Financial Statement

Analysis:
Chapter 14
FIN 3130
Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Example using Apple Inc. in Excel
Common Sized Financial Statements
Financial Ratio Analysis
Are the stockholders receiving an adequate return
on their investment?
How is the firm financing its assets?
Is management generating adequate operating profits
on firms assets?
How liquid is the firm?

Liquidity Ratios:
abilities Current Li
Assets Current
tio Current Ra =
s Liabilitie Current
s Receivable Securities Marketable Cash
Ratio Test Acid Ratio Quick
+ +
= =
s Liabilitie Current
Securities Marketable Cash
Ratio Cash
+
=
Asset Utilization Ratios:
365 Sales Annual
Receivable Accounts Average
Day Per Sales Average
Receivable Accounts Average
Period Collection Average s Receivable Days
=
= =
Inventory Average
COGS
Turnover Inventory =
Assets Total Average
Sales
Turnover Asset Total =
Assets Fixed Net Average
Sales
Turnover Asset Fixed =
Leverage Ratios:
Assets Total
es Liabiliti Total
Debt Ratio =
Equity Total
es Liabiliti Total
tio Equity Ra Debt to =
Expense Interest
EBIT
TIE Earned Interest Times Coverage Interest = = =
Leverage Ratios:
EBIT
Expense Interest - EBIT
Burden Interest =

Equity
Debt
1
Equity
Assets
Ratio Leverage + = =
Equity
Assets

EBIT
Expense Interest - EBIT

Ratio Leverage Burden Interest Factor Leverage Compound

= =
Profitability Ratios:
Sales
Income Net
Sales on Margin Profit Net =
Sales
EBIT
Sales on Return Margin Profit Operating = =
Assets Total Average
EBIT
ROA Assets on Return = =
Equity rs' Stockholde Average
Income Net
ROE Equity on Return = =
Market Price Ratios:
Share Per Earnings
Share Per Price
E
P
Ratio Earnings Price = =
Share Flow Per Cash Net
Share Per Price
Flow Cash Net Price =
g Outstandin Shares
Equity Common
Share Per Value Book =
Share Per Value Book
Share Per Price
Ratio Book Market to =
Share Per Price
Share Per Earnings
Yield Earnings =


Du Pont Equations:
Assets Total Average
Sales
Sales
EBIT
ROA
Turnover Asset Total Margin Profit Operating ROA
=
=
Du Pont Equations:
Factor Leverage Compound ROA Burden Tax ROE
Equity rs' Stockholde Average
Assets Total Average
Assets Total Average
Sales


Sales
EBIT

EBIT
Interest - EBIT

Interest - EBIT
Income Net
ROE
Leverage Turnover Asset Total
Margin Profit Operating Burden Interest Burden Tax ROE
=

=

=
Other Formulas:
( ) ( )
(

+ =
Equity
Debt
Rate Interest - ROA ROA Rate Tax - 1 ROE
( ) Firm in Invested Capital WACC - ROA
EVA Added Value Economic

= =
Limitations of Ratio Analysis
Difficulty in identifying industry categories or
finding peers
Published peer group or industry averages
are only approximations
Accounting practices differ among firms
Financial ratios can be too high or too low
Industry averages may not provide a
desirable target ratio or norm
Use of average account balances to offset
effects of seasonality
Homework: Chapter 14:
Problems: 1, 4, 5, 8, and 9.
CFA Problems: 3, 7, and 8
Holden: Chapter 8: Problem 2.