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FM - Chapter 4

This document discusses various methods for analyzing financial statements including horizontal analysis, vertical analysis, and ratio analysis. It provides examples of key ratios used in liquidity analysis, asset management analysis, debt management analysis, profitability analysis, and market value analysis. These ratios can be tracked over time and compared to industry benchmarks to evaluate a company's financial performance and position.

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Maxine Santos
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307 views19 pages

FM - Chapter 4

This document discusses various methods for analyzing financial statements including horizontal analysis, vertical analysis, and ratio analysis. It provides examples of key ratios used in liquidity analysis, asset management analysis, debt management analysis, profitability analysis, and market value analysis. These ratios can be tracked over time and compared to industry benchmarks to evaluate a company's financial performance and position.

Uploaded by

Maxine Santos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 4

ANALYSIS OF
FINANCIAL STATEMENTS
Introduction

 Interpretation is when users evaluate


financial information to make judgments
 It is the key to any in-depth understanding of
an organization's performance.
 Basically, the users evaluate an organization's
performance and financial position using the
information from INCOME STATEMENT
and BALANCE SHEET.
 The value of the analysis is depends on the
value of the financial statements.
Types of analysis

1. Horizontal Analysis
Comparing key figures in financial statement
Evaluates a series of financial statement over a
period of time.
Types of analysis
2. Vertical Analysis
Evaluates financial statement by expressing each item in a
financial statement as a percent of the base amount (key figure)
Key-figure (such as sales in IS and total assets on BS) are
set to 100%
Types of Analysis
3. Ratio Analysis
It expresses the relationship among selected
items of financial statement data.

Types of Ratio Analysis

3-1. Liquidity Ratio- 1st type of Ratio Analysis which


give us an idea of the firm’s ability to pay off debts that
are maturing within a year.

Will the firm be able to pay off its debt?


3.1 Liquidity Ratio
3-1a. Current Ratio- The primary liquidity ratio which is
calculated by dividing current assets by current liabilities.
Current ratio= CA/CL
= 1000/310
= 3.2
3-2b. Quick, or Acid test, Ratio- this ratio is calculated
by deducting inventories from current assets and then dividing the
remainder by current liabilities.
Quick, or Acid test, Ratio = CA- Inventories/CL
= 385/310
= 1.2
Types of Ratio Analysis

3-2 Asset Management Ratios- 2nd type of


ration analysis, It is a set of ratio that measure how
effectively a firm is managing its asset.

3-2a. Inventory Turnover Ratio


-This ratio is calculated by dividing sales by inventories.
Inventory turnover Ratio= Sales/Inventories
= 3000/615
= 4.9
3-2 Asset Management Ratios-

3-2b. Day sales Outstanding- It indicates the


average length of time the firm must wait after making a sale
before it receives cash.
DSO= Receivables/ Annual sales/365
= 375/(3000/365)
= 45.625 0r 46 days

3-2c. Fixed Asset Turnover Ratio - it’s a ratio of


sales to net fixed assets
= Sales/Net Fixed Assets
= 3000/1000
= 3.0
3.2 Asset Management Ratios-

3-2d. Total Assets Turnover Ratio – it


measures the turnover of all the firm’s assets.
= Sales/Total Assets
= 3,000/2,000
= 1.5
Types of Ratio Analysis

3-3. Debt Management Ratio- 3rd types of


Ratio analysis that measure how effectively a firm
manages its debt.

3-3a. Total debt to Total Asset- it is generally


called Debt Ratio, it measure the percentage of
funds provided by the creditors.
Debt Ratio = Total Liabilities/ Total Assets
= 1060/2000 = 53 %
3-3. Debt Management Ratio

3-3b. Times- Interest-Earned Ratio- it


measures the firm’s ability to meet its annual
interest payments.
=EBIT / Interest charges
= 283.8/ 88
= 3.2
Types of Ratio Analysis

3-4. Profitability Ratios- 4th types of ratio analysis


that show the combined effects of liquidity, asset
management , and debt on operating result.
3-4a. Operating margin –It highlights the
operating income (EBIT) of the business as
a percentage of the revenue.
Operating Margin = EBIT/ Sales
= 238.8/3000
=9.5 %
3-4. Profitability Ratios

3-4b. Profit Margin – also sometimes called


Net Profit margin, calculated by dividing net income by
sales.
Profit Margin = Net Income/Sales
= 117.5/3000
= 3.9 %
Return on Total Assets (ROA)- The ratio of net
income to Total Assets.
ROA = Net Income/ Total Assets
= 117.5/ 2000
= 5.9%
Profitability Ratios-

3-4d. Basic Earning Power (BEP) Ratio- it


indicates the ability of firm’s assets to generate
operating income(EBIT).
BEP Ratio = EBIT/ Total Assets
=283.8/2000
= 14.2%
3-4e. Return on Common Equity (ROE)- it measure
the rate of return on common stockholders investment.
ROE = Net Income/ Common Equity
= 117.5/940
=12.5%
Types of Ratio Analysis

3-5. Market Value Ratios – Ratios that


relate the firm’s stock price to its earning
and book value per share.
MVR are used in 3 primary ways.
 By investor when they are deciding to buy or sell
a stock
 By investment bankers when they are setting the
share price for a new stock issue
 By the firms when they are deciding how much
to offer for another firm in potential merger.
3-5. Market Value Ratios

3-5a. Price/ Earning Ratio- The ratio of the


price per share to earning per share.
(P/E) Ratio =Price per share/ Earning Per share
= 23.06/2.35
= 9.8
3-5b. Market / Book Ratio- The ratio of stock’s
market price to its book value.
(M/B) Ratio = Market Price per share/Book value per share
= 23.06/18.80
= 1.2
4. Trend Analysis
-An analysis of a firm’s financial ratios over time, measures if
its likely to improve or deteriorate.
ROE
(%)
20

15

10
Allied
5

0
2008 2009 2010 2011 2012
The DuPont Equation

-It shows the relationships among asset management,


debt management and profitability ratios.

ROE= 117.5/3000 x 3000/2000 x 2000/940


ROE= 3.92% x 1.5 x 2.13 = 12.5
_________________________________
Industry = 5.0% x 1.8 x 1.67 = 15.0%
Average
Comparative Ratio and
Bench Marking
Comparison to Industry Average
- it is a tool that helps business to make comparisons that helps
to determine its position within the industry and evaluate
financial performance of the business.

Bench Marking Company Profit


Margin
The process of comparing a Campbell Soup 10.7
particular company with a HJ. Heinz 9.4
set of benchmark companies. Hershey Food 9.0
Flower Foods 5.3
Allied Food Products 3.9
Fresh Del Monte Produce 2.2
Deans Food 0.5

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