financial statement analysis_2

8/12/2019 Financial Statement Analysis_2

1/55

TOPIC 5

Financial Statement

Analysis


2/55

FACTORS IN COMMUNICATING

USEFUL INFORMATION

13-2

Users

Types ofDecisions

Methods of

Analysis

The primary objective of accounting is to provide information useful for decision

making. To provide information that supports this objective, accountants must consider

the following:


3/55

METHODS OF ANALYSIS

Horizontal

Analysis

Vertical Analysis

Ratio Analysis


4/55

MILAVEC COMPANY FINANCIAL STATEMENTS


5/55

MILAVEC COMPANY FINANCIAL STATEMENTS


6/55

HORIZONTAL ANALYSIS

13-6

Horizontal analysis (or trend analysis) refers tostudying the behavior of individual financial

statement items over several accounting

periods

Absolute Amounts Percentage Analysis


7/55

MILAVEC COMPANY HORIZONTAL ANALYSIS

13-7


8/55

MILAVEC COMPANY TREND ANALYSIS

13-8

TrendPercentage Current Year AmountBase Year Amount 100%=


9/55

Vertical Analysis

Vertical analysis usespercentages to compare

individual components of

financial statements to akey statement figure. A

common-sizefinancial

statement is a vertical

analysis in which each

financial statement item is

expressed as a

percentage


10/55

VERTICAL ANALYSIS OF INCOME STATEMENT

In income

statements, all

items areusually

expressed as a

percentage ofsales.


11/55

MILAVEC COMPANY VERTICAL ANALYSIS

13-11


12/55

VERTICAL ANALYSIS OF

BALANCE SHEET

In balance

sheets, all items

are usually

expressed as a

percentage of

total assets


13/55

MILAVEC COMPANY VERTICAL ANALYSIS

13-13


14/55

RATIO ANALYSIS

Ratio analysis

involves studying

various relationships

between different

items reported in a set

of financial

statements.


15/55

LIQUIDITY RATIOS

Liquidity ratios indicate a companys

ability to pay short-term debts. They

focus on current assets and current

liabilities.

1. Working Capital

2. Current Ratio

3. Quick Ratio

4. Accounts Receivable Ratios

5. Inventory Ratios


16/55

WORKING CAPITAL

The excess of current assets overcurrent liabilities is known as

working capital


17/55

Current Ratio

The current ratio measures a

companys short-term debt payingability.

A declining ratio may be asign of deteriorating

financial condition, or it

might result from eliminating

obsolete inventories.

Current

Ratio

Current Assets

Current Liabilities=


18/55

Current Ratio


19/55

Quick (Acid-Test) Ratio

Quick Assets

Current Liabilities=Acid-Test

Ratio

Quick assets include Cash,

Current Marketable Securities, and Accounts Receivable.

This ratio measures a companys ability to meet obligations

without having to liquidate inventory.


20/55

Quick (Acid-Test) Ratio


21/55

Accounts Receivable

Turnover

Net Credit Sales

Average Accounts Receivable

Accounts

Receivable

Turnover=

This ratio measures how many times a

company converts its receivables into casheach year.


22/55

Accounts Receivable

Turnover


23/55

Average Days to Collect

ReceivablesAverage

Collection

Period=

365 Days

Accounts Receivable Turnover

This ratio measures, on average, how manydays it takes to collect an account

receivable.

= 21 daysAverageCollection

Period=

365 Days

16.98 Times


24/55

Inventory Turnover

This ratio measures how many times acompanys inventory has been sold and

replaced during the year.

Cost of Goods Sold

AverageInventory

Inventory

Turnover =


25/55

Inventory Turnover

13-25


26/55

Average Days to Sell

InventoryAverage Sale

Period =365 Days

Inventory Turnover

This ratio measures how many days, on

average, it takes to sell the inventory.

= 34 daysAverage SalePeriod =365 Days

10.80 Times


27/55

Solvency Ratios

Solvency ratios are used to analyze a

companys long-term debt-paying

ability and its financing structure.

1. Debt to Assets Ratio

2. Debt to Equity Ratio

3. Number of Times Interest Earned

4. Plant Assets to Long-Term Liabilities


28/55

Debt to Assets Ratio

This ratio measures the percentage of acompanys assets that are financed by

debt.

Total Liabilities

Total Assets

Debtto Assets

Ratio =


29/55

Debt to Equity Ratio

This ratio indicates the relativeproportions of debt to equity on acompanys balance sheet.

Stockholders like a lot ofdebt if the company can

take advantage of

positive financial

leverage.

Total Liabilities

Stockholders Equity

Debtto EquityRatio =

Creditors prefer lessdebt and more equity

because equity

represents a buffer of

protection.

Debt to Assets and Debt to Equity


30/55

Debt to Assets and Debt to Equity

Ratios


31/55

Number of Times Interest Earned Ratio

This is the most common measure of a

companys ability to provide protection for

its long-term creditors.

Times

Interest

Earned

Earnings before Interest Expense

and Income Taxes

Interest Expense=


32/55

Number of Times Interest Earned Ratio


33/55

Plant Assets to Long-Term

Liabilities

This ratio suggests how well long-term debt

is managed to finance long-term assets.

Plant Assets

to Long-Term

Liabilities

Net Plant Assets

Long-Term Liabilities=


34/55

Plant Assets to Long-Term

Liabilities


35/55

Profitability Ratios

Profitability ratios measure a

companys ability to generate

earnings.

1. Net Margin (or Return on Sales)

2. Asset Turnover Ratio

3. Return on Investment

4. Return on Equity


36/55

Net Margin

This measure describes the percent remaining ofeach sales dollar after subtracting other expenses

as well as cost of goods sold.

Net

Margin

Net Income

Net Sales=


37/55

Net Margin


38/55

Asset Turnover Ratio

This ratio measures how many salesdollars were generated for each

dollar of assets invested.

Net Sales

AverageTotal Assets

Asset

Turnover =


39/55

Asset Turnover Ratio

13-39


40/55

Return on Investment (ROI)

This is the ratio of wealth generated (net income)

to the amount invested (average total assets).

Return on

Investment

Net Income

AverageTotal Assets=


41/55

Return on Investment (ROI)

For Milavec, ROI was as follows:


42/55

Return on Equity

This measure is often used to measure the

profitability of the stockholders investment.

Return on

Equity

Net Income

AverageTotal Stockholders Equity=


43/55

Return on Equity

13-43


44/55

Stock Market Ratios

Stock market ratios analyze the

earnings and dividends of a company.

1. Earnings Per Share

2. Book Value

3. Price-Earnings (PE) Ratio

4. Dividend Yield


45/55

Earnings Per Share

This measure indicates how muchincome was earned for each share of common

stock outstanding.

Earnings

per

Share

Net Earnings Available for Common Stock

AverageNumber of Outstanding Common Shares=


46/55

Earnings Per Share

Milavecs 2008 EPS is calculated as follows:


47/55

Book Value Per Share

13-47

This ratio measures the amount that would be distributed to

holders of each share of common stock if all assets were sold attheir balance sheet carrying amounts and if all creditors were

paid off.

Book Value

per Share

Stockholders Equity - Preferred Dividends

Outstanding Common Shares=


48/55

Book Value Per Share

Book value per share for 2008


49/55

Price-Earnings Ratio

Price-Earnings

Ratio

Market Price Per Share

Earnings Per Share=

This ratio compares the earnings of a company to the

market price for a share of the companys stock.


50/55

Dividend Yield

Dividend

Yield

Dividends Per Share

Market Price Per Share=

This ratio identifies the return, in terms of cash

dividends, on the current market price of the stock.

Presentation of Analytical


51/55


Relationships

13-51



52/55


Relationships

P t ti f A l ti l


53/55


Relationships13-53


54/55

Limitations of Financial Statement

Analysis

Different IndustriesChanging Economic

Environment

Accounting

Principles


55/55

End of TOPIC 5

financial statement analysis_2

Documents