1 / 47

Financial Statement Analysis

17. Financial Statement Analysis. Student Version. 1. Describe basic financial statement analytical methods. 17-2. 1. Horizontal Analysis. The percentage analysis of increases and decreases in related items using comparative financial statements is called horizontal analysis. Exhibit 1.

alana-fulton
Download Presentation

Financial Statement Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 17 Financial Statement Analysis Student Version

  2. 1 Describe basic financial statement analytical methods. 17-2

  3. 1 Horizontal Analysis The percentage analysis of increases and decreases in related items using comparative financial statements is called horizontal analysis.

  4. Exhibit 1 1 Comparative Balance Sheet—Horizontal Analysis Horizontal Analysis: Difference$17,000 Base year (2009)$533,000 = 3.2%

  5. Exhibit 2 1 Comparative Schedule of Current Assets—Horizontal Analysis Horizontal Analysis: Difference$25,800 Base year (2009)$64,700 = 39.9%

  6. Exhibit 3 1 Comparative Income Statement—Horizontal Analysis Horizontal Analysis: Increase amount$296,500 Base year (2009) $1,234,000 = 24.0%

  7. Exhibit 4 1 Comparative Retained Earnings Statement—Horizontal Analysis Horizontal Analysis: Increase amount$37,500 Base year (2009)$100,000 = 37.5%

  8. 1 Vertical Analysis A percentage analysis used to show the relationship of each component to the total within a single statement is called vertical analysis.

  9. 1 Vertical Analysis of Balance Sheet In a vertical analysis of the balance sheet, each asset item is stated as a percent of the total assets. Each liability and stockholders’ equity item is stated as a percent of the total liabilities and stockholders’ equity.

  10. Exhibit 5 Vertical Analysis: Current assets $550,000 Total assets $1,139,500 = 48.3% 1 Compar-ative Balance Sheet—Vertical Analysis

  11. 1 Vertical Analysis of the Income Statement In a vertical analysis of the income statement, each item is stated as a percent of net sales.

  12. Exhibit 6 1 Comparative Income Statement—Vertical Analysis Vertical Analysis: Selling expenses $191,000 Net sales $1,498,000 = 12.8%

  13. 1 Common-Size Statements In acommon-sized statements, all items are expressed as a percentage. Common-sized statements are useful in comparing the current period with prior periods, individual businesses, or one business with with industry percentages.

  14. Exhibit 7 1 Common-Sized Income Statement

  15. 2 Use financial statement analysis to assess the solvency of a business. 17-15

  16. 2 Working Capital The excess of current assets of a business over its current liabilities is called working capital. The working capital is often used in evaluating a company’s ability to pay current liabilities.

  17. 2010 2009 Current assets $550,000 $533,000 Current liabilities –210,000–243,000 Working capital $340,000 $290,000 2 Working Capital = Current Assets – Current Liabilities

  18. 2 Current Ratio The current ratio, sometimes called the working capital ratio or bankers’ ratio measures a company’s ability to pay its current liabilities.

  19. $550,000 $210,000 $533,000 $243,000 2 Current Assets Current Liabilities Current Ratio = 2010 2009 Current assets $550,000 $533,000 Current liabilities $210,000 $243,000 Current ratio 2.6 2.2

  20. 2 Quick Ratio A ratio that measures the “instant” debt-paying ability of a company is called the quick ratio or acid-test ratio.

  21. 2 Quick assets are cash and other current assets that can be quickly converted to cash. 2010 2009 Quick assets: Cash $ 90,500 $ 64,700 Temporary Investments 75,000 60,000 Accounts receivable (net) 115,000 120,000 a. Total quick assets $280,500 $244,700 b. Current liabilities $210,000 $243,000 Quick ratio (a ÷ b) 1.3 1.0

  22. 2 Accounts Receivable Turnover The relationship between sales and accounts receivable may be stated as the accounts receivable turnover. Collecting accounts receivable as quickly as possible improves a company’s solvency.

  23. Net Sales Average Accounts Receivable Accounts Receivable Turnover = 2 20102009 • a. Net sales $1,498,000$1,200,000 • Accounts receivable (net): • Beginning of year $ 120,000 $ 140,000 • End of year 115,500 120,000 • Total $ 235,000 $ 260,000 • Average (Total ÷ 2) $ 117,500 $ 130,000 Accounts receivable turnover (a ÷ b) 12.7 9.2

  24. Average Accounts Receivable Average Daily Sales Number of Days’ Sales in Receivables = Net Sales 365 2 Number of Days’ Sales in Receivables The number of days’ sales in receivables is an estimate of the length of time (in days) the accounts receivable have been outstanding.

  25. 2 2010 2009 • Average accounts receivable • (Total accounts • receivable ÷ 2) $ 117,500 $ 130,000 • Net sales $1,498,000 $1,200,000 • Average daily sales • (Sales ÷ 365) $ 4,104 $ 3,288 Number of days’ sales in receivables (a ÷ b) 28.6 39.5

  26. 2 Inventory Turnover The relationship between the volume of goods (merchandise) sold and inventory may be stated as the inventory turnover. The purpose of this ratio is to assess the efficiency of the firm in managing its inventory.

  27. 2010 2009 • a. Cost of goods sold $1,043,000 $ 820,000 • Inventories: • Beginning of year $ 283,000 $ 311,000 • End of year 264,000 283,000 • Total $ 547,000 $ 594,000 • Average (Total ÷ 2) $ 273,500 $ 297,000 2 Cost of Goods Sold Average Inventory Inventory Turnover = Inventory turnover (a ÷ b) 3.8 2.8

  28. 2 Number of Days’ Sales in Inventory The number of days’ sales in inventory is a rough measure of the length of time it takes to purchase, sell, and replace the inventory.

  29. Cost of Goods Sold 365 2010 2009 • a. Average inventory (Total ÷ 2) $ 273,500 $ 297,000 • Cost of goods sold $1,043,000 $ 820,000 • Average daily cost of goods • sold (COGS ÷ 365 days) $2,858 $2,247 2 Average Inventory Average Daily Cost of Goods Sold Number of Days’ Sales in Inventory = Number of days’ sales in inventory (a ÷ b) 95.7 132.2

  30. 2 Ratio of Fixed Assets to Long-Term Liabilities The ratio of fixed assets to long-term liabilities is a solvency measure that indicates the margin of safety of the noteholders or bondholders. It also indicates the ability of the business to borrow additional funds on a long-term basis.

  31. Fixed Assets (net) Long-Term Liabilities Ratio of Fixed Assets to Long-Term Liabilities = 2 2010 2009 a. Fixed assets (net) $444,500 $470,000 b. Long-term liabilities $100,000 $200,000 Ratio of fixed assets to long-term liabilities (a ÷ b) 4.4 2.4

  32. 2 Ratio of Liabilities to Stockholders’ Equity The relationship between the total claims of the creditors and owners—the ratio of liabilities to stockholders’ equity—is a solvency measure that indicates the margin of safety for creditors.

  33. 2 Total Liabilities Total Stockholders’ Equity Ratio of Liabilities to Stockholders’ Equity = 2010 2009 a. Total liabilities $310,000 $443,000 b. Total stockholders’ equity $829,500 $787,500 Ratio of liabilities to stockholders’ equity ( a÷ b) 0.4 0.6

  34. 2 Number of Times Interest Charges Earned Corporations in some industries normally have high ratios of debt to stockholders’ equity. For such corporations, the relative risk of the debtholders is normally measured as the number of times interest charges are earned (during the year), sometimes called the fixed charge coverage ratio.

  35. 2 Income Before Income Tax + Interest Expense Interest Expense Number of Times Interest Charges Earned = 2010 2009 • Income before income tax $162,500 $134,600 • a. Add interest expense 6,000 12,000 • Amount available to meet • interest charges $168,500 $146,600 Number of times interest charges earned (b ÷ a) 28.1 12.2

  36. 2 Number of Times Preferred Dividends Are Earned The number of times interest charges are earned can be adapted for use with dividends on preferred stock. Number of Times Preferred Dividends Are Earned Net Income Preferred Dividends =

  37. 3 Use financial statement analysis to assess the profitability of a business. 17-37

  38. 3 Profitability Analysis Profitability analysis focuses primarily on the relationship between operating results and the resources available to a business.

  39. 3 Net Sales Average Total Assets Ratio of Net Sales to Assets = 2010 2009 a. Net sales $1,498,000 $1,200,000 Total assets: Beginning of year $1,053,000 $1,010,000 End of year 1,044,500 1,053,000 Total $2,097,500 $2,063,000 b. Average (Total ÷ 2) $1,048,750 $1,031,500 Ratio of net sales to assets (a ÷ b) 1.4 1.2

  40. 2010 2009 Net income $ 91,000 $ 76,500 Plus interest expense 6,000 12,000 a. Total $ 97,000 $ 88,500 Total assets: Beginning of year $1,230,500 $1,187,500 End of year 1,139,500 1,230,500 Total $2,370,000 $2,418,000 b. Average (Total ÷ 2) $1,185,000 $1,209,000 3 Net Income + Interest Expense Average Total Assets Rate Earned on Total Assets = Rate earned on total assets (a ÷ b) 8.2% 7.3%

  41. 2010 2009 a. Net income $ 91,000 $ 76,500 Stockholders’ equity: Beginning of year $ 787,500 $ 750,000 End of year 829,500 787,500 Total $1,617,000 $1,537,500 b. Average (Total ÷ 2) $ 808,500 $ 768,750 3 Net Income Average Total Stockholders’ Equity Rate Earned on Stockholders’ Equity = Rate earned on stockholders’ equity (a ÷ b) 11.3% 10.0%

  42. 2010 2009 Net income $ 91,000 $ 76,500 Less preferred dividends 9,000 9,000 a. Remainder—common stock $ 82,000 $ 67,500 Common stockholders’ equity: Beginning of year $ 637,500 $ 600,000 End of year 679,500 637,500 Total $1,317,000 $1,237,500 b. Average (Total ÷ 2) $ 658,500 $ 618,750 3 Net Income – Preferred Dividends Average Common Stockholders’ Equity Rate Earned on Common Stockholders’ Equity = Rate earned on common stockholders’ equity (a ÷ b) 12.5% 10.9%

  43. 3 Net Income – Preferred Dividends Shares of Common Stock Outstanding Earnings per Share (EPS) on Common Stock = 2010 2009 • Net income $91,000 $76,500 • Preferred dividends 9,000 9,000 • Remainder—identified with • common stock $82,000 $67,500 • b. Shares of common stock 50,000 50,000 Earnings per share on common stock (a ÷ b) $1.64 $1.35

  44. 2010 2009 Market price per share of common stock $41.00 $27.00 Earnings per share on common stock ÷ 1.64÷ 1.35 3 Market Price per Share of Common Stock Earnings per Share on Common Stock Price-earnings (P/E) ratio = Price-earnings ratio on common stock 25 20

  45. 2010 2009 a. Dividends $40,000 $30,000 b. Shares of common stock outstanding 50,00050,000 3 Dividends Shares of Common Stock Outstanding Dividends per Share = Dividends per share of common stock (a ÷ b) $0.80 $0.60

  46. 2010 2009 a. Dividends per share of common stock $ 0.80 $ 0.60 b. Market price per share of common stock 41.0027.00 3 Dividends per Share of Common Stock Market Price per Share of Common Stock Dividend Yield = Dividend yield on common stock 2.0% 2.2%

More Related