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Topic 3: Analysis of Financial Statement 1. Industry Average Company's Ratio Vs Industry Average Comment

This document analyzes financial statement ratios to evaluate a company's financial performance and position. It provides formulas for key ratios like liquidity, asset management, debt management, and profitability. It also discusses how to benchmark ratios against industry averages and analyze trends over time. The DuPont equation breaks down return on equity into its components to identify issues affecting profitability.

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Nguyen Hai Anh
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50 views4 pages

Topic 3: Analysis of Financial Statement 1. Industry Average Company's Ratio Vs Industry Average Comment

This document analyzes financial statement ratios to evaluate a company's financial performance and position. It provides formulas for key ratios like liquidity, asset management, debt management, and profitability. It also discusses how to benchmark ratios against industry averages and analyze trends over time. The DuPont equation breaks down return on equity into its components to identify issues affecting profitability.

Uploaded by

Nguyen Hai Anh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Topic 3: Analysis of financial statement

1. Industry average
Companys
ratio vs
Ratio Formula Comment
Industry
Average

company will probably


have better luck getting
>
short term loans from
Liquidity lenders

company will probably


< have chance to get a long
term loans from lenders

> Good

Current
< Poor

> Good
Quick
< Poor
the firm is successful in
> managing its assets to
Asset generate sales
Management the firm is not successful in
< managing its assets to
generate sales
Poor (Inventories- worse
performance > the firm
Inventory turnover <
cannot sell inventories as
fast as Industry)
> Good

Poor ( A/R worse- the firm


> takes a longer time to
Days sales
collect A/R)
outstanding (DSO) /365
< Good

Fixed assets > Good


turnover < Poor

Total assets > High


turnover < Low
company negotiate lower
< interest rates on long-term
loans.
Debt Management
Company cannot negotiate
> lower interest rates on long-
term loans.
Total debt to total > High risky
assets < Low risky

Times interest < Low risky

earned (TIE)
> High risky

company is probably in a
>
healthy financial position.
Profitability
company is probably in a
<
bad financial position.
Operating profit < Low
margin > High

< Poor
Profit margin
> Good
Return on total < Poor
assets (ROA) > Good

< Poor
Basic earning Good (Firm can use the
power (BEP) > assets to make money
better)
Return on common < Poor
equity (ROE) > Good
paying out more than
> average, which will attract
investors
Market Value
paying out less than
< average, which may be not
attract many investors
< Low
<< Stock price is cheaper
High (Investors think that
Price/earnings > firm has good potential
(P/E) performances)

Stock price is more


>>
expensive

< Low
Market/book (M/B)
> High

2. Benchmarking
- M/B
+ < 1 > High risk of being taken over
+ >1 > Low risk of being taken over
- TIE
+ < 1 > Firm cannot make enough earnings to pay its interest > bankruptcy.
+ > 1 > Firm can make enough earnings to pay its interest.
3. Trend analysis:
- Analyzes a firms financial ratios over time
- Can be used to estimate the likelihood of improvement or deterioration in financial
condition.
4. Dupont Equation:
ROE = ROA * Equity multiplier
= Profit margin * Total Asset Turnover * Equity multiplier
ROE low have to see reason why by checking PM, TA.TO, and EM to see problem.

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