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Financial-Ratios-Managerial-Accounting-Presentation.pptx
- 1. Understanding financial statementsby making analysis and deriving interpretations out of it. ACC 041: MANAGERIAL ACCOUNTING COMPANY TO BE EXAMINED: P&G
- 2. LET'S GET TOKNOW THEM RIYAH SADIA AGUIRRE, CPA FINANCE ANALYST ETHEL JOYCE FERNANDEZ ACCOUNTANT
- 3. DEFINITION OF FINANCIAL STATEMENT ANALYSIS:OBJECTIVES & IMPORTANCE TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS & INTERPRETATION A complete overview of Financial Statement Analysis & Ratio Analysis ICE RATIO ANALYSIS: DIFFERENT TYPES & INTERPRETATION LIMITATION OF FS ANALYSIS & KNOWLEDGE CHECK
- 5. Assets Liabilities Equity Contribution by anddistribution to owners in their capacity as owner PROVIDE INFORMATION ABOUT THE FINANCIAL POSITION, FINANCIAL PERFORMANCE AND CASH FLOWS OF AN ENTITY THAT IS USEFUL TO A WIDE RANGE OF USERS IN MAKING ECONONOMIC DECISIONS. Income and expenses, including gains and losses 1 2 3 4 5
- 6. Reveals important factsconcerning managerial performance and the efficiency of the firm. to assess the current profitability & operational efficiency of the fir as a whole. to ascertain the relative importance of different components of the financial position of the firm to identify the reasons for change in the profitability/financial position of the firm to judge the ability of the firm to repay its debt and assessing the short term as well as the long-term liquidity position of the firm.
- 7. Different users, differentuse. Owners and Managers Employers Prospective Investors Financial Institutions Government Entities Vendors Media and General Public
- 8. Financial statement usersand analysts have developed a number of techniques to help them analyse and interpret financial statements. Comparative Financial Statements Horizontal Analysis Vertical Analysis Trend Analysis Ratio Analysis
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- 11. -Method of expressing relationsamong various items in a company’s financial statement. - The indicated quotient of two mathematical expression -Provide with clues and symptoms of underlying conditions. -A ratio can help us uncover conditions and trends difficult to detect by inspecting individual component making up the ratio. A widely-used tools of financial analysis. DEFINITION SIGNIFICANCE
- 12. Usefulness of ratiosdepends on our skillful interpretation of them, and is the most challenging aspect of ratio analysis. Use of rule of thumb/industry's average index can be used.
- 13. USED TO ASSESSOVERALL FINANCIAL HEALTH OF BUSINESSES END GOAL OF MAKING BETTER INVESTMENT DECISIONS TO GET A BETTER UNDERSTANDING OF HOW THEIR BUSINESSES ARE PERFORMING. GREAT WAY TO COMPARE TWO COMPANIES THAT ARE DIFFERENT IN SIZE OPERATIONS AND MANAGEMENT STYLE.
- 14. PROFITABILITY RATIOS A. ReturnRatios B. Margin Ratios LEVERAGE RATIOS EFFICIENCY RATIOS A. Turnover Ratios LIQUIDITY RATIOS A. Asset Ratios B. Earnings Ratios C. Cash Flow Ratios VALUATION RATIOS A. Price Ratios B. Enterprise Value Ratios Debt-to-Equity Ratio Equity Ratio Debt Ratio
- 15. B. Margin Ratios A.Return Ratios Represent the company’s ability to generate returns for its shareholders. Represent the company’s ability to convert sales into profits at various degrees of measurement MEASURE AND EVALUATE THE ABILITY OF A COMPANY TO GENERATE INCOME (PROFIT) RELATIVE TO REVENUE, BALANCE SHEET ASSETS, OPERATING COSTS, AND SHAREHOLDERS’ EQUITY DURING A SPECIFIC PERIOD OF TIME.
- 16. Return on Equity(ROE) -measure of a company’s annual return (net income) divided by the value of its total shareholders’ equity, expressed as a percentage (e.g. 10%). RETURN ON EQUITY RETURN ON ASSETS RETURN ON CAPITAL EMPLOYED INTERPRETATION Looks at the firm’s bottom line to gauge overall profitability for the firm’s owners and investors. It indicates how well the company has used the resources of owners. It ultimately determines how attractive an investment is.
- 21. Return on Assets(ROA) measures the profitability of a business in relation to its total assets. RETURN ON EQUITY RETURN ON ASSETS RETURN ON CAPITAL EMPLOYED INTERPRETATION Indicates how well a company is performing by comparing the profit it’s generating to the total capital it has invested in assets. The higher the return, the more productive and efficient the management is in utilizing economic resources.
- 26. Gross Margin Ratio-compares the gross margin of a company to its revenue GROSS MARGIN RATIO OPERATING PROFIT MARGIN NET PROFIT MARGIN INTERPRETATION It shows how much profit a company makes after paying off its cost of goods sold (COGS). The ratio indicates the percentage of each dollar of revenue that the company retains as gross profit, so naturally a high gross margin ratio is desired.
- 29. Net Profit Margin Used tocalculate the percentage of profit a company produces from its total revenue. GROSS MARGIN RATIO OPERATING PROFIT MARGIN NET PROFIT MARGIN INTERPRETATION It measures the amount of net profit/net income a company obtains per dollar of revenue gained.
- 32. INDICATES THE LEVELOF DEBT INCURRED BY A BUSINESS ENTITY AGAINST SEVERAL OTHER ACCOUNTS IN ITS BALANCE SHEET, INCOME STATEMENT, OR CASH FLOW STATEMENT. Leverage ratios represent the extent to which a business is utilizing borrowed money. It also evaluates company solvency and capital structure. Having high leverage in a firm’s capital structure can be risky, but it also provides benefits.
- 33. Equity Ratio Calculatesthe proportion of total shareholders’ equity versus total assets. DEBT-TO-EQUITY RATIO EQUITY RATIO DEBT RATIO INTERPRETATION The ratio determines the residual claim of shareholders on a business. It determines what portion of the business could be claimed by shareholder in a liquidation event.
- 36. Debt Ratio Indicatesthe percentage of assets that are being financed with debt. DEBT-TO-EQUITY RATIO EQUITY RATIO DEBT RATIO INTERPRETATION Determine the overall risk of a company. Companies with a higher ratio are more leveraged and hence, riskier to invest in and provide loans to.
- 39. USED TO MEASUREHOW WELL A COMPANY IS UTILIZING ITS ASSETS AND RESOURCES. These ratios generally examine how many times a business can accomplish a metric within a certain period of time, or how long it takes for a business to fulfill segments of its operations. Accounts Receivable Turnover Ratio Accounts Receivable Days Asset Turnover Ratio Inventory Turnover Ratio Inventory Turnover Days TURN OVER RATIOS TYPES OF TURN OVER RATIOS
- 40. Accounts Receivable Turnover Ratio Measuresthe number of times over a specific period that a company collects its average accounts receivable ACCOUNTS RECEIVABLE TURNOVER RATIO ACCOUNTS RECEIVABLE DAYS ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO INVENTORY TURNOVERDAYS INTERPRETATION Determines how many times per year does the company collects its accounts receivables. To see how efficient the company is in collecting payments versus its competitors.
- 43. Accounts Receivable DaysThe number of days on average that it takes a company to collect on credit sales from its customers. ACCOUNTS RECEIVABLE TURNOVER RATIO ACCOUNTS RECEIVABLE DAYS ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO INVENTORY TURNOVERDAYS INTERPRETATION Determines the average days it takes for the company to collect its accounts receivables. To see how efficient the company is in collecting payments versus its competitors.
- 46. Asset Turnover RatioMeasures how efficient a company uses its assets to generate sales.This ratio looks at how many dollars in sales is generated per dollar of total assets that the company owns. ACCOUNTS RECEIVABLE TURNOVER RATIO ACCOUNTS RECEIVABLE DAYS ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO INVENTORY TURNOVERDAYS INTERPRETATION A higher ratio is generally favourable as it indicates efficient use of assets. Conversely, a low ratio may imply poor utilization of assets, poor collection methods, or poor inventory management.
- 49. Inventory Turnover RatioMeasures how many times a business sells and replaces its stock of goods in a given period of time. ACCOUNTS RECEIVABLE TURNOVER RATIO ACCOUNTS RECEIVABLE DAYS ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO INVENTORY TURNOVERDAYS INTERPRETATION This number determines how many time does the company sold its entire stock of inventory a year.
- 52. Inventory Turnover Days Measuresnumber of days on average it takes to sell a stock of inventory. ACCOUNTS RECEIVABLE TURNOVER RATIO ACCOUNTS RECEIVABLE DAYS ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO INVENTORY TURNOVERDAYS INTERPRETATION This number should be compared to industry averages to see how efficient the company is in converting inventory into sales versus its competitors.
- 55. Valuation by DifferentMethods of Accounting Policies and Estimates: Inflationary Effects Are Being Ignored Limitations of Methods Application for Analysis The Reports of The Analysis Should Not Create the Assessment of Managerial Ability Reports issued by various analyst and auditor are subject to limitations and every investor must aware of the limitations, since Financial Statement heavily relies on past and present data Change of Business Conditions