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Financial analysis
Introduction to Financial
Management course
Why?
Evaluate the success of an
ongoing business
Determine weaknesses of an
ongoing business
Compare current performance
with past performance
Compare current performance
with industry standards.
Financial Statements:Review
Assets
Balance = Liabilities + Owner’s Equity
Sheet
Current Assets Current Liabilities Common Stock
Cash A/P Par Value
Inventory Accruals Paid-In Capital
A/R S-T Debt Retained Earnings
Income Statement
Revenues - Expenses = Net Income
Sales COGS
Investment Income Salaries
Gains Depreciation Addition to
Interest Received Taxes Dividends
Dividend Received Other Expenses
Retained
Interest Paid Earnings
Financial Statements: Review
The income statement for the Simsboro
Computer Company is as follows:
Income Statement
Simsboro Computer Company
Sales $1,450
Cost of Goods Sold 875
Gross Profit $575
Operating Expenses 45
Depreciation 200
Net Operating Income $330
Interest Expense 60
Net Income Before Taxes $270
Taxes (40%) 108
Net Income $162
Dividends Paid 100
Addition to Retained Earnings $62
Basic Teminology:
Balance Sheet
Simsboro Computer Company
Per Share Data: (100 SharesAssets Outstanding) Liabilities
Cash $175 Accounts Payable $115
Net Income
Accounts Receivable 430 S-T Notes Payable 115
Earnings Per Share (EPS) = Shares Outstanding
Inventories 625 Current Liabilities $230
Current Assets $1,230 Bonds $600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr. (1,200) Common Stock (par) $300
Net Fixed Assets $1,300 Paid-in Capital 600
Income Statement Total Assets $2,530 Retained Earnings 800
Simsboro Computer Company Total Owners’ Equity $1,700
Sales $1,450 Total Liabilities and
Cost of Goods Sold 875 Owners Equity $2,530
Gross Profit $575
Operating Expenses 45
Depreciation 200
Net Operating Income $330
Interest Expense 60 EPS = $162 = $1.62
Net Income Before Taxes $270 100
Taxes (40%) 108
Net Income $162
Dividends Paid 100
Addition to Retained Earnings $62
Basic Terminology
Balance Sheet
Simsboro Computer Company
Per Share Data: (100 SharesAssets Outstanding) Liabilities
Cash $175 Accounts Payable $115
Accounts Receivable 430 S-T Notes Payable 115
Dividends Per Share =Inventories Total Dividends Paid
625 Current Liabilities $230
Shares
Current Assets Outstanding
$1,230 Bonds $600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr. (1,200) Common Stock (par) $300
Net Fixed Assets $1,300 Paid-in Capital 600
Income Statement Total Assets $2,530 Retained Earnings 800
Simsboro Computer Company Total Owners’ Equity $1,700
Sales $1,450 Total Liabilities and
Cost of Goods Sold 875 Owners Equity $2,530
Gross Profit $575
Operating Expenses 45
Depreciation 200
Net Operating Income $330
Interest Expense 60 Dividends Per Share = $100 = $1.00
Net Income Before Taxes $270 100
Taxes (40%) 108
Net Income $162
Dividends Paid 100
Addition to Retained Earnings $62
Ratio Analysis
Financial Ratios: attempt to standardize
financial information facilitate meaningful
comparisons over time and between firms.
Sales
Receivables Turnover Ratio = Accounts Receivable
AR
Turnover 1
Turnover 2
Turnover 3
Turnover …
Business Cycles
Ratio Analysis
Balance Sheet
Simsboro Computer Company
Assets Liabilities
Cash $175 Accounts Payable $115
Accounts Receivable 430 S-T Notes Payable 115
Inventories 625 Current Liabilities $230
Current Assets $1,230 Bonds $600
Plant & Equipment $2,500 Owner’s Equity
Less:Acc. Depr. (1,200) Common Stock (par) $300
Net Fixed Assets $1,300 Paid-in Capital 600
Income Statement Total Assets $2,530 Retained Earnings 800
Simsboro Computer Company Accts Rec. Total Owners’ Equity $1,700
Sales
Sales $1,450 Turnover = Total Liabilities and
Cost of Goods Sold 875 Accounts Receivable
Owners Equity $2,530
Ratio
Gross Profit $575
Operating Expenses 45
Depreciation 200
Net Operating Income $330
Interest Expense 60 Accts Rec Turnover = $1450 = 3.37x
Net Income Before Taxes $270 $430
Taxes (40%) 108
Net Income $162
Dividends Paid 100
Addition to Retained Earnings $62
Ratio Analysis
Efficiency Ratios
Sales
Fixed Asset Turnover Ratio = Net Fixed Assets
Sales
Total Asset Turnover Ratio = Total Assets
Two Types
Balance Sheet Leverage Ratios
Coverage Ratios
Ratio Analysis
Leverage Ratios
Operating Income
Times Interest Earned Ratio =
Interest Expense
Two Types:
Profit in Relation to Sales
Profit in Relation to Investment
Ratio Analysis
Profitability Ratios
Net Income
Net Profit Margin =
Sales
Net Income
Return on Assets = Total Assets
Net Income
Return on Equity = Common Equity
ROE = ROA * EM
= PM * TAT * EM
Net Income
Return on Assets = Total Assets
Total Asset
Turnover
Can be rewritten as: 0.57 times
Net Income
Return on Equity = Common Equity
Equity multiplier
1.49
DuPont System
Total Assets
Return on Equity = ROA * Equity
Return on
Assets
6.40% .064 * 1.49 = 0.0953 = 9.53%
Use of financial ratios
Market ratios
P/E ratio 42 35.58
M/B ratio 3.70 3.39