FSA

Friday, 24 November 2023 1:17 PM

- Is a type of analysis utilized by stakeholders to analyze the company position

- It is a relationship between different items in a single financial statement or across multiple
financial statements.
FSA used to analyze:
- Liquidity: The ability to pay short term liabilities.
- Asset Management: The ability of utilizing company assets.
- Debt Management: The ability to pay long term liabilities.
- Profitability: The ability to generate profit.
- Market Value: The ability to attract new investments.
There are two methods of analysis:
- Trend Analysis: Compare the data with the previous company data "Benchmark"
- Cross-sectional analysis: Compare the data with industry average or a peer
 Peer is a competitor have the nearest conditions and circumstances.
 Industry Avg. provided by investment banks.
 Accepted Ratio is 10-15% up or down to Industry Avg.

1- Liquidity
1. Current Ratio:
company's ability to cover its short-term obligations with its current assets.
2. 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
If it has a lower current ratio than the average for its industry. This is a red flag, and
analysts should be concerned about why the variance
For example, suppose a low current ratio is traced to low inventories.

3. Quick Ratio:
company's ability to pay off its short-term liabilities with its short-term
assets.
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

If the industry average quick ratio is low in comparison with other firms in its industry.
Still, if the accounts receivable can be collected, the company can pay off its current
liabilities without having to liquidate its inventory.
4. Cash Ratio:
company's ability to pay off its short-term liabilities with cash.
𝐶𝑎𝑠ℎ
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

2- Asset Management
 These ratios are designed to answer this question: Does the total amount of each type of
asset as reported on the balance sheet seem reasonable, too high, or too low in view of
current and projected sales levels? If a company has excessive investments in assets, then
its operating assets and capital will be unduly high, which will reduce its free cash flow
and its stock price. On the other hand, if a company does not have enough assets, it will
lose sales, which will hurt profitability, free cash flow, and the stock price
1. Inventory turnover:
measures how efficiently a company uses its inventory by dividing the cost
of goods sold by the average inventory value during the period.
𝑆𝑎𝑙𝑒𝑠
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

If Inventory turnover is much lower than the industry average. This suggests that company is holding
too much inventory. Excess inventory is, of course, unproductive, and it represents an investment with
a low or zero rate of return. Company’s low inventory turnover ratio also makes us
question the current ratio. With such a low turnover, we must wonder whether the
firm is actually holding obsolete goods not worth their stated value.
 2. Days of sales outstanding: “average collection period” (ACP), is used to appraise accounts
receivable,
the average number of days it takes a company to receive payment for a
sale.
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑎𝑙𝑒𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦

The fact that xxx days of sales are outstanding indicates that customers, on
the average, are not paying their bills on time. This deprives company of funds
that it could use to invest in productive assets. Moreover, in some instances the fact that a customer is
paying late may signal that the customer is in financial trouble, in which case company may have a hard
time ever collecting the receivable.
Therefore, if the trend in DSO over the past few years has been rising, but the
credit policy has not been changed; this would be strong evidence that steps.
should be taken to expedite the collection of accounts receivable.

3. Days of payable outstanding:

indicates the average time (in days) that a company takes to pay its bills
and invoices to its trade creditors.
𝐴𝑐𝑐𝑜𝑢𝑛𝑡 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
𝐶𝑂𝐺𝑆

4. Fixed assets turnover ratio: The fixed assets turnover ratio measures how effectively the firm
uses its plant and equipment. It is the ratio of sales to net fixed assets:

how efficient a company is at generating sales from its existing fixed assets.
𝑆𝑎𝑙𝑒𝑠
𝑁𝑒𝑡 𝑓𝑖𝑥𝑒𝑑 𝑎𝑠𝑠𝑒𝑡𝑠

5. Total assets turnover ratio:

how effectively a company uses its assets to generate revenue or sales.
𝑆𝑎𝑙𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Total assets turnover ratio is somewhat below the industry average, indicating that the company is not
generating a sufficient volume of business given its total asset investment. Sales should be increased,
some assets should be sold, or a combination of these steps should be taken

3- Debt Management
1. Debt ratio:
measures the amount of leverage used by a company in terms of total debt
to total assets.
𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
EX: Company’s debt ratio is 53.2%, which means that its creditors have supplied
more than half the total financing.

Dept ratio exceeds the industry average raises a red flag and may make it costly for a company to
borrow additional funds without first raising more equity capital.
2. Times-interest-earned ratio:
ability to meet its debt obligations based on its current income.

𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠 "𝐸𝐵𝐼𝑇"

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

The TIE ratio measures the extent to which operating income can decline before
the firm is unable to meet its annual interest costs. Failure to meet this obligation
can bring legal action by the firm’s creditors, possibly resulting in bankruptcy
EX: MicroDrive’s interest is covered 3.2 times. Since the industry average is 6 times,
MicroDrive is covering its interest charges by a relatively low margin of safety.
Thus, the TIE ratio reinforces the conclusion from our analysis of the debt ratio that
MicroDrive would face difficulties if it attempted to borrow additional funds

4- Profitability
1. Profit Margin:
a measure of a company's earnings relative to its revenue.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑜 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘𝑠
𝑁𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
EX: MicroDrive’s profit margin is below the industry average of 5%. This sub-par
result occurs because costs are too high. High costs, in turn, generally occur
because of inefficient operations. However, MicroDrive’s low profit margin is also
a result of its heavy use of debt.

2. Basic earning power:

A metric that measures a company's ability to generate operating profits
from its assets.
𝐸𝑎𝑟𝑛𝑖𝑛𝑔 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠 "EBIT"

𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠

Because of its low turnover ratios and low profit margin on sales, MicroDrive is not getting as high a
return on its assets as is the average company in its industry

3. Return on total assets:

measures the profitability of a business in relation to its total assets.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑜 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘𝑠
𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠
MicroDrive’s 5.7% return is well below the 9% average for the industry. This low
return results from (1) the company’s low basic earning power plus (2) high interest costs resulting
from its above-average use of debt, both of which cause its net
income to be relatively low.
 4. Return on equity:
measures how efficiently a company is generating income from the equity
investments of its shareholders.
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑜 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘𝑠

𝐶𝑜𝑚𝑚𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦

Stockholders invest to get a return on their money, and this ratio tells how well
they are doing in an accounting sense. MicroDrive’s 12.7% return is below the 15%
industry average, but not as far below as the return on total assets