Financial-Statement-Analysis in finance.pptx

Financial statement

1. Financial Statement Analysis -Sir M.

2. Learning Objectives; Prepare and interpret financial statement in comparative and common-size from. Compute and interpret financial ratios that managers use to assess liquidity, asset and debt management, profitability and market performance.

3. Why Managers use FSA? Enables them to better understand how their company’s results will be interpreted by stockholders and creditors for the purpose of making investing and lending decisions. Financial statement analysis provides managers with valuable feedback regarding their company’s performance.

4. Limitations of Financial Comparing Financial Data across Companies Use of different Accounting methods.( e.g. Inventory management.) Looking beyond Ratios Ratios should not be viewed as an end, but rather as a starting point.

5. Statement in Comparative and Common-Size form Dollar/Peso and percentage changes on statement (Horizontal Analysis) Common-Size Statements ( Vertical Analysis) Ratios

6. 1. Dollar/Peso and percentage changes on statement (Horizontal Analysis) - Also known as Trend Analysis Involves analyzing financial data over time, such as computing year-to-year dollar/peso and percentage changes within a set of financial statements. Comp Balance Sheet.jpeg Comp Income Statement.jpeg

7. 2 . Common-Size Statements (Vertical Analysis) Focuses on the relations among financial statement accounts at a given point in time. A vertical analysis in which each financial statement account is expressed as a percentage. Income Statement – all items are usually expressed as percentage of sales. ComSize Balance sheet.jpeg Balance Sheet – all items are usually expressed as a percentage of total assets. ComSize Income statement.jpeg

8. 3. Ratio Analysis a. Liquidity - Refers to how quickly an asset can be converted to cash. If a company’s liquid assets are not enough to support timely payments to short-term creditors, this presents an important management problem that, if not remedied, can lead to bankruptcy. Working Capital = Current Asset-Current Liabilities

9. 3. Ratio Analysis a. Liquidity 3.a. 1 .) Current Ratio = A declining ratio might be a sign of deteriorating financial condition An improving ratio might be the result of stockpiling inventory or might indicate an improving financial situation.  

10. 3. Ratio Analysis a. Liquidity 3.a. 2 .) Acid-Test ratio = A more rigorous test of a company’s ability to meet its short-term debts than the current ratio. Inventories and prepaid expenses are excluded from total current assets, leaving only the more liquid assets.  

11. 3. Ratio Analysis b. Asset Management 3.b .1) Accounts Receivable Turnover = Average Collection Period =  

12. 3. Ratio Analysis b. Asset Management 3.b. 2 .) Inventory turnover = Measures how many times a company’s inventory has been sold and replaced during the year. 3. b.3 ) Average Sales Period = - The number of days needed on average to sell the entire inventory.  

13. 3. Ratio Analysis b. Asset Management 3.b. 2 .) Operating Cycle OC = Average sales period + Average Collection Period Measures the elapsed time from when an inventory is received from suppliers to when cash is received from customers. 3. b . 3 ) Total Asset Turnover =  

14. 3. Ratio Analysis c. Debt Management Managers need to evaluate their company’s debt management choices from the vantage point of two stakeholders – a. long-term creditors and b. common stockholders. Financial Leverage - refers to borrowing money to acquire assets in an effort to increase sales and profits. If the company’s rate of return on total assets exceeds the rate of return the company pay its creditors, Financial Leverage is positive. If the rate of return on total assets is less than the rate of return the company pay its creditors, Financial Leverage is Negative.

15. 3. Ratio Analysis c. Debt Management 3.c.1) Times Interest Earned Ratio = - measure of company’s ability to provide protection to its long-term creditors. - less than 1 is inadequate because interest expense exceeds the earnings that are available for paying that interest.  

16. 3. Ratio Analysis c. Debt Management 3.c.2) Debt-to-Equity Ratio = - a type of leverage ratio that indicates the relative proportions of debt and equity at one point in time on a company’s balance sheet. - As it increases, it indicates that a company in increasing its financial leverage.  

17. 3. Ratio Analysis c. Debt Management 3.c.3) Equity Multiplier = - another type of leverage ratio that indicates the portion of a company’s assets funded by equity. - As it increases, it indicates that a company in increasing its financial leverage.  

18. 3 . Ratio Analysis d. Profitability 3.d.1) Gross Margin Percentage = - Focuses on only one type of expense (Cost of goods sold) and its impact on performance. 3.d.2) Net Profit Margin Percentage = - looks on how selling and administrative expenses, Interest expense, and income tax expense have influenced performance.  

19. 3 . Ratio Analysis d. Profitability 3.d.3) Return on Total Assets = - Interest is added back to net income to show what earnings would have been if the company had no debt. - Manager can evaluate his company’s return on total assets over time without the analysis being influenced by changes in the company’s mix of debt and equity over time.  

20. 3 . Ratio Analysis d. Profitability 3.d.4) Return on Equity = - looks at profits relative to the book value of stockholders equity. = x X - Pioneered by E.I. du Pont de Nemours and Company - Recognizes that return on equity is influenced by three elements (1. operating efficiency, 2. asset usage efficiency and 3. Financial leverage.)  

21. 3 . Ratio Analysis e . Market Performance 3.e.1) Earnings per share = -Investors buys a stock in the hope of realizing a return in the form of either dividends or future increases in the value of the stock.  

22. 3 . Ratio Analysis e . Market Performance 3.e.2) Price –Earnings Ratio = - express the relationship between a stock’s market price per share and its earnings per share. - a high price-earnings ratio means that investors are willing to pay a premium for the company’s stock-presumably because the company is expected to have higher than average future growth.  

23. 3 . Ratio Analysis e . Market Performance 3.e.3) Dividend Payout and Yield Ratios Dividend Payout Ratio = - Quantifies the percentage of current earnings being paid our in dividends. - Companies with ample growth opportunities at high rates of return tend to have low payout ratios, whereas companies with limited reinvestment opportunities tend to have higher payout ratios. Dividend yield ratio = - Measures the rate of return (in the form of cash dividends only) that would be earned by an investor who buys common stock at the current market price.  

24. 3 . Ratio Analysis e . Market Performance 3.e.4) Book Value per Share = - Measures the amount that would be distributed to holders of each share of common stocks if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.  

25. End………….. Thank you and God bless…..