opening and closing cash reconciliation

Long and short analysis

Financial reporting standards

PART FOUR Determinants of corporate value

12 Corporate valuation

Introduction

Share values

13 Financial leverage and corporate valuation

Introduction

Financial leverage

V chart

Market to book ratio

14 Growth

Growth

Analysis

Growth equilibrium

Application to acquisitions

PART FIVE Management decision-making

15 Cost, volume and price relationships

Introduction

Costing illustration

Contribution

Break-even (B/E)

Contribution to sales percentage (CPS)

Summary

16 Investment ratios

Introduction

Project appraisal – the problem

Project appraisal – steps to a solution (1)

Project appraisal – steps to a solution (2)

Project appraisal – present value (PV)

Project appraisal – internal rate of return (IRR)

Project appraisal – summary

17 Shareholder value added (SVA)

Introduction

Description

Approach to valuation (1)

Approach to valuation (2)

Value for the equity shareholders

Discount factor

Terminal (continuing) value

Complete model

18 Acquisition analysis

Introduction

Financial profile of Alpha Inc.

Financial profile of Beta Inc.

Acquisition – first offer

Acquisition impact on EPS

Shareholder effects – generalized

Summary of effects on shareholders

Revised offer

Relative versus absolute values

SVA models – Alpha Inc. and Beta Inc.

Addendum

19 Integrity of accounting statements

Introduction

Where we focus attention

Operating revenue enhancement

Methods of revenue enhancement – fictitious sales

Revenue enhancement – clues for detection

Operating cost

The balance sheet

The cash flow statement

Appendix 1: Special items

Appendix 2: Companies used in the sample

Appendix 3: Full set of ratio charts from sample companies

Appendix 4: Discounting and compounding tables

Glossary

Index