FINANCIAL

STATEMENT ANALYSIS
Rhia Cabael
Jeruz Madlangbayan
Francisca Magno
 CONTENTS

• Financial Statement Analysis

• Methods of Financial Statement Analysis (Horizontal and
Vertical Analysis)
• Ratio Analysis
 WHAT IS FINANCIAL STATEMENT?

• It is a formal records of the financial activities and position of a business, person, or

other entity.
• They show you where a company’s money came from, where it went, and where it is
now.
• Firms are required to provide their financial statements in the annual report while
publicly listed companies are required to submit their F/S to the Securities and
Exchange Commission
PURPOSE/USES OF FINANCIAL STATEMENT
ANALYSIS
• a method of reviewing and analyzing a company’s accounting reports (financial
statements) in order to gauge its past, present or projected future performance. This
process of reviewing the financial statements allows for better economic decision
making.
• Another important purpose of the analysis of financial statements is to identify
potential problem areas and troubleshoot those.
 USERS OF FINANCIAL STATEMENT

• Investors:
- Shareholders or proprietors of the business are interested in the well being
of the business. They like to know the earning capacity of the business and its
prospects of future growth
• Management:
- The management is interested in the financial position and performance of the
enterprise as a whole and of its various divisions. It helps them in preparing budgets
and assessing the performance of various departmental heads.
• Trade Unions/ Employees:
- They are interested in financial statements for negotiating the wages or salaries or
bonus agreement with the management.
• Lenders:
- Lenders to the business like debenture holders, suppliers of loans and lease are
interested to know short term as well as long term solvency position of the entity.
• Suppliers and trade creditors:
- The suppliers and other creditors are interested to know about the solvency of the
business i.e. the ability of the company to meet the debts as and when they fall due.
• Tax Authority/ Government:
- Determining the tax liability.
-To determine how the economy is performing in general so they can plan their
financial and industrial policies
• Competitors:
- To alter their strategies.
 KEY FINANCIAL STATEMENTS

Balance Sheet
• Also called Statement of Financial Position
• The balance sheet summarizes a business’s assets, liabilities, and shareholders ‘ equity.
• Assets= Liabilities + Shareholder’s Equity
• We use the Balance Sheet Analysis to know the financial position of a company
• Quick Ratio
• Current Ratio
• Return on Equity
INCOME STATEMENT
• Also called a profit and loss account.
• To report the revenues and expenditures of a firm

• Income statement Analysis

• To understand the cost structure of a business, and its ability to earn a profit.
• Gross Margin
• Net Profit Margin
STATEMENT OF CASHFLOWS
• shows explicitly the sources of the firm’s cash and where the cash is utilized.
• The cash flow statement is intended to provide information on a firm’s liquidity and
solvency, improve the comparability of different firms’ operating performance, and to
indicate the amount, timing, and probability of future cash flows.
• Operating
• Financing
• Investing
STATEMENT OF SHAREHOLDER’S EQUITY
• It highlights the changes in value to stockholders' or shareholders' equity, or
ownership interest in a company, from the beginning of a given accounting period to
the end of that period.
NOTES TO FINANCIAL STATEMENT
• Additional information provided in a company’s financial statements. These notes
provide details and information that are left out of the main reporting documents.
They are important for the sake of clarity on many points as they outline the
accounting methodology used for recording certain transactions.
But the information as is provided in the financial statements is
not adequately helpful in drawing a meaningful conclusion.
Thus, an effective analysis and interpretation of financial
statements is required.
METHODS OF FINANCIAL STATEMENT
ANALYSIS
 VERTICAL ANALYSIS

• Is the comparison of figures within the same accounting period. It is establishing

relationship of the size of one account with the standard account to be compared.
 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠
• We want to know how big our cost of sales is compared to our sales ( )
𝑠𝑎𝑙𝑒𝑠

𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
• We want to know how big our gross profit is compared to our sales ( )
𝑠𝑎𝑙𝑒𝑠
𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
• We want to know how big our expenses are compared to our sales ( )
𝑠𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
• We want to know how big our net income is compared to our sales ( )
𝑠𝑎𝑙𝑒𝑠
EXERCISE
 HORIZONTAL ANALYSIS

• Is the comparison of the previous year’s account title with the current year’s account
title. Here, you are establishing the increase or decrease of the account over the
period analyzed. When done for several years, you can develop a trend, which might
be helpful to some user of accounting reports.
EXERCISE
 FINANCIAL ANALYSIS

• Computing percentages and ratios in the financial statement has no significance at all
if there is no interpretation, as well as recommendations for improvement of what is
considered weak areas in the operation. The reason is that financial analysis is
prepared or not to push certain people in the organization, but to improve weak
areas, and, therefore, build better control, protecting the assets of the company.
RATIO ANALYSIS
 FINANCIAL RATIO ANALYSIS

• Investigate financial health of the company

• Appraise the position (assets, liabilities and equity) of a business
• Identify trouble spots that need attention
• Make projections and forecasts about the course of future operations
• Profitability Ratios are a class of financial metrics that are used to assess a
business's ability to generate earnings relative to its revenue, operating costs,
balance sheet assets, and shareholders' equity over time, using data from a specific
point in time
• Liquidity Ratios are an important class of financial metrics used to determine a
debtor's ability to pay off current debt obligations without raising external capital.
• Solvency Ratio is a key metric used to measure an enterprise’s ability to meet its
debt obligations and is used often by prospective business lenders. The solvency
ratio indicates whether a company’s cash flow is sufficient to meet its short-and long-
term liabilities.
• Asset Utilization Ratio Asset turnover is the ratio of total
sales or revenue to average assets.
 This metric helps investors understand how effectively
companies are using their assets to generate sales.
 Investors use the asset turnover ratio to compare similar
companies in the same sector or group.
 It is a tool to see which firms are making the most use of
their assets and to identify weaknesses in firms.
 RATIO ANALYSIS: - STOCKHOLDERS

• These ratios focus on net income, dividends, and stockholders’ equity.

1. Earnings per Share
2. Price-Earnings Ratio
3. Dividend Payout and Yield Ratio
4. Return on Total Assets
5. Return on Common Stockholders’ Equity
6. Financial Leverage
7. Book Value per Share
 Earnings per Share
• An investor buys a stock in the hope of
realizing a return in the form of either
dividends or future increases in the value of
the stock (appreciation).
• Net income available for common
stockholders

Net income - Preferred dividends

Earnings per share =
Average number of
common shares
outstanding

“Ratios should not be viewed as an end, but rather as a starting point.”

 Price-Earnings Ratio
• The relationship between market price of a
stock and the stock’s current earning per
share
• A high price-earnings ratio means that
investors are willing to pay a premium for
the company’s stock—presumably because
the company is expected to have higher
than average future earnings growth.

Market Price per Share

Price-earnings Ratio =
Earnings per share

“Ratios should not be viewed as an end, but rather as a starting point.”

 Dividend Payout Ratio
• Gauge the portion of current earnings being
paid out in dividend
• There is no such thing as a “right” dividend
payout ratio, although the ratio tends to be
similar for companies within the same
industry.
• companies with ample growth opportunities
at high rates of return tend to have low
payout ratios and vice versa
Dividend per Share
Dividend Payout =
Ratio Earnings price per share

“Ratios should not be viewed as an end, but rather as a starting point.”

Dividend Yield Ratio
• measures the rate of return (in the form of
cash dividends only) that would be earned
by an investor who buys common stock at
the current market
• A low dividend yield ratio is neither bad nor
good by itself

Dividend per Share

Dividend Yield Ratio =
Market Price per Share

“Ratios should not be viewed as an end, but rather as a starting point.”

 Return on Total Assets
• measures of operating performance
• Interest expense is added back to net
income to show what earnings would have
been if the company had no debt.
• interest expense is placed on an after-tax
basis by multiplying it by the factor (1 Tax
rate)

Return on Total Net Income + [ Interest expense x (1 – Tax rate ) ]

=
Assets Average total assets

“Ratios should not be viewed as an end, but rather as a starting point.”

 Return on Common Stockholders’
Equity
• measures the percentage of profit derived
for every common stockholders’ equity
• when compared to the return on total assets,
it measures the effective extent in using
financial leverage for or against the common
shareholders' equity

Return on common = Net income - Preferred dividends

stockholders’ equity Average common stockholders
equity

“Ratios should not be viewed as an end, but rather as a starting point.”

 Financial Leverage
• results from the difference between the rate
of return the company earns on investments
in its own assets and the rate of return that
the company must pay its creditors.

Financial EBIT
=
Leverage EBIT - Interest expense -
Preference dividend before
tax

EBIT = Earnings before Interest and Taxes

“Ratios should not be viewed as an end, but rather as a starting point.”

 Book Value per Share
• measures the amount that would be
distributed to holders of each share of
common stock if all assets were sold at their
balance sheet carrying amounts (i.e., book
values) and if all creditors were paid off.

Book value Total stockholders’ equity Preferred stock

=
per share Number of common shares
outstanding

*The number of stocks outstanding is equal to the number of issued shares less
the number of treasury shares

“Ratios should not be viewed as an end, but rather as a starting point.”

Ratio Analysis: - Short-term
Creditor
• These ratios focus on the company’s cash flows
and on its working capital since these are the
company’s short term primary sources of cash.
1. Working Capital
2. Current Ratio
3. Acid-Test (Quick) Ratio
4. Accounts Receivable Turnover
5. Inventory Turnover

“Ratios should not be viewed as an end, but rather as a starting point.”

Working Capital
• Ample working capital provides some
assurance to short-term creditors that they
will be paid by the company.
• large and growing working capital balance
could results to unwarranted growth in
inventories.

Working Capital = Current Assets – Current Liabilities

“Ratios should not be viewed as an end, but rather as a starting point.”

Current Ratio
• measures short-term debt-paying ability, the
current ratio must be interpreted with great
care.
• A declining ratio might be a sign of a
deteriorating financial condition or it might
be the result of eliminating obsolete
inventories or other stagnant current assets
• An improving ratio might be the result of
stockpiling inventory, or it might indicate an
improving financial situation.
Current Assets
Current Ratio =
Current Liabilities

“Ratios should not be viewed as an end, but rather as a starting point.”

 Acid-Test (Quick) Ratio
• measure how well a company can meet its
obligations without having to liquidate or
depend too heavily on its inventory
• is a more rigorous test of a company’s ability
to meet its short-term debts than the current
ratio.
• Inventories and prepaid expenses are
excluded from total current assets
• Ideal ratio is 1:1
Cash + Marketable securities + Accounts receivable
+ Short-term notes receivable
Acid-test ratio =
Current Liabilities

“Ratios should not be viewed as an end, but rather as a starting point.”

 Accounts Receivable
Turnover
• The accounts receivable turnover and
average collection period ratios are used to
measure how quickly credit sales are
converted into cash.
Sales on account
Accounts receivable =
turnover Average accounts receivable
balance

Average collection 365 days

=
period Accounts receivable turnover

“Ratios should not be viewed as an end, but rather as a starting point.”

 Inventory Turnover
• measures how many times a company’s
inventory has been sold and replaced
during the year.
• A company whose inventory turnover ratio is
much slower than the average for its
industry may have too much inventory or the
wrong sorts of inventory.
Cost of goods sold
Inventory turnover =
Average inventory balance

365 days
Average sale period =
Inventory turnover

“Ratios should not be viewed as an end, but rather as a starting point.”

Ratio Analysis: - Long-term
Creditor
• Long-term creditors are concerned with a
company’s ability to repay its loans over
the long run.
• creditors often seek protection by
requiring that borrowers agree to various
restrictive covenants, or rules.
• restrictions on payment of dividends
• maintain certain financial ratios at
specified levels.
“Ratios should not be viewed as an end, but rather as a starting point.”
 Times Interest Earned Ratio
• measures the ability of a company’s
operations to provide protection to long-
term
• Interest expenses are deducted before
income taxes are determined; creditors have
first claim on the earnings before taxes are
paid.
Earnings before interest expense and
Times interest = income taxes
earned Interest expense

EBIT = Earnings before Interest and Taxes

“Ratios should not be viewed as an end, but rather as a starting point.”

 Debt-to-Equity Ratio
• measures the company’s ability to keep a
reasonable balance between its debt and
equity
• stockholders would like a lot of debt to take
advantage of positive financial leverage
• creditors would like to see less debt and
more equity

Total liabilities
Debt-to-equity =
ratio Stockholders’ equity

“Ratios should not be viewed as an end, but rather as a starting point.”

Financial Analysis – Management
Actual vs Budget

ANALYSIS:
 Sales - Consequential to the decrease in transaction count
 HCMD - No provision for employee resignations in the year
was included in the budget. Attrition rate at 33% for 68
employees in the year
 Marketing - Some of the marketing plans included in the year
budget did not materialize.
 Financial Analysis – Management
Trend / Detailed Account Analysis

COUNTRY

VOLUME SERVICE FEES / transaction TOTAL SERVICE FEES

SERVICE MODE Current Year Prior Year Change Current Year Prior Year Current Year Prior Year Change (Fees)
Prod. 1 22,631 18,787 3,844 40.77 42.58 1,541,921 1,399,695 142,227
Prod. 2 193,553 173,624 19,929 53.49 53.02 17,300,539 16,107,990 1,192,549
Prod. 3 168,137 289,976 (121,839) 107.59 94.26 30,228,799 47,831,056 (17,602,257)
Prod. 4 952 1,206 (254) 75.28 75.81 119,764 159,988 (40,224)
Prod. 5 46,035 43,121 2,914 37.88 38.20 2,913,853 2,882,043 31,810
TOTAL 431,308 526,714 (95,406) 63.00 60.77 52,104,876 68,380,772 (16,275,896)
Ave. Exchange Rate 1.67 1.75 (0.08)
=change in volume x 3rd ccy ave. service fees / 3rd ccy-php rate
VARIABLES Prod. 1 Prod. 2 Prod. 3 Prod. 4 Prod. 5 Change (Fees) Change (Fees) %
Change in volume 273,500 1,765,696 (19,192,565) (32,179) 185,994 (16,999,553) -104%

Change in Fees (68,273) 151,875 3,743,189 (844) (24,464) 3,801,483 23%

Change in Exchange Rate (63,000) (725,022) (2,152,881) (7,201) (129,721) (3,077,826) -19%
TOTAL 142,227 1,192,549 (17,602,257) (40,224) 31,810 (16,275,896)

ANALYSIS:
 Sales – New and terminated agents
 Treasury - Rate/Pricing Scheme
 Marketing – Marketing activity per product
Financial Analysis – Bureau of Internal Revenue (BIR)
Tax Assessment
Financial Analysis – Securities and Exchange Commission
Compliance in SEC Rules and Accounting Standards
Financial Analysis – Securities and Exchange Commission
Vertical Analysis – Balance Sheet
Financial Analysis – Securities and Exchange Commission
Vertical Analysis – Balance Sheet
Financial Analysis – Securities and Exchange Commission
Vertical Analysis – Income Statement
Financial Analysis – Securities and Exchange Commission
Horizontal Analysis – Income Statement
Financial Analysis – Stocks Broker / Trading Platform
Cross-sectional analysis
Financial Analysis – Stocks Exchange / Broker / Trading Platform
Fundamental Analysis
Financial Analysis – Stocks Exchange / Broker / Trading Platform
Fundamental Analysis
Financial Analysis – Stocks Exchange / Broker / Trading Platform
Fundamental Analysis
Financial Analysis – Stocks Exchange / Broker / Trading Platform
Fundamental Analysis
Financial Analysis – Stocks Exchange / Broker / Trading Platform
Fundamental Analysis
THANK YOU!
 SOURCES

• Fundamentals of basic Accounting, ALILING

• Managerial Accounting, Noreen Garrison
• https://www.cleverism.com/financial-statement-analysis-
introduction/?fbclid=IwAR3351bNu5wyEU-nm8SsXe-
OXYUpVCgt58hf9j2p2eVGEc9rMCefx82C7Ww
• Cdn.fbsbx.com
• https://courses.lumenlearning.com/