Analysing and Interpreting Financial Statements

Transcription

1 Analysing and Interpreting Financial Statements Dr. Christoph Stork

2 Quiz What is the difference between Net Income and Net Profit? What I the difference between: Cash received Income Profit What is the difference between: Money paid Cost Loss

3 Introduction Analysing financial statements is important for investors, creditors, regulators as well as managers running the company Similar to a GPS on open sea. It tells you where you are and the direction the company is going

4 Financial Statement Balance Sheet Income Statement Cash Flow Statement

5 Balance Sheet

6 Balance Sheet Financial snapshot taken at a point in time of all the assets the company owns and all the claims against those assets Shareholder s equity = assets - liabilities (equals the value of the shareholder s investment) Assets Liabilities Shareholder equity

7 Balance Sheet Change Assets Cash + Accounts Receivable + Other current assets = Total current assets + Property, plant, equipment + other assets Listed by decreasing liquidity, i.e.speed item can turned into cash = Total Assets Liabilities Accounts payable + Other current liabilities = Total current liabilities + Long term debt + other long-term liabilities = Total liabilities Shareholder s equity Common stock Retained earnings Total liabilities and shareholder s equity

8 Quiz How does the shareholder s equity change if: The company takes a loan ZAR 1 million The company receives ZAR 10,000 payment from customer

9 Income & Cash Flow Statement

10 Income & Cash Flow Statement If balance sheet equals a snapshot then income and cash flow statements equal a video recording of two accounts of the balance sheet. Income statement: displays revenues and expenses for the financial year (Revenues - expenses = net income) Cash flow statement provides detailed look at the changes of the companies cash balance over time

11 Accrual Accounting 1) Identify the revenues for a period 2) Match the corresponding costs Revenue is not the same as cash received! Revenue is recognised as soon as the effort required to generate the sale is substantially complete...and payment certain... Example: an increase in accounts receivable from one year to the next implies that more revenue was made than cash received.

12 Depreciation Fixed assets often last longer than 1 year, i.e. they contribute to revenue generation for longer than 1 year Example: a newly purchased Taxi. Treating the purchase as an expense in the year the taxi was bought would mean that in this year the net profit would be lower and in subsequent years higher Distortion can be avoided by using depreciation: spreading the cost of the Taxi over its expected life

13 Taxes Often companies file two financial statements, 1 for the shareholders and 1 for Ministry of Finance Shareholders: accurately portray the company s financial performance Tax: minimise taxes Example: depreciation - using the most rapid method of depreciation over the shortest useful life that the tax authority allows

14 Cash Flow Cycle

15 Cash Flow Timely conversion of cash into inventory, accounts receivable and back into cash is the lifeblood of any company If severely interrupted, company might become insolvent Cash flow does not equal profit Cash in does not equal revenues Cash out does not equal expenses

16 Quiz A company can make a profit in a financial year and still be insolvent: How?

17 Cash Flow Definitions Net Cash Flow = Net Income (Profit)+ Non-cash items Also known as cash earnings More or less net income + depreciation (both taken from income statement) Cash Flow from Operating Activities = Net Cash Flow +/- changes in current assets and liabilities Companies have to report this in most countries Avoids changes in current assets and liabilities to distort the picture Remember! Net Income= Revenues -Expenses, increase in current assets (inventory e.g.) are expenses, so one would slap that on top.

18 Value Problem Market vs. Book Value Property bought 50 years ago is more worth than it is in the book for e.g. Value of a brand name and consumer loyalty Shareholder s equity does not refer to the future but the end of the last financial year Market value= shares(outstanding)* share price Economic Income vs. Accounting income Difference between realized and unrealized income Example: shares bought and dividends accountant - only dividend is income; economist-also change in value of shares is income Imputed Costs Income statement does not take into account the cost of equity (dividends)

19 Analysing the Income Statement How did the company do in the last period? How might it do in the future?

20 Performance Measures Net Income (bottom line): revenues - expenses Operating Income: profit from day-to-day operations excluding taxes, interest income and expenses, and what is known as extraordinary items (unusual in nature and infrequent in occurrence). EBIT (E-bit): Earnings before interests and taxes (measure free of financing) EBITDA (E-bit-da): Earnings before interests and taxes, depreciation and amortization (measure free of financing and accounting)

21 Ratios Return on Equity (ROE) Net Income / Shareholder s Equity Efficiency with which the company uses owner s capital Profit Margin Net Income / Sales Fraction of each ZAR of sales that trickles down the income statement to profits Asset Turnover Financial Leverage Sales / Assets Assets / Shareholder Equity Sales generated per ZAR of assets (ideal produce income without assets) Challenge: strike a prudent balance: debt is cheaper than equity, equity is safer ROE = NetIncome Sales Sales Assets Assets Shareholder' sequity

22 Ratios Profit Margin and Asset Turnover are inversely related - sell more cheap or sell less dear! Liquidity Ration=Current Assets / Current Liabilities (the lower, the riskier) P/E Ration = Price per share / Earnings per share P/E is not a good performance measure since price subject to expectations. It is the price for 1ZAR of current earnings = future earnings and the risk associated with those earnings

23 Exercise Workgroup: Calculate for Telecom Namibia and MTC 2010/2011 RoE Profit Margin Financial leverage Interpret the Ratios

24 MTC: Key Financial Indicators (Group) Revenue N$ million ,113 1,232 1,390 1,407 1,453 Shareholders Equity N$ million ,136 1,153 1,166 1,121 Taxation N$ million Net profit after tax N$ million Capital Expenditure in million N$ Total assets N$ million 915 1,169 1,329 1,608 1,632 1,791 1,696 Dividend N$ million Dividend as % of after tax profit 37.5% 23.7% 72.1% 61.7% 95.4% 96.7% 114.2% Return on equity 45.4% 37.3% 34.0% 31.5% 33.6% 34.0% 28.4% Profit Margin 38.1% 36.0% 30.5% 29.0% 27.9% 28.2% 21.9% EBITDA margin 61% 60.2% 52.2% 50.9% 53.8% 55.8% 53.2% Active SIM cards in ,009 1,284 1, Full-time Staff Monthly ARPU in N$ Source: MTC Annual Reports

25 Telecom Namibia (company): Key Financial Indicators Revenue N$ million 1,055 1,058 1,061 1,081 1,130 1,161 Taxation N$ million Net profit after tax (N$ million Total assets N$ million 1,267 1,781 2,040 2,231 2,325 2,534 Shareholders Equity N$ million ,015 1,062 1,088 1,158 Dividend N$ million Asset Turnover Return on Equity 13.5% 11.5% 2.3% 7.5% 2.4% 6.0% Financial Leverage Profit Margin 8.0% 10.6% 2.2% 7.4% 2.3% 6.0% DELs in 1000 incl. public phones No of Public Phones ,200 3,860 3,726 2,949 Full-time Staff 1,463 1,306 1,069 1, Source: Telecom Namibia Annual Reports

26 Return on Equity Te le com Namibia MTC 60% 50% 48% 45% 51% 51% 52% 46% 40% 30% 20% 10% 9% 7% 11% 15% 21% 13% 0%

27 Top 10 Telcos from S&P + MTC and Telecom Namibia 2005 Re turn o n Eq uity Industry Ave rag e MTC BT Group Plc France Te le com Ve rizon Communcations Inc NTT Docomo Inc Te le com Namibia SBC Communications Inc Te le fonica SA Nippon Te le g raph & Te le phone Te le com Italia SPA - NEW Vodafone Group Plc De utsche Te le kom -70.5% -7.4% 8.9% 46.1% 42.2% 23.9% 19.3% 16.2% 13.5% 12.3% 11.9% 9.3% 8.3%

28 Profit Margin Te le com Namibia MTC 40% 35% 30% 27% 30% 34% 34% 25% 20% 20% 21% 15% 12% 10% 5% 5% 3% 5% 7% 8% 0%

29 Top 10 Telcos from S&P + MTC and Telecom Namibia 2005 Profit Ma rg ins Industry Ave rag e MTC NTT Docomo Inc SBC Communications Inc Ve rizon Communcations Inc Te le com Namibia Te le fonica SA BT Group Plc France Te le com Nippon Te le g raph & Te le phone Te le com Italia SPA - NEW De utsche Te le kom Vodafone Group Plc -26.9% 6.9% 34.0% 12.9% 12.2% 10.2% 8.0% 7.8% 7.7% 7.0% 5.8% 3.9% 2.2%

30 Financial Leverage Te le com Namibia MTC

31 MTC

32 September of Voice Calls Data SMS N$ Million N$ Billion N$ Million Billion SMS Billion Minutes Sept-09 Sept-10 Billion MB Sept-11 Sept-09 Sept-10 Sept-11 Sept-09 Sept-10 Sept-11 Data is gaining more momentum as a result of the investment in an advanced network and the commercial activities around our NetMan product that enhanced our focus since June 2010.

33 SUBSCRIBERS Postpaid Prepaid

34 REVENUE 2011 Prepaid 54% Postpaid 31% Roaming 5% Interconnect 5% 4% Other 1% REVENUE 2010 Prepaid 54% Postpaid 31% Roaming 5% 5% Interconnect 4% Other 1%

35 SUBSCRIBER GROWTH RATE 38% 34% 36% 27% 20% 21% 18%

36 REVENUE VS EBITDA (NAD ) 1, , , , , ,0 785, , ,1 583,6 627,1 687,0 706, EBITDA Comparison to previous year Revenue EBITDA

37 CAPEX VS NET PROFIT AFTER TAX (NAD ) Intangible Assets

38 EBITDA MARGINS 60.6% 58.5% 57.4% 55.8% 55.8% 52.4% 50.9% 53.8% 53.2% 49.4% 50.1% 46.7% EBITDA% Comparison to previous year EBITDA%

39 CAPITAL EXPENDITURE AS A % OF NET INCOME AFTER TAX 100% 103% 80% 67% 74% 49% 58% 55% 56%

40 DIVIDENDS PAID Dividends Paid - Accumulated Dividends Paid

41 Depreciation and Amortization MTC s depreciation increased by N$ 84 million to N$ 303 million for the financial year ended 30 September This was due to the high capital investment made during the last few years.

42 INCOME TAX PAID

43 STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 2011 Notes N$ 000 N$ 000 N$ 000 N$ 000 REVENUE 3 1,452,850 1,406,725 1,452,850 1,406,725 OTHER INCOME 1,849 2,497 2,107 2,132 1,454,699 1,409,222 1,454,957 1,408,857 Changes in inventories of finished goods 81,349 79,784 81,349 79,784 Direct costs 278, , , ,321 Sales and marketing 73,554 75,892 73,554 75,892 General and administration 104,758 92, ,921 92,222 Personnel costs 142, , , ,777 Depreciation 174, , , ,787 Amortisation 128,252 64, ,252 64,319 PROFIT FROM OPERATIONS 3 470, , , ,755 Finance income 4 13,027 18,772 13,024 18,766 Finance costs 5 5,103 1,667 5,103 1,339 PROFIT BEFORE TAXATION 478, , , ,182 Taxation 7 160, , , ,052 PROFIT FOR THE YEAR 318, , , ,130 Other comprehensive income Taxation thereon , , , ,130 Profit attributable to: Equity holders of the parent 318, , , ,130 Total comprehensive income attributable to: Equity holders of the parent 318, , , ,130 - Basic and diluted 8 1,275,4 1,587,0 1,278,9 1,588,5 1,456 1,535 1,456 1,535

44 STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2011 Notes N$ 000 N$ 000 N$ 000 N$ 000 ASSETS NON-CURRENT ASSETS Property, plant and equipment 9 939,733 1,022, ,059 1,019,969 Intangible assets , , , ,228 Investment in subsidiaries ,508 2,345 Long term deposit ,113 38,886 75,113 38,886 1,239,381 1,279,831 1,239,215 1,279,428 CURRENT ASSETS Inventories 13 73,140 90,229 73,140 90,229 Trade and other receivables , , , ,415 Cash and cash equivalents , , , , , , , ,859 TOTAL ASSETS 1,696,289 1,790,852 1,696,083 1,789,287 Share capital 16 25,000 25,000 25,000 25,000 Retained income 1,096,089 1,141,240 1,095,557 1,139,828 Total equity 1,121,089 1,166,240 1,120,557 1,164,828 NON-CURRENT LIABILITIES Long term liability 17-45,940-45,940 Trade and other payables 19 1,087 3,059 1,087 3,059 Deferred taxation , , , , , , , ,039 CURRENT LIABILITIES Trade and other payables , , , ,583 Deferred revenue 20 89,564 81,783 89,564 81,783 Taxation 24,226 13,905 24,566 14, , , , ,420 TOTAL EQUITY AND LIABILITIES 1,696,289 1,790,852 1,696,083 1,789,287

45 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 2011 Notes N$ 000 N$ 000 N$ 000 N$ 000 Cash receipts from customers 1,469,390 1,385,520 1,469,648 1,384,860 Cash paid to suppliers and employees (699,975) (565,253) (698,939) (564,499) Cash generated from operations , , , ,361 Interest paid (5,103) (1,667) (5,103) (1,339) Interest received 13,027 18,772 13,024 18,766 Taxation paid 21.2 (160,483) (145,360) (160,489) (145,350) Net cash flows from operating activities 616, , , ,438 Purchase of property, plant and equipment (127,267) (231,708) (127,267) (231,708) Acquisitions of intangible assets (109,353) (178,325) (109,353) (178,325) Proceeds on disposal of property, plant and equipment 3, , Proceeds on disposal on intangibles 1,598-1,598 - Construction deposit paid (36,227) (38,886) (36,227) (38,886) Net movement in subsidiary company loan - - (163) (141) Net cash flows from investing activities (267,651) (448,327) (267,814) (448,468) Long term liabilities raised - 45,940-45,940 Dividends paid (364,003) (383,626) (364,003) (383,626) Net cash flows from financing activities (364,003) (337,686) (364,003) (337,686) AT BEGINNING OF YEAR 267, , , ,916 AT END OF YEAR , , , ,215

46 Telecom Namibia

47 Comparative Growth Technical Port Capacity (Network Switch Capacity) 195, , , , , ,947 Percentage Digital 100% 100% 100% 100% 100% 100% Direct Exchange Lines (DEL s) Analogue, ISDN & DID slots 138, , , , , ,037 (Including public telephones) Manual TOTAL (DELs) 138, , , , , ,063 Waiting List 3,521 3,844 3,100 2,829 1, DEL Penetration 6.9% 6.5% 6.5% 6.6% 6.6% 7.3% Population 2,028,238 2,080,972 2,135,077 2,190,589 2,247,544 2,143,410 # of Public Phones 4,930 6,086 4,200 3,860 3,726 2,949 Public phones per Number of Households (projected) 383, , , , , ,725 Penetration per Households 36.2% 34.6% 34.2% 35.1% 34.9% 38.7%

48 Financial Company N$ 000 N$ 000 N$ 000 N$ 000 N$ 000 Revenue 1,058,072 1,060,687 1,080,491 1,129,828 1,160,663 Operating profit 175,497 67, ,967 58, ,964 Profit after Taxation 112,294 23,217 46,943 25,598 69,712 Accumulated Retained Profits 539, , , , ,031 Fixed Assets 831,315 1,472,304 1,593,404 1,598,143 1,600,530 Long term Liabilities 119,764 75, , , Equity 992,210 1,015,427 1,062,370 1,087,968 1,157,680 Capital Projects 170, , , , ,350 Equity to Debt Ratio Return on Fixed Assets 13.50% 1.57% 2.94% 1.60% 4.35

49 ADSL Telecom Namibia has been blessed with an unmatched copper wire line network that stretches across the length and breadth of the country. This is the network which supported the company s earliest telecommunication services. Today, this copper-based network continues to be an invaluable medium, delivering the Company s broadband technologies such as ADSL. ADSL is a data communications technology known as Asymmetrical Digital Subscriber Line that provides a faster data transmission over copper telephone lines. ADSL access has the highlights with high bandwidth, reliability and security. ADSL was initially rolled out in December 2006, and was intended to provide short term solution serving as an early start of the service. The solution presented many restrictions in terms of capacity and flexibility due to non-availability of supporting networks. With the supporting network (MPLS and Metro Ethernet network) roll outs, the ADSL expansion continued to expand to other regions throughout the country including remote areas. Sites with minimal backhaul capacity were also redesigned and migrated to high bandwidth networks to avoid bottlenecks while ensuring high availability, and preparing the network for fixed broadband access (FBA)services. FBA were completed and packaged and have since grown in popularity. A 10MB package was added at the end of the financial year. To deliver such a broadband package to urban customers, an additional 5,431 ports were added to the ADSL DSLAM infrastructure. Currently 109 DSLAM s cater for a 22,382 ports capacity in total of which 13,274 were connected at end of the year. All DSLAM s are now backhauled by means of the new IP/MPLS standards and network. ADSL services have made remarkable progress as seen in the number of ports rolled out countrywide and the number of customers acquired to date. Currently there are numbers of ports.

50 Notes Group 2010 N$ 000 Group 2009 N$ 000 Company 2010 N$ 000 Company 2009 N$ 000 ASSETS Non-current assets Plant and equipment Intangible assets Goodwill Investment in subsidiary Loans advanced Investment in associates Derivative financial instruments Finance lease receivable Current assets Inventories Trade and other receivables Derivative financial instruments Amounts owing by fellow subsidiaries 13 Amounts owing by holding company Current tax asset Short-term portion of finance lease receivable Cash and cash equivalents Total assets

51 EQUITY Capital and reserves attributable to the company s equity holders Share capital Retained earnings Total equity LIABILITIES Non-current liabilities Post-retirement benefit obligations Long-term liabilities Deferred tax Deferred revenue Current liabilities Trade and other payables Derivative financial instrument Current tax liability Short-term portion of long-term liabilities Bank overdraft Amount owing to fellow subsidiaries Amount owing to holding company Deferred revenue Total liabilities Total equity and liabilities

52 Statements of Comprehensive Income for the year ended at 30 September 2010 Notes Group 2010 N$ 000 Group 2009 N$ 000 Company 2010 N$ 000 Company 2009 N$ 000 Revenue Sale of goods Services rendered Other operating income Distribution costs ( ) ( ) ( ) ( ) Administrative expenses ( ) ( ) ( ) ( ) Other operating expenses ( ) ( ) ( ) ( ) Operating profit Finance income Finance costs 24 (47 538) (52 746) (47 538) (52 746) Share of results of associates after tax 8 ( ) ( ) (Loss)/Profit before tax ( ) (77 887) Taxation 26 (17 964) (9 198) (17 964) (9 198) (Loss)/Profit for the year ( ) (87 085) Other comprehensive income Total comprehensive (loss)/income for the year ( ) (87 085) Attributable to: Equity holders of the company ( ) (87 085)