FC_08_2808

FINANCIAL STATEMENT ANALYSIS : 

FINANCIAL STATEMENT ANALYSIS Cross-sectional techniques Time-series techniques Commonly used method Trend analysis Common-Size statements Financial ratio analysis

COMMON-SIZE ANALYSIS : 

COMMON-SIZE ANALYSIS Allows comparisons of companies of different sizes Based on assets or revenues Understand the nature of costs Variable: move in proportion to sales Fixed: unchanged within a relevant range of activity

COMMON-SIZE ANALYSISIncome Statement : 

COMMON-SIZE ANALYSISIncome Statement Vertical analysis – income statement items are expressed as a percentage of sales Sales = 100% Each line item = Item/Sales Horizontal analysis with a base year Each line item of base year = 100% Growth/decline is relative to base year Focus on changes over time Use to forecast earnings

COMMON-SIZE ANALYSISBalance Sheet : 

COMMON-SIZE ANALYSISBalance Sheet Vertical analysis Set total assets = 100% Divided each balance sheet time by total assets Horizontal analysis Set base year = 100% Determine relative change (growth/decline) from base year amount

CROSS-SECTIONAL COMPARISONS : 

CROSS-SECTIONAL COMPARISONS Compare firm to peers Compare firm to industry averages In a single time period Differences in accounting methods and business models make this analysis difficult

CROSS-SECTIONBalance Sheet : 

CROSS-SECTIONBalance Sheet

INTERIM REPORTS : 

INTERIM REPORTS Generally unaudited More timely; prepared quarterly or semi-annually Detect trends and seasonality Compare results of current period to those presented in annual reports Data can be used to forecast earnings

FINANCIAL RATIO ANALYSIS : 

FINANCIAL RATIO ANALYSIS Profitability Asset utilization Liquidity Debt utilization

PROFITABILITY RATIOS : 

PROFITABILITY RATIOS To measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital Ratios Profit margin Return on assets [investment] Return on equity Return on share basis

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RETURN ON ASSETS

RETURN ON EQUITY : 

RETURN ON EQUITY

SHARE-BASED RETURN : 

SHARE-BASED RETURN Earnings per share (EPS) Price-earnings ratio

ASSET UTILIZATION RATIOS : 

ASSET UTILIZATION RATIOS To measure the firm’s ability to effectively employ its resources Ratios Receivable turnover Average collection period Inventory turnover Fixed asset turnover Total asset turnover

RECEIVABLE TURNOVER : 

RECEIVABLE TURNOVER Is a measure of how effectively a firm is using credit extended to customers

INVENTORY TURNOVER : 

INVENTORY TURNOVER Indicates how well the firm has used inventory to generate the goods and services that are sold

OPERATING CYCLE : 

OPERATING CYCLE The time takes for the firm to get cash back from its investment in inventory and A/R The longer the operating cycle, the more current assets are needed (relative to current liabilities)

ASSET TURNOVER : 

ASSET TURNOVER Total asset turnover Fixed asset turnover

LIQUIDITY RATIOS : 

LIQUIDITY RATIOS To measure the firm’s ability to pay off short-term obligations Ratios Current ratio Quick [acid test] ratio

DEBT UTILIZATION RATIOS : 

DEBT UTILIZATION RATIOS To evaluate the overall debt position of the firm in light of its asset base and earning power To assess how much financial risk the firm has taken on Ratios Debt to total assets Interest coverage ratio Fixed charge coverage

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EBIT Sales Profit Margin Total Assets Total Debt Total Assets Financing plan Asset turnover Return on Assets Return on Equity DU PONT ANALYSIS ÷ ÷ x ÷ Return on assets (1 - Debt/Assets) =

FINANCIAL ANALYSIS Limitations : 

FINANCIAL ANALYSIS Limitations Horizontal, vertical, and ratio analysis are frequently used in making significant business decisions One should be aware of the limitations of these tools and the financial statements Estimations Quality of earnings

ESTIMATIONS : 

ESTIMATIONS Financial statements are based on estimates. allowance for uncollectible accounts depreciation costs of warranties contingent losses To the extent that these estimates are inaccurate, the financial ratios and percentages are also inaccurate.

QUALITY OF EARNINGS : 

QUALITY OF EARNINGS A company that has a high quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements

ALTERNATIVE ACCOUNTING METHODS : 

ALTERNATIVE ACCOUNTING METHODS One company may use the FIFO method, while another company in the same industry may use LIFO If the inventory is significant for both companies, it is unlikely that their current ratios are comparable In addition to differences in inventory costing methods, differences also exist in reporting such items as depreciation, depletion, and amortization