Financial

Statement
Analysis
What is Financial Statement Analysis?
 It is the process of analyzing financial statements for
decision making.
Techniques or Methods of FS Analysis
 Horizontal Analysis
 Vertical Analysis
 Ratio Analysis
 Trend Analysis
 Cost-volume Analysis
Horizontal Analysis
 It is used when a company wans to analyze or evaluate
company performance over time. It shows the changes of some
areas or accounts in Financial Statements over a year or period.
Vertical Analysis
It is used when a company want s to know the percentage
of each line of account composed with in the financial
statement.
Ratio Analysis
 It is used when a company measures its financial statement to
evaluate their liquidity, solvency, profitability, asset
management and market value.
5 Categories of Ratio Analysis
 Liquidity – Firms ability to pay debts maturing within a year
 Solvency – Firms ability to pay debts that are maturing more
than one year and gives idea on how the company financed
its asset.
 Asset Management Ratios – Firms efficiency of using their
asset
 Profitability Ratios – Firms operating profitability by utilizing
their asset.
 Market Value Ratios – Firms value in the market or investors
perception about the firm.
Liquidity Ratios
 Current Ratio = Current Asset/Current Liabilities
-Measures the number of times that the current
liabilities could be paid with the available current assets.
 Acid Test Ratio = (Current Asset – Inventory –
Prepayments) / Current Liabilities
-Measures the number of times that the current
liabilities could be paid with the available cash and near
cash asset.
 Cash Ratio = (Cash + Marketable Securities)/ Current
Liabilities
-Measures the number of times that the current
liabilities could be paid with the available cash and near
cash asset.
Solvency Ratios
 Times Interest earned = (Income before tax + Interest)/ Interest Expense
-Determines the extent to which operations cover interest expense
 Debt-Equity Ratio = Total Liabilities / Total Shareholder’s Equity
-Proportion of assets provided by creditors compared to that provided by
owners.
 Debt Ratio =Total Liabilities / Total Assets
-Proportion of total assets provided by creditors.
 Equity Ratio = Total Stockholder’s equity / Total Assets
-Proportion of total assets provided by owners.
 Fixed asset to Long term Liabilities = Fixed Asset / Total Liabilities
-Reflects extent of the utilization of resources from long term debt.
Indicative of sources of additional funds.
 Fixed asset to Total Equity = Fixed Asset / Total Equity
-Measures the proportion of owner’s equity to fixed asset. indicative of
over or under investment by owners
 Fixed asset to Total Asset = Fixed Asset (net) / Total Asset
-Indicative for possible over expansion of Plant and Equipment.
 Sales to Fixed Asset = Net Sales / Fixed assets
-Test the firms efficiency of management in keeping plant properties
employed.
Asset Management Ratios
 Receivable Turnover = Net Credit Sales / Average receivables
-The time required to complete one collection cycle from the
receivable was recorded, then collected, to the time new
receivables are recorded again.
 Average age of Receivable = No. of working days in a year /
Receivable Turnover
-Indicates the average number of days during which company
must wait before receivables are collected.
 Inventory Turnover = Cost of goods sold / Average Inventory
-Measures the number of times that is replaced during the
period.
 Average Age of inventory = Number of working days in a year/
Inventory Turnover
= Average Inventory / Average daily cost of
goods sold
 Operating Cycle = Average age of receivable + Average age of
Profitability Ratios
 Return on Sales = Earnings After Tax / Net Sales
-Determines the amount of income earned on each
peso sales
 Return on total Asset (ROA) = Net income / Total Asset
-Efficiency which the firm used total asset to operate the
business
 Return on Equity (ROE) = Net Income / Owner’s Equity
-Measures the amount of income on owner’s
investment.
 Earnings per Share = (Net Income – Preferred Dividend) /
Weighted Average number of common shares
-Measures the amount of net income earned by each
common share
 Gross Profit Margin Ratio = Gross Profit/ Net Sales
Market Value Ratio
 Price/earnings ratio (P/E) = Price per share / earnings per
shares
-Indicates the number of pesos required to buy P1 of
earnings
 Dividend Yield = Ordinary dividend per share / Price per
share
-Measures the rate of return in the investors common
stock investment
 Dividend Pay-out = Ordinary dividend per share / Earnings
per share
-Indicates the proportion of earnings distributed as
dividends
 Market/Book Ratio = Market price per share/ Book Value
per share
-The ratio of stock’s market price to its book value.
DuPont Equation
-A useful technique used to decompose the different
drivers of return on equity (ROE). It allows investor to focus on
the key metrics of financial performance individually to identify
strength and weaknesses.

= (Operating Income/Total Sales) x ( Total Sales/ Total Asset ) x

( Total Assets / Shareholder’s Equity)
Trend Analysis
Analysis of firms financial conditions using ratios or any line
item over a period of time.
Additional Data:
The net credit sale is 10 times the balance of
Accounts receivable and Notes receivable.
The COGS is 60% of the net credit sales.
Net income is 75% of the retained earnings.
Common shares : 100/share
Preferred shares : 200/share, 10% preferred and non-
commulative
ABC Company declared dividends equal to the 10%
non-commulative preferred dividends.
Scenario 1. Compute the ratios using the original
data.
Scenario 2. Compute the ratios when the bonds
payable is due on March 2023
Scenario 3. Compute the ratios when the bonds
receivable is to be collected before March 2023.