FINANCIAL

ANALYSIS
Part 2
 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.

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  is a financial ratio that indicates whether a
company's current assets will be sufficient
to meet the company's obligations when
they become due.

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 Leverage Ratios show the capital structure
of a company, that is, how much of the
total assets of a company is financed by
debts and how much id financed by
stockholders’ equity.
It can be used to measure the company’s ability to
meet long-term obligations.

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 The efficiency ratio or Turnover Ratios 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.

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Measures the company’s ability to generate
revenues for every peso of asset invested. It is an
indicator of how productive the company is in
utilizing its resources.
 ◦ The asset
turnover ratio of
2.22 means that
for every P1.00
of asset of the
business has in
a current year. It
is able to
Net Sales = P 100,000 generate sales
Average Total Assets = P 45,000
of P 2.22
Total Asset Turnover Ratio = 2.22
Measures the company’s ability to generate revenues
for every peso of asset invested. It is an indicator of
how productive the company is in utilizing its resources.
 ◦ In that year the
business was
able to
generate P 6.61
for every P1.00
of Plant,
Property and
Equipment
(Fixed Assets)
of the business
that it has.
Net Sales = P 260,000 .
Average Net Fixed Assets = (P41,304 + P 37,378) /2

Fixed Asset Turnover Ratio = 6.61

Measures the efficiency by which accounts receivable are
managed. A high accounts receivable turnover ratio means
efficient management of receivables.
 Net Credit Sales __________ = P 250,000,000 .
Average Accounts Receivable= (P80,000,000+ P90,000,000) /2

Accounts Receivable Turnover Ratio = 3.33

The AR Turnover ratio becomes more meaningful when

converted to days receivable or average collection
period. To convert, simply divide 360 days by the AR
Turnover ratio if annual data are use. Otherwise, use 90
days if quarterly data are used.. To illustrate see
example below:

Average Collection Period = 360 / 3.33

Average Collection Period =
108. 11 or 108 days
◦ The business had an average of 108 days collecting its accounts receivable.
This means that from the day the sale was made, it took the company 108 days,
on the average, to collect its accounts receivable.
Measures the company’s efficiency in managing its
inventories. Trading and manufacturing companies and
companies that are dealing with highly perishable products
and those are prone in technological obsolescence must
pay close attention to this ratio to minimize losses.
 Cost of Goods Sold = P 1,000,000
Average Inventories = 3,500,000
Inventory Turnover Ratio = 0.29
The Inventory Turnover ratio becomes more
meaningful when converted to days inventory.
To convert, simply divide 360 days by the
Inventory Turnover ratio if annual data are use.
Otherwise, use 90 days if quarterly data are
used.. To illustrate see example below:

Days Inventories = 360 / Inventory Turnover Ratio

This 1,241 days means that in the current Days Inventories = 360 / 0.29
year, the business took 1,241 days on the
Days Inventories =
average, to sell its inventories from the 1,241.37 days or 1,241 days
time they were bought.
Provides information regarding the rate by which trade payables are
paid. Any operating company will prefer to have a longer payment
period for its accounts payable but this should be done only with the
concurrence of the suppliers.
 Credit Purchases = P 162,857
Average Accounts Payable = P 50,065
Accounts Payable Turnover Ratio = 3.25
The AP Turnover ratio becomes more
meaningful when converted to days payable
or average payment period. To convert, simply
divide 360 days by the AP Turnover ratio if
annual data are use. Otherwise, use 90 days if
quarterly data are used.. To illustrate see
example below:

Days payable = 360 / Accounts Payable Turnover Ratio

This figure suggests that in the current Days Payables = 360 / 3.25
year, the average payment period of Days Payable =
110.76 or 110 days
the company for its trade accounts
payable was 110 days.
Operating Cycle = Days’ Inventories / Days Receivable
Operating Cycle = 1,241 + 101
Operating Cycle = 1,342 days
When the business bought the merchandise, did it
already pay the merchandise bought? Chances are
the company was given credit terms. As our days
payable suggests, payment to suppliers averaged of
110 days in the current year. If we are interested to find
out how long it takes the company to collect
receivables from the time the cost of the merchandise
sold was actually paid, cash conversion cycle or
sometimes called net trade cycle can be computed.
Cash Conversion Cycle = Operating Cycle – Days Payable
Cash Conversion Cycle = 1,342 days – 110 days
Cash Conversion Cycle = 1,232 days
◦ Vertical analysis is a method of financial Another form of financial statement analysis used in
statement analysis in which each line item is ratio analysis is horizontal analysis
listed as a percentage of a base figure within
or trend analysis. This is where ratios or line
the statement. Thus, line items on an income
items in a company's financial statements are
statement can be stated as a percentage compared over a certain period of time by choosing
of gross sales, while line items on a balance one year's worth of entries as a baseline, while every
sheet can be stated as a percentage of total other year represents percentage differences in
assets or liabilities, and vertical analysis of a terms of changes to that baseline.
cash flow statement shows each cash inflow For example, the amount of cash reported on the
or outflow as a percentage of the total cash balance sheet on December 31 of 2018, 2017, 2016,
inflows. 2015, and 2014 will be expressed as a percentage of
the December 31, 2014, amount. Instead of peso
amounts, you might see 141, 135, 126, 118, and 100.
To compute for the change, simply get the difference from one period to
another. The earlier period is used as the base period.
To illustrate, let us compute the change in the sales of JFC Foods
Corporation from 2013 to 2014

◦Peso Change = (Sales 2014 - Sales 2013)

◦Peso Change = 52,501,085 - 47,345,223
◦Peso Change = 5,155,862
◦% Change = (Sales 2014 - Sales 2013) / Sales 2013) X 100%
◦% Change = (5,155,852 / 47,345,223) X 100%
◦% Change = 10.89
 In a
pro nalyz
wh fit or l ing a s
e
goo ther oss, h tatem
d o the o
r no ear w ca ent of
t? nin n yo
gs a u t
re ell

There are information in the financial statements that should be

looked into.

Among these are the following:

1. Is the income coming
from the core business?
2. How much of the
income translates into
cash flows?

3. Is the income stable?

 LIMITATIONS OF FINANCIAL ANALYSIS
◦1. Financial ◦2. ◦3. Different
Management companies may
analysis deals
use different
only with can take accounting
quantitative short-run principles though
data. actions to they come from
influence the same
ratios. industry.
◦4. Different ◦5. The amounts ◦6. A financial
formulas can found in the
ratio standing
financial
be used in statements are alone is useless.
computing already part of
financial historical data.
ratios.
 -End Part 2-

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[email protected] Joe Cor Ali IAMJOEAL @IAMJOEAL