Post on 24-Jan-2016
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Chapter 13
Financial Analysis & Ratios
Comparative Analysis
There are three types of comparisons to provide decision usefulness of financial information:
• Intra-company basis
• Inter-company basis
• Industry averages
Comparative Analysis
• Intra-company basis – comparisons within the company.
• Inter-company basis – comparisons with other companies.
• Industry averages – comparisons with other companies in the same industry.
Financial Statement AnalysisThree basic tools are used in financial statement analysis :
1. Horizontal analysis
2. Vertical analysis
3. Ratio analysis
Horizontal Analysis
• Is a technique for evaluating a series of financial statement data over a period of time.
• Did an increase or decrease take place?
– Pages 613 - 614
Horizontal Analysis
P1 – P0 P0
$245 – $281 = (12.81)%
$281The amount of cash for Lowe’s decreased approximately 12.81%
from fiscal 2007 to 2008.
Vertical Analysis• Expresses each item in a financial statement as a
percent of a base amount.
• Total Assets is the base amount on a Balance Sheet.
• Common-size balance sheet
• Net Sales is the base amount on an Income Statement.
• Common-size income statement
Pages 615 - 616
Ratio AnalysisFive types:
Liquidity ratios
Solvency ratios
Turnover ratios
Profitability ratios
Market value ratios
Liquidity Ratios
Measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
WHO CARES?Short-term creditors such as bankers and suppliers
Current Ratio
Indicates short-term debt-paying ability
Current AssetsCurrent Liabilities
Acid-Test Ratio
Indicates immediate short-term debt-paying ability
Current Assets - Inventory Current Liabilities
Cash Ratio
Indicates short-term debt-paying ability (cash basis)
_ Cash _Current Liabilities
Solvency Ratios
Measure the ability of the enterprise to survive over a long period of time
WHO CARES?Long-term creditors and stockholders
Debt to Assets Ratio
Indicates % of total assets provided by creditors
Total Liabilities
Total Assets
Times Interest Earned Ratio
Indicates company’s ability to meet interest payments as they come due
_ EBIT _
Interest Expense
Cash Debt Coverage Ratio
Indicates long-term debt-paying ability (cash basis)
Cash provided by operations Average total liabilities
Turnover Ratios
Measure how efficiently, or intensively, a firm uses its assets to generate sales
.
WHO CARES?
Short-term creditors such as bankers and suppliers
Inventory Turnover Ratio
Indicates liquidity of inventory
Cost of Goods SoldInventory
Average Days in Inventory
Indicates liquidity of inventory and inventory management
365 days
Inventory Turnover Ratio
Receivables Turnover Ratio
Indicates liquidity of receivables
Net SalesAccounts Receivable
Average Collection Period
Indicates liquidity of receivables and collection success
365 daysReceivables Turnover
Asset Turnover Ratio
Indicates how efficiently assets are used to generate sales
Net Sales
Total Assets
Profitability Ratios
Measure the income or operating success of an enterprise for a given period of time
WHO CARES? Everybody
WHY? A company’s income affects: its ability to obtain debt and equity financingits liquidity positionits ability to grow
Profit Margin Ratio
Indicates net income generated by each dollar of sales
Net IncomeNet Sales
Return On Assets
Reveals the amount of net income generated by each dollar invested
Net IncomeAverage Total Assets
Return on Equity
Indicates profitability of common
stockholders’ investment
Net IncomeAverage Total Equity
Market Value Ratios
Deals with market value of stock.
.
WHO CARES?Stockholder’s
Earnings Per Share (EPS)
Indicates net income earned on each share of common stock sales
Net IncomeShares Outstanding
Price Earnings Ratio
Indicates relationship between market price per share and earnings per share
Stock PriceEarnings Per Share
Payout Ratio
Indicates % of earnings distributed in the form of cash dividends
DividendsNet Income
Retention Ratio
Indicates % of earnings plowed back into the corporation.
Addition to Retained EarningsNet Income
Limitations Of Financial Analysis
• 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.