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Horizontal Analysis: Basic Rule

This document outlines various financial analysis techniques including horizontal analysis, vertical analysis, and financial ratios. It provides the basic formulas for liquidity ratios like current and quick ratios, efficiency ratios like receivable and inventory turnover, solvency ratios like debt and equity ratios, and profitability ratios like return on assets and earnings per share. The document also discusses how to calculate ratios related to leverage, cash flows, and market and share performance.

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37 views3 pages

Horizontal Analysis: Basic Rule

This document outlines various financial analysis techniques including horizontal analysis, vertical analysis, and financial ratios. It provides the basic formulas for liquidity ratios like current and quick ratios, efficiency ratios like receivable and inventory turnover, solvency ratios like debt and equity ratios, and profitability ratios like return on assets and earnings per share. The document also discusses how to calculate ratios related to leverage, cash flows, and market and share performance.

Uploaded by

glcpa
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 PDF, TXT or read online on Scribd
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HORIZONTAL ANALYSIS

Percentage Change = Most recent value – Base period value


Base Period Value

VERTICAL ANALYSIS
Total Asset=100%
Net sales=100%

FINANCIAL RATIOS (RELATIONSHIP)


Basic Rule
BS Amount, 12-31-20 IS Amount, 12-31-20
BS Amount, 12-31-20 IS Amount, 12-31-20

IS Amount, 12-31-20
(BS Amount, 1-1-20 + BS Amount, 12-31-20) / 2

Sales and purchase---not stated if made in cash or on credit, assumption


- Turnover (on Credit)
- Cash flow ratio (in Cash)

Operating year (360 days unless specified otherwise)

Liquidity
1. Current Ratio = Current Assets 10= 2.0 10=0.50
Current Liabilities 5 20

2. Quick/Acid Test Ratio = Quick Assets (Cash, Current Receivable and marketable securities)
Current Liabilities

3. Working Capital = Current Assets - Current Liabilities

Efficiency (working capital)


1. Receivable Turnover = Net Credit Sales 1000/20=50x
Average Receivables

2. Average age of Receivables = 360 days or Average Receivable


Receivable Turnover (Net Credit Sales/ 360 days)

3. Inventory Turnover = Cost of goods sold


Average Inventory

4. Average age of Inventory = 360 days or Average Inventory


Inventory Turnover (Cost of goods sold/ 360 days)

5. Normal Operating Cycle = Average age of Receivables + Average age of Inventory


6. Trade Payables Turnover = Net Credit Purchases
Average Trade Payables

7. Average age of Trade Payables = 360 days or Average Trade Payable


Trade Payables Turnover (Net Credit Purchases/ 360 days)

8. Cash Conversion Cycle = Average age of Receivables + Average age of Inventory - Average age of Trade
Payables

Solvency and Leverage


1. Debt Ratio = Liabilities/ Asset

2. Equity Ratio = Equity/ Asset

3. Debt to Equity = Liabilities/ Capital

4. Times interest earned = EBIT/ Interest Expense

Net Sales – COGS = GP – Ae – Me = EBIT - Interest Expense = EBT - Tax Expense = Net Income
ex. 50/5= 10x

Profitability
1. Return on Sales = Income/ Net Sales (vertical analysis)

2. Return on Assets = Income/ Average Assets

3. Return on Equity = Income/ Average Equity

4. Earnings per share = Net Income- Preferred Dividends


Wtd. Ave. Common Outstanding Shares

Dupont model

1 10 5 1
x x =
10 5 2 2 or 0.5
Marketability

1. Price earnings = Price per share/ EPS

2. Dividend Yield = Dividend per share/ Price per share

3. Dividend Payout = Dividend per share/ EPS 2/10=20%

4. Retention Ratio = EPS- DPS 10-2/10 8/10=80%


EPS

Stability

1. Book value per share = Common Shareholders’ Equity/ Common Outstanding Shares

2. Fixed Assets to Total Equity = Fixed assets/ total Equity

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