Cash Reinvestment Ratio

Cash Flow Adequacy Ratio

 Corporate Reporting

Annual Report of a Company

The annual report to shareholders is a document used by most public companies to

disclose corporate information to their shareholders. It is usually a state-of-the-
company report, including an opening letter from the Chief Executive Officer,
financial data, results of operations, market segment information, new product
plans, subsidiary activities, and research and development activities on future
programs.
• Reporting companies must send annual reports to their shareholders
when they hold annual meetings to elect directors. Under the proxy
rules, reporting companies are required to post their proxy materials,
including their annual reports, on their company websites
• An annual report is a document that contains comprehensive financial information
about public companies, small and large corporations, non-profit organizations,
partnerships, and other businesses. It includes their financial performance and
activities over the prior fiscal year.
Annual reports can also be known as "business annual
reports," "statements of information," or "yearly statements."
Beyond the legal requirements, they also:
• Help to attract new investors
• Retain the confidence of current stakeholders
• Provide business analysts and creditors with insight into the
company's financial status
The annual report forms generally require the following information
to be included:

• Information regarding the name of the company, business type, and registered
agent
• Information concerning corporate officers and directors and the corporation's
physical location
• A report from the CEO to update current and potential investors on the company's
economic status, key events, activities and achievements, yearly highlights, details
regarding new products or services, and future needs, wants, and goals, as well as
the desired direction of the company
• The company's financial breakdown (including balance sheet summaries, a cash
flow statement, capital investment data, an auditor's report, anticipated revenues
and expenses, changes in equity report, income statement, and other profit and
loss details)
• A restatement of the company's core values, mission statement, and future
objectives
There are normally annual report fees involved when you file the annual report,
including, but not limited to, franchise taxes.
Statutory Annual Reports
• Statutory financial statements are your company’s official financial statements
that are submitted to the regulatory authorities, across jurisdictions.
• Statutory financial statements are the annual, quarterly or bi-annual consolidated
financial statements of your company. These statements provide information on
the income, expenses, balance sheets, budgets, and are reviewed by a statutory
auditor. The preparation and requirements of these statements vary across
jurisdictions and industries.
• These statements cover:
• Income Statement: Includes revenue from operations, business expenses, profit
or loss, income tax and earnings per share
• Balance Sheet: Includes details of your company’s assets, liabilities and
shareholder equity
• Notes to Financial Statements: Accounting policies as well as the assumptions
and methods of calculating key figures in the financial statements
• Report of the Statutory Auditor: An audit verification document by a statutory
auditor
Pros of addressing Statutory Financial Statements
• A comprehensive and consolidated view of your company overall
• Aid in forecasting financial performance of your company by leveraging historical
trends
• Transparency between regulatory authorities and your company
• Obtain funding and loans quicker by providing audited financial statements of
your company
• Provision of up-to-date financial statements to internal and external stakeholders
and regulators across jurisdictions
• Cons of not addressing this topic
• Increase in exposure to risk of liabilities, fines and litigation due to
non-submission of statements
• Hampering of transparency between your company and shareholders
• Increased time and cost of due diligence for both internal company
management and potential investors
How to read Cash Flow Statement?
Which company is displaying elements of cash flow stress?

• IronMount Corp and BronzeMetal Corp had identical cash positions at

the beginning and end of 2007.
• Each company also reported a net income of $225,000 for 2007.
• IronMount and Bronze Metal, both companies have the same end of
the year cash of $365,900.
• Additionally, changes in cash during the year is the same at $315,900. 
We note that Cash Flow from Operations is negative for IronMount at
-21,450. Gain on sale of equipment is deducted as this is not an operating cash flow.
 IronMount sale of equipment adds 307,350 which contributes to the increase in the
cash.

On the other hand, when we look at BronzeMetal, we note that its cash flow from
operations are strong at $374,250 and seems to be doing great in its business. They
are not relying on the one-time sale of equipment to generate cash flows.

With this, we conclude that IronMount is showing signs of stress due to low core
operating income and its reliance on other one-time items to generate cash.
Sensitivity Analysis

Learning Outcome:
Discuss and illustrate the importance of
Sensitivity Analysis
Background/ Need of Sensitive Analysis

The projected financial statements are primarily based on expected

relations between income statement and balance sheet accounts. The
most recent ratios as Target’s operations are fairly stable and we are
assuming no significant changes in operating strategy. It is often useful,
however, to vary these assumptions in order to analyze their impact on
financing requirements, return on assets and equity, and so on.

For example, if we assume increases in capital expenditures to 7.5% of

sales, capital expenditures will rise to $3.9 billion, and the cash balance will
decline to $845 million. In that case, external financing in the form of debt
and/or equity will be required.
Similar increases in financing requirements would also result from a
decrease in receivable or inventory turns.
 Background/ Need of Sensitive Analysis

• Analysts often prepare several projections to examine best (worst) case scenarios in
addition to the most likely case.
• This sensitivity analysis highlights which assumptions have the greatest impact on financial
results and, consequently, help to identify those areas requiring greater scrutiny.
Sensitivty analysis
• Vary projection assumptions to find those with greatest effect on
projected profits and cash flows
• Examine the influential variables closely
• Prepare expected, optimistic, pessimistic scenarios to develop a range
of possible outcomes
Cont…
• A sensitivity analysis determines how different values of an independent variable affect a
particular dependent variable under a given set of assumptions. This technique is used
within specific boundaries that depend on one or more input variables.
• Sensitivity analysis is used in the business world and in the field of economics. It is commonly
used by financial analysts and economists, and is also known as a what-if analysis.
• Eg. What will happen to the profit if Cost of raw materials will go up by 10%?
• What will happen to the market share of the company if competitors will increase their
discounts by 5%?
• What will happen to the sales of company if competitors will increase their budget on social
media promotional activities?
• How much cost of production will increase if company is going to increase the salaries by
10%?
Key takeaways
How Sensitivity Analysis Works
Cont..
Example
Assume Sue is a sales manager who wants to understand the impact of customer traffic on
total sales. She determines that sales are a function of price and transaction volume. The
price of a widget is $1,000, and Sue sold 100 last year for total sales of $100,000. Sue also
determines that a 10% increase in customer traffic increases transaction volume by 5%.

This allows her to build a financial model and sensitivity analysis around this equation based
on what-if statements. It can tell her what happens to sales if customer traffic increases by
10%, 50%, or 100%. Based on 100 transactions today, a 10%, 50%, or 100% increase in
customer traffic equates to an increase in transactions by 5%, 25%, or 50% respectively. The
sensitivity analysis demonstrates that sales are highly sensitive to changes in customer traffic.
Benefits of Sensitivity Analysis
Conducting sensitivity analysis provides a number of benefits for decision-makers. First, it
acts as an in-depth study of all the variables. Because it's more in-depth, the predictions may
be far more reliable. Secondly, It allows decision-makers to identify where they can make
improvements in the future. Finally, it allows for the ability to make sound decisions about
companies, the economy, or their investments.

Sensitivity Analysis adds credibility to any type of financial model by testing the model across a
wide set of possibilities.
Financial Sensitivity Analysis allows the analyst to be flexible with the boundaries within which to
test the sensitivity of the dependent variables to the independent variables. For example, the
model to study the effect of a 5-point change in interest rates on bond prices would be different
from the financial model that would be used to study the effect of a 20-point change in interest
rates on bond prices.
Sensitivity analysis helps one make informed choices. Decision-makers use the model to
understand how responsive the output is to changes in certain variables. This relationship can
help an analyst in deriving tangible conclusions and be instrumental in making optimal decisions.
Limitations of Sensitivity Analysis

The outcomes are all based on assumptions because the variables are all based on
historical data. This means it isn't exactly accurate, so there may be room for error when
applying the analysis to future predictions.