Financial Statement Analysis

Chan, Irish Serrano, Marianne Villodres, Niliza Yap, Florence

Introduction
Stockholders Report
summarizes and documents the firms financial activities during the past year.

Generally Accepted Accounting Principles (GAAP)

used to prepare and maintain financial records and reports, authorized by the Financial Accounting Standards Board (FASB).

Introduction
Four Key Financial Statements
1. 2. 3. 4. Income Statement Balance Sheet Statement of Stockholders Equity Statement of Cash Flows

Introduction
Ratio Analysis
Methods of calculating and interpreting financial ratios to analyze and monitor the firms performance.

Type of Ratio Comparisons a. Cross Sectional Analysis b. Time-Series Analysis c. Combined Analysis

Introduction
Cautions about using Ratio Analysis 1. Ratio that reveal large deviations from the norm merely indicate the possibility of a problem. 2. A single ratio does not generally provide sufficient information from which to judge the overall performance of the firm. 3. The rations being compared should be calculated using financial statements dated at the same point in time during the year.

Introduction
Cautions about using Ratio Analysis 4. It is preferable to use audited financial statements. 5. The financial data being compared should be developed in the same way 6. Results can be distorted by inflation.

Liquidity ratios
CURRENT RATIO Current ratio = Current assets Current liabilities

QUICK (ACID-TEST) RATIO Quick Ratio = Current assets - Inventory Current Liabilities

Activity Ratios
INVENTORY TURNOVER Inventory turnover = Cost of goods sold Inventory AVERAGE COLLECTION PERIOD Average Collection Period = Accounts Receivable Average Sales Per Day = Accounts Receivable Annual sales 365

Activity Ratios
AVERAGE PAYMENT PERIOD Average Payment Period = Accounts Payable Average Purchase Per Day = Accounts Payable Annual Purchases 365 TOTAL ASSET TURNOVER Total Asset Turnover = Sales Total Assets

Debt Ratios
Debt Position of a Firm Indicates the amount of other peoples money being used to generate as profits Measures the ability to pay a long term debt

Debt Ratio
Measures the degree of indebtedness the amount of debt relative to other significant balance sheet amounts Measures the proportion of total assets financed by the firms creditors Debt Ratio= Total liabilities Total assets

Coverage Ratios
Measures ability to service debts or to pay debts on time Measures the firms ability to pay certain fixed charges
Times Interest Earned Ratio Fixed Payment Coverage Ratio

Times Interest Earned Ratio

Also called the interest coverage ratio Measures the firms ability to make contractual interest payments Times interest earned ratio= Earnings before interest and taxes Interest Times interest earned ratio= Operating profits Interest

Fixed Payment Coverage Ratio

Measures the firms ability to meet all fixed payment obligations Fixed Payment Coverage Ratio=
Earnings before interest and taxes + Lease payments Interest + Lease payments + {(Principal payments + Preferred stock dividends) x [1/(1-T)]} Where T is the corporate tax rate applicable to the firms income

Profitability Ratios
Enable analysts to evaluate the firms profits with respect to a given level of sales, a certain level of assets, or the owners investment
Common-size income statement Gross profit margin Operating profit margin Net profit margin Earnings per share (EPS) Return on total assets (ROA) Return on common equity (ROE)

Common-size income statement

Each item on this statement is expressed as a percentage of sales
2012 Sales Revenue Less: COGS Gross Profit Less: Operating Expenses Operating Profit Less: Interest Expense Net Profits Before Taxes Less: Taxes Net Profits After Taxes Less: Preferred Stock Dividends Net Profit $3074 2088 986 568 418 93 325 94 231 10 $221 100.0% 67.9 32.1 18.5 13.6% 3.0 10.6 3.1 7.5 0.3 7.2% 2011 $2567 1711 856 553 303 91 212 64 148 10 $138 100% 66.7 33.3 21.5 11.8% 3.5 8.3 2.5 5.8 0.4 5.4% Evaluation Same Worse Worse Better Better Better Better Better Worse Better Better

Gross Profit Margin

Measures the percentage of each sales dollar remaining after the firm has paid for its goods
Gross profit margin = Sales Cost of Goods Sold Sales = Gross Profits Sales

Operating Profit Margin

Measures the percentage of each sales dollar remaining after all the costs and expenses other than interest, taxes, and preferred dividends are deducted Operating Profit Margin = Operating profits Sales

Net Profit Margin

Measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes and preferred stock dividends, have been deducted.
Net Profit Margin = Earnings available for common stockholders Sales

Earnings Per Share (EPS)

Represents the number of dollars earned during the period on behalf of each outstanding share of common stock
EPS = Earnings available for common stockholders No. of shares of common stock outstanding

Return on Total Assets (ROA)

Also called the return on investment (ROI) Measures the effectiveness of management in generating profits with its available assets
ROA = Earnings available for common stockholders Total assets

Return on Common Equity (ROE)

Measures the return earned on the common stockholders investment in the firm
ROE = Earnings available for common stockholders Common stock equity