FIN AN CIAL

STATEMENTS
AN ALYSI S
BUS IN ESS
OBJ ECTI VES
 Profit Motive – to create a value for its
shareholders while maintaining a sound
financial position

Economic Factors Non-economic Factors

(Measurable) (Non-measurable)

• Profit • Employees satisfaction

• Sale Volume • Social responsibility
• Assets • Prestige
• Market Share • Ethical consideration
USE OF FINA NCI AL
RA TIOS

To evaluate the financial condition and

performance of the company. Its
purpose is not only internal control but
also better understanding of what capital
suppliers seek in financial condition
FOU R ASPEC TS OF
BUS IN ESS
 LIQUIDITY – the ability of a company to meet it’s obligation
as they come due.

 STABILITY – is measured by the ability of a company to make

interest and principal payments on outstanding debt and to
pay regular dividends to its stockholders.

 PROFITABILITY – is measured by the ability of a business to

increase it’s owner’s equity from its operation.

 GROWTH POTENTIAL – is measured by the expansion &

growth in new markets, the rate of the growth in earnings per
share & the amount of expenditures for the research &
development.
FO UR M ETH ODS OF
CO MPA RISO N

 EXPERIENCE

 BUDGETS

 HISTORICAL / TREND

 EXTERNAL BENCHMARKS / INDUSTRY

GRO WTH
MEA SURE MEN T

 AVERAGE GROWTH RATE

 COMPOUND GROWTH RATE

DI FFICU LTI ES I N
MA KI NG
COM PAR IS ONS
 Deciding on the proper basis for
comparison
 Differences in the dollar measuring stick
 Differences in definition/situation
 Hidden short-run changes
 The past as an indication of future
MET HOD S IN
FINAN CI AL
STA TEMEN T ANA LYSI S

 Horizontal analysis

 Vertical analysis
 SUMM ARY OF RA TIOS
 OVERALL PERFORMANCE MEASURES:
State
Name of ratio Formula Results as

Market price per share

2. Price/earnings ratio --------------------------- Times
Net income per share

Net income + Interest(1 - Tax rate)

6. Return on assets -------------------------------------------- Percent
Total assets

Net income + interest(1 – Tax rate)

10.Return on invested capital ---------------------------------------------- Percent
Long-term lia. + Shareholders’ equity

Net income
14.Return on shareholder’s equity --------------------------
Percent
 SUMM ARY OF RA TIOS
 PROFITABILITY MEASURES:
State
Name of ratio Formula Results as

Gross margin
5. Gross margin percentage --------------------------- Percent
Net sales revenues

Net income
6. Profit margin -----------------------
Percent
Net sales revenues

Net income
7. Earnings per share -------------------------------- Dollars
No. of shares outstanding
 SUMM ARY OF RA TIOS
 TESTS OF INVESTMENT UTILIZATION:
State
Name of ratio Formula Results as

Sales revenues
8. Asset turnover -----------------------
Times
Total assets

Sales revenues
9. Invested capital turnover ----------------------------------------------- Times
Long-term lia. + Shareholders’ equity

Sales revenues
10. Equity turnover ---------------------------- Times
Shareholders’ equity
 SUMM ARY OF RA TIOS
 TESTS OF INVESTMENT UTILIZATION (cont..):
State
Name of ratio Formula Results as

Sales revenues
11. Capital intensity ------------------------------------ Times
Property, plant & equipment

Cash
12. Days’ cash ---------------------------------- Days
Cash expenses / 365 days

Accounts receivables
13. Days’ receivables ---------------------------- Days
Sales / 365 days
 SUMM ARY OF RA TIOS
 TESTS OF INVESTMENT UTILIZATION (cont..):
State
Name of ratio Formula Results as

Inventory
14. Days’ inventory ------------------------------- Days
Cost of sales / 365 days

Cost of sales
15. Inventory turnover ---------------------- Times
Inventory

Sales revenues
16. Working capital turnover -----------------------
Times
Working capital
 SUMM ARY OF RA TIOS
 TESTS OF FINANCIAL CONDITION:
State
Name of ratio Formula Results as

Current assets
17. Current ratio -----------------------
Ratio
Current liabilities

Monetary current assets

6. Acid-test (quick) ratio ---------------------------------
Ratio
Current liabilities

Long-term liabilities
19. Debt/equity ratio --------------------------- Percent
Shareholders’ equity
or
Total liabilities
 SUMM ARY OF RA TIOS
 TESTS OF FINANCIAL CONDITION
(cont..): State
Name of ratio Formula Results as

Long-term liabilities
20. Debt/capitalization ----------------------------------------------
Percent
Long-term lia. + Shareholders’ equity

Pretax operating profit + Interest

21. Times interest earned ------------------------------------------
Times
Interest

Cash generated by operations

22. Cash flow/debt --------------------------------------- Percent
Total debt
 SUMM ARY OF RA TIOS
 TESTS OF FINANCIAL CONDITION
(cont..):
State
Name of ratio Formula Results as

Dividends per share

23. Dividend yield ------------------------------ Percent
Market price per share

Dividends
24. Dividend payout ------------------ Percent
Net income

Source: ACCOUNTING TEXT AND CASES

By: Robert N. Anthony, D.B.A.
James S. Reece, D.B.A., C.M.A.
Julie H. Hertenstein, D.B.A.
RET UR N ON INV EST ME NT
• ROI is broadly defined as Net Income divided
by investment

Return on assets (ROA)

• reflects how much the firm has earned on the investment of all
the financial resources committed to the firm

• it is a measure how well an enterprise has used its funds,

without regard to the relative magnitudes of the sources
of those funds
RET UR N ON INV EST ME NT
(cont.)

Return on Owners’ Equity (ROE)

• reflects how much the firm has earned on the funds

invested by the stockholders

Return on Invested Capital (ROIC)

• is equal to non-current liabilities plus shareholders’

equity and hence represents the funds entrusted
to the firm for long periods
INVES TM ENT TURNOVER
& PR OF IT MAR GIN

Equity Profit Margin + Investment Turnover

=
Turnover (Return on Sales) (Asset Turnover)

Net Income Net Income Sales

----------------- = ------------------------ + ----------------
Investment Sales Investment

Ways of Improving ROI

1. Increase profit margin

2. Increase investment turnover
a. Generate more sales w/same amount of investment
b. Reduce amount of investment for a given volume
PRI CE/ EAR NI NG S
RAT IO
Market Price per Share
Price Earning Ratio = ------------------------------------
Net Income per Share

- The P/E Ratio is an indicator of how investors judge the firm’s

future performance

- Management compares its P/E Ratio with similar companies

to determine the marketplace’s relative rankings of the firm
EAR NI NGS PE R SH AR E

Net Income After Taxes

-------------------------------------
No. of Shares Outstanding
 LIQUI DI TY &
SOL VE NCY
 LIQUIDITY – the company’s ability to
meet its current
obligations

 SOLVENCY – the company’s ability to

meet interest costs and
repayment schedules
associated with long-term
obligations
 I. LI QUI DI TY RA TIO
 Used to judge a firm’s ability to meet
short-term obligations

1. Current Ratio

Current Assets
------------------------------------
Current Liabilities

7. Quick Ratio

Current Assets – Inventories

---------------------------------------
Current Liabilities
1. Liquidity of Receivables
- indicates the slowness of receivables
- tests the efficiency of credit and collection policies

a. Average Collection Period

- too low an average collection period may suggest an
excessively restrictive credit policy
- too high an average collection period may indicate too
liberal a credit policy

Receivables x Days in year

----------------------------------------
Annual Credit Sales

b. Receivable Turnover Ratio

Annual Credit Sales

------------------------------------
Receivables
c. Aging of Accounts
- Receivables are categorized at a moment in time according
to the proportions billed in previous months
- Gives considerably more information than the calculation of
the average collection period because it pinpoints the trouble
spots more specifically
4. Liquidity of Inventories

Inventory Turnover Ratio

- Tells the rapidity with which the inventory is turned over into
receivables thru sales
- The higher inventory turnover, the more efficient the inventory
management
- When the inventory turnover ratio is relatively low, it indicates
slow-moving inventory or obsolescence of stock

Cost of Goods Sold

----------------------------------
Average Inventory
 II . DEBT RATIO
 Tells the relative proportions of capital
contribution by creditors and by owners
1. Debt-to-Equity
- A comparison of the debt ratio for a given company with
those of similar firms gives us a general indication of the
creditworthiness and financial risk of the firm

Total Debt
------------------------------------
Shareholder’s Equity

10.Long-term Capitalization
- All long-term debt, preferred stock, and shareholder’s equity
- Tells the relative importance of long-term debt in the capital
structure
Long-term Debt
---------------------------------------
Total Capitalization
3. Cash-flow-to-total-liabilities ratio
- Useful in assessing the creditworthiness of a company seeking debt funds
- Useful in predicting the deteriorating financial health of a company

Cash Flow (EBITDA)

--------------------------------------
Total Liabilities

4. Cash-flow-to-long-term ratio
- Used to evaluate the bonds of a company
- Helpful in corporate restructuring
- Useful in predicting the deteriorating financial health of a company

Cash Flow (EBITDA)

--------------------------------------
Long-term Debt
5. Cash Flow (EBITDA)
- Long-term debt
- Enterprise-value-to-EBITDA ratio
- Bank loans, notes payable and long-term debt represent total borrowings
- The higher the ratio, the greater the value that is being placed on the securities

Total Borrowings + Equity

------------------------------------------
Cash Flow (EBITDA)
 III. COV ERAGE R ATI OS
 Designed to relate the financial charges of a
firm to its ability to service them
1. Interest Cover Ratio
- Ratio of earnings before interest and taxes for a particular
reporting period to the amount of interest charges for the period

5. Cash-Flow Coverage Ratios

a. Cash-Flow Coverage of Interest
- Useful in determining whether a borrower is going to be able
to service interest payments on a loan
EBITDA
---------------------------------------
Annual Interest Payments

b. Cash-Flow Coverage of Interest and Principal Ratio

EBITDA
---------------------------------------------------
Interest + Principal payments (1/(1-t))
 IV. DURA TION OF
PAYA BLES
 Average Payable Period
 Valuable in evaluating the probability that a
credit applicant will pay on time

Accounts Payable x 365

-----------------------------------
Purchases
THANK YOU !