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Financial Analysis

This document discusses various methods of financial statement analysis including vertical analysis, horizontal analysis, and financial ratios. It provides definitions and calculations for liquidity ratios, solvency ratios, efficiency ratios, profitability ratios, and leverage ratios. Key metrics covered include the current ratio, quick ratio, debt-to-equity ratio, return on assets, profit margin, and interest coverage ratio.

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20 views

Financial Analysis

This document discusses various methods of financial statement analysis including vertical analysis, horizontal analysis, and financial ratios. It provides definitions and calculations for liquidity ratios, solvency ratios, efficiency ratios, profitability ratios, and leverage ratios. Key metrics covered include the current ratio, quick ratio, debt-to-equity ratio, return on assets, profit margin, and interest coverage ratio.

Uploaded by

Lowelyn Presidente
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Financial Analysis

FINANCIAL ANALYSIS
• VERTICAL ANALYSIS
• COMMON STATEMENT ANALYSIS
• HORIZONTAL ANALYSIS
• TRENDING ANALYSIS
• FINANCIAL RATIOS
• LIQUIDITY RATIOS
• SOLVENCY RATIOS
• EFFICIENCY RATIOS
• PROFITABILITY RATIOS
• LEVERAGE RATIOS
VERTICAL ANALYSIS
• - A method of financial statement analysis in which each line item is
listed as a percentage as a base figure within the statement.
The line item on an income statement can be stated as a
percentage of gross sales, while the line item on a balance sheet can be
stated as a percentage of total assets or liabilities, and a vertical
analysis of cash flow statement shows each cash
Vertical analysis
Vertical analysis
Horizontal analysis
• Horizontal analysis is used in financial statement analysis to
compare historical data, such as ratios, or line items, over a number
of accounting periods. Horizontal analysis can either use absolute
comparisons or percentage comparisons, where the numbers in
each succeeding period are expressed as a percentage of the
amount in the baseline year, with the baseline amount being listed
as 100%. This is also known as base-year analysis.
HORIZONTAL ANALYSIS
Liquidity ratio
• 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. Liquidity ratios measure a
company's ability to pay debt obligations and its margin of safety
through the calculation of metrics including the current ratio, quick
ratio, and operating cash flow ratio.
Liquidity ratio
Current ratio - measures a company's ability to pay off its current
liabilities (payable within one year) with its total current assets such
as cash, accounts receivable, and inventories. The higher the ratio, the
better the company's liquidity position:
Liquidity Ratio
Quick ratio - measures a company's ability to meet its short-term
obligations with its most liquid assets and therefore excludes
inventories from its current assets. It is also known as the acid-
test ratio:
Liquidity Ratio
Days Sales Outstanding (DSO) -refers to the average number of days it
takes a company to collect payment after it makes a sale. A high DSO
means that a company is taking unduly long to collect payment and is
tying up capital in receivables. DSOs are generally calculated on a
quarterly or annual basis:
Solvency ratio
A solvency ratio is a key metric used to measure an enterprise’s ability to
meet its long-term debt obligations and is used often by prospective
business lenders. A solvency ratio indicates whether a company’s cash
flow is sufficient to meet its long-term liabilities and thus is a measure of
its financial health. An unfavorable ratio can indicate some likelihood that
a company will default on its debt obligations.

The main solvency ratios are the debt-to-assets ratio, the interest coverage
ratio, the equity ratio, and the debt-to-equity (D/E) ratio. These measures
may be compared with liquidity ratios, which consider a firm's ability to
meet short-term obligations rather than medium- to long-term ones.
Solvency Ratio
Interest coverage ratio - measures how many times a company can
cover its current interest payments with its available earnings. In
other words, it measures the margin of safety a company has for
paying interest on its debt during a given period.

The higher the ratio, the better.


Solvency Ratio
Debt-to-assets ratio - measures a company's total debt to its
total assets. It measures a company's leverage and indicates how
much of the company is funded by debt versus assets, and therefore,
its ability to pay off its debt with its available assets. A higher ratio,
especially above 1.0, indicates that a company is significantly funded
by debt and may have difficulty meetings its obligations.
Solvency ratio
Equity Ratio - shows how much of a company is funded by equity as
opposed to debt. The higher the number, the healthier a company is.
The lower the number, the more debt a company has on its books
relative to equity.
Solvency ratio
Debt-to-equity ratio - is similar to the debt-to-assets ratio, in that it
indicates how a company is funded, in this case, by debt. The higher
the ratio, the more debt a company has on its books, meaning the
likelihood of default is higher. The ratio looks at how much of the debt
can be covered by equity if the company needed to liquidate.
Efficiency ratio
The efficiency ratio is typically used to analyze how well a company
uses its assets and liabilities internally. An efficiency ratio can
calculate the turnover of receivables, the repayment of liabilities, the
quantity and usage of equity, and the general use of inventory and
machinery. This ratio can also be used to track and analyze the
performance of commercial and investment banks.
Efficiency ratio for banks:
PROFITABLITY RATIO
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, or shareholders'
equity over time, using data from a specific point in time.
Profit Margin
Return on Asset (ROA)
Return on Equity (ROE)
Profitability ratio. Profit Margin
Gross Margin - measures how much a company makes after
accounting for COGS.
Operating Margin - is the percentage of sales left after covering COGS
and operating expenses.
Pretax Margin - shows a company's profitability after further
accounting for non-operating expenses.
Net Profit Margin - is a company's ability to generate earnings after
all expenses and taxes.
Profitability ratio . Return on Asset
Profitability is assessed relative to costs and expenses and analyzed in
comparison to assets to see how effective a company is deploying
assets to generate sales and profits. The use of the term "return" in
the ROA measure customarily refers to net profit or net income—the
value of earnings from sales after all costs, expenses, and taxes. ROA is
net income divided by total assets.
Profitability ratio . Return on Equity (ROE)
ROE is a key ratio for shareholders as it measures a company's ability
to earn a return on its equity investments. ROE, calculated as net
income divided by shareholders' equity, may increase without
additional equity investments. The ratio can rise due to higher net
income being generated from a larger asset base funded with debt.
Leverage ratio
A leverage ratio is any one of several financial measurements that
look at how much capital comes in the form of debt (loans) or
assesses the ability of a company to meet its financial obligations. The
leverage ratio category is important because companies rely on a
mixture of equity and debt to finance their operations, and knowing
the amount of debt held by a company is useful in evaluating whether
it can pay off its debts as they come due. Several common leverage
ratios are discussed below.
Leverage ratio
Debt-to-equity ratio
Equity multiplier -
Debt-to-capitalization ratio - An indicator that measures the amount of
debt in a company’s capital structure is the debt-to-capitalization ratio,
which measures a company’s financial leverage.
Leverage ratio
Degree of financial leverage - is a ratio that measures the sensitivity of
a company’s earnings per share (EPS) to fluctuations in its operating
income, as a result of changes in its capital structure. It measures the
percentage change in EPS for a unit change in earnings before interest
and taxes (EBIT) and is represented as:
Leverage ratio
Consumer Leverage Ratio - is used to quantify the amount of debt the
average American consumer has relative to their disposable income.

Debt-to-capital ratio - is used to evaluate a firm's financial structure and


how it is financing operations. Typically, if a company has a high debt-
to-capital ratio compared to its peers, it may have a higher default
risk due to the effect the debt has on its operations.
Leverage ratio
Debt-to-EBITDA leverage ratio - measures a company's ability to pay off
its incurred debt. Commonly used by credit agencies, this ratio
determines the probability of defaulting on issued debt.
Leverage ratio
Interest coverage ratio – The "coverage" in the interest coverage ratio
stands for the length of time—typically the number of quarters or fiscal
years—for which interest payments can be made with the company's
currently available earnings. In simpler terms, it represents how many
times the company can pay its obligations using its earnings.
Leverage ratio

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