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Lecture Financial Analysis

The document discusses various types of financial statement ratios that can be used to analyze a company's financial performance and position. It defines key liquidity, activity, debt, profitability, and market ratios and provides the formulas to calculate each. For example, it states that the current ratio measures a company's ability to meet short-term obligations by dividing current assets by current liabilities. It also provides an example calculation of ratios using data from the fictional Ace Industries.

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53 views

Lecture Financial Analysis

The document discusses various types of financial statement ratios that can be used to analyze a company's financial performance and position. It defines key liquidity, activity, debt, profitability, and market ratios and provides the formulas to calculate each. For example, it states that the current ratio measures a company's ability to meet short-term obligations by dividing current assets by current liabilities. It also provides an example calculation of ratios using data from the fictional Ace Industries.

Uploaded by

rizcst9759
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Financial Statement Anal

We recognize that the balance sheet is a statement of the firms


financial position at a point in time

The income statement shows the result of operation s during an


interval of time

The statement of Retained Earnings indicates how the retained earnings


account on the balance sheet is adjusted between balance sheet dates.

Ratio Analysis

Financial ratios are designed to help evaluate a financial statement.


From an investors view, financial statement analysis is all
about future prediction.

From management standpoint, financial statement analysis is usefu

both to help anticipate future conditions and, more important, as a

starting point planning actions that will improve the firms future pe

Following ratios are useful in financial analysis:


Liquidity ratios
Activity ratios
Debt ratios
Profitability ratios
Market ratios

A liquid asset is one that trades in an active market and hence can be
quickly converted to cash at a fair market price.
Two commonly used liquidity ratios are:
The current ratio
Quick, or Acid Test ratio

Current Ratio (Ability to meet short-term obligations)

Current assets
Current ratio
Current liabilities

Quick, or Acid test ratio

Current assets Inventories


Quick ratio
Current liabilities

Activity Ratios
It measures how effectively the firm is managing its assets

Ratios are analyze the different types of assets are:


The Inventory Turnover ratio
Average collection period ratio
Average payment period ratio

The Inventory Turnover Ratio (Evaluating Inventories)

Sales
Inventory Turnover
Inventories
OR

COGS
Inventory Turnover
Average Inventory

Average Collection Period (Evaluating


Receivables)

Accounts Receivables
Average Collection Period
Average sales per day
Accounts Receivables

Annual Sales
365

Average Payment Period: (Evaluating average age of A/Ps)

Accounts payable
Average Payment Period
Average Purchases per day

Accounts payable

Annual purchases
365

10

Total Asset Turnover: (efficiency with which the firm uses its
assets)

Total Asset turnover

Sales
Total assets

11

Debt Ratios
Firms use debt financing (external sources) to raise funds
This debt financing (financial leverage) has three important implications:
1) By raising funds through debt, existing stockholders can maintain
control of the firm with out increasing their investment.
2) Creditors look to equity funds (which act as a margin of safety)
3) If the firm earns more on investments with borrowed funds and pays
more interest, the return on owners equity capital is magnified or
leveraged

12

Total Debt to Total Assets: (How the firm is financed)

Total liabilities
Debt ratio
Total assets

Times Interest Earned: (Ability to pay interest)

EBIT
Times interest earned (TIE) ratio
Interest charges
13

Profitability Ratios
The effectiveness of a firms operations are shown by Profitability Ratios .

Gross Profit Margin

Sales C.O.G.S.
Gross Profit margin
Sales

14

Operating Profit Margin

Operating profits
Operating profit margin
Sales

Net Profit Margin

Earnings available for common stockholders


Net profit margin
Sales

15

Q. Ace Industries has current assets equal to $3 million. The companys


current ratio is 1.5 and its quick ratio is 1.0. What is the firms level of
current liabilities? What is the firms level of inventories?
Q. The K. Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory
turnover of 6 times, total current assets of $810,000 and cash and marketable
securities of $120,000. What were K. annual sales and its Average collection
period?

16

Earning Per Share (EPS)


Earnings available for common stockholders
EPS
No. of shares of common stock outstanding

Return on Total assets (ROA)


Net Income available to common stock holders
Return on total assets
Total assets

17

Return on Common Equity (ROE)

Earnings available
to common stockholders
Return on common equity
Common equity

18

Market Value Ratios


These ratios give management an indication of what investors think of
the companys past performance and future prospects in terms of
risk and return.

Price Earning Ratio

Market Price per share


P/E ratio
Earnings per share

19

Market/ Book Ratio

Common equity
Book value per share
Shares outstanding
Market price per share
Market/Book ratio
Book value per share

20

Assets (in millions)

2001

2000

Cash and equivalents

$10

$15

Short-term investments

65

Accounts receivable

375

315

Inventories

615

415

$1000

$810

Total current assets

Net plant and equipment 1,000

870

Total assets

$1680

$2000

21

Liabilities and equity


Accounts payable

2001
$60

2000
$30

Notes payable
Accruals
Total current liabilities

110
140
310

60
130
220

Long-term bonds
Total debt
Preferred Stock (40m shares)
Common stock (50m shares)

754
1064
40
130

580
800
40
130

Retained Earnings
Total common equity

766
896

710
840

Total liabilities and equity

$2,000

$1,680
22

2001
$3000
2616.2
383.8

2000
$2850
2497
353

Depreciation and
amortization

100

90

EBIT
Less: Interest

283.8
88

263
60

Earnings before taxes (EBT)


Taxes (40%)
Net Income before Preferred
dividends

195.8
78.3
117.5

203.0
81.2
121.8

Net Income

113.5

117.8

Common dividends

57.5

53.0

Net sales
Operating costs
EBITDA

Perform the possible Ratio analysis on this data and compare the results of 23
year
2000 and 2001.

Du Pont Analysis
Return on Equity (ROE) is affected by asset turnover, the profit
margin and leverage.
This approach is useful for evaluating performance
The profit margin times the total assets turnover is called the
Du Pont Equation and it gives the rate of return on assets (ROA)

ROA Profit margin Total assets turnover


Earnings available for
common stock holders
Sales

Sales
Total assets
24

Net Income
Net Income
ROA
and ROE
Total assets
Common Equity
This equality holds only if Total assets = Common equity (i.e. company
uses no debt)
To find the ROE, multiply the rate of return on assets (ROA) by the
Financial Leverage multiplier, which is the ratio of assets to
common equity.

Total assets
Financial Leverage Multiplier
Common equity
25

ROE ROA FLM


Net Income
Total assets

Total assets Common equity


OR
ROE (Profit Margin) (Total asset turnover)
(Financial Leverage multiplier)

26

Q. Kamas Dealer has an ROA (Return on Asset) of 10%, a 2% profit margin,


and a return on equity equal to 15%? What is the companys Total asset
turnover? What is the firms Financial Leverage multiplier (FLM)?

27

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