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Financial Statement AnalysisFinancial Statement Analysis

1.1. Short-Term SolvencyShort-Term Solvency

2.2. Activity Activity

3.3. Financial LeverageFinancial Leverage

4.4. ProfitabilityProfitability

5.5. Value Value

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1. Short-Term Solvency1. Short-Term Solvency

Current RatioCurrent Ratio Quick RatioQuick Ratio

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2. Activity2. Activity

Total Asset TurnoverTotal Asset Turnover Receivables TurnoverReceivables Turnover Inventory TurnoverInventory Turnover a. A large increase in the ratio of days in inventory:a. A large increase in the ratio of days in inventory: high inventory of unsold goods or high inventory of unsold goods or a change in the firm’s product mix, etc.a change in the firm’s product mix, etc. b. The method of inventory valuation can b. The method of inventory valuation can materially affect the computed inventory ratios. materially affect the computed inventory ratios.

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Operating Cycle Operating Cycle = Accounts Receivable = Accounts Receivable Turnover in Days + Inventory Turnover in Turnover in Days + Inventory Turnover in DaysDays

The inventory turnover in days is The inventory turnover in days is understated, and the liquidity of the understated, and the liquidity of the inventory overstated, if the company uses inventory overstated, if the company uses LIFO inventory.LIFO inventory.

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The Operating Cycle of Merchandising ConcernsThe Operating Cycle of Merchandising Concerns

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進貨 銷貨 收現 進貨 銷貨 收現

平均銷售天數 平均收現天數平均銷售天數 平均收現天數 營 業 週 期營 業 週 期

進貨 付現 收現 進貨 付現 收現 平均付款天數 現金週期平均付款天數 現金週期

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3. Financial Leverage3. Financial Leverage

Debt RatioDebt Ratio Interest CoverageInterest Coverage

a. Interest is an obstacle that a firm must a. Interest is an obstacle that a firm must

surmount if it is to avoid default.surmount if it is to avoid default.

b. “The standard deviation of cash flowsb. “The standard deviation of cash flows

relative to the average cash flow” proxiesrelative to the average cash flow” proxies

for the uncertainty of future cash flows. for the uncertainty of future cash flows.

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4. Profitability4. Profitability

Two problems: current profits could be a poorTwo problems: current profits could be a poor reflection of true future profitability; ignoring risk.reflection of true future profitability; ignoring risk. Profit Margin: not direct measures of profitability.Profit Margin: not direct measures of profitability. Return on AssetsReturn on Assets Return on Equity: the most important difference Return on Equity: the most important difference

between ROA and ROE is due to financial between ROA and ROE is due to financial leverage. Financial leverage not always magnifies leverage. Financial leverage not always magnifies ROE.ROE.

Payout Ratio: dividend per share/earnings per Payout Ratio: dividend per share/earnings per shareshare

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Du Pont EquationDu Pont Equation

ROEROE

=Net Income/Average Stockholders’ Equity=Net Income/Average Stockholders’ Equity

=(Net Income/Total Operating Revenue) * =(Net Income/Total Operating Revenue) * (Total Operating Revenue/Average Total (Total Operating Revenue/Average Total Assets) * (Average Total Assets/Average Assets) * (Average Total Assets/Average Stockholders’ Equity)Stockholders’ Equity)

=Profit Margin (Net) * Total Asset Turnover =Profit Margin (Net) * Total Asset Turnover * Equity Multiplier* Equity Multiplier

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5. Market Value Ratios5. Market Value Ratios

Market PriceMarket Price Price-to- Earnings (P/E) RatioPrice-to- Earnings (P/E) Ratio Dividend YieldDividend Yield Market-to-Book (M/B) Value and Tobin’s Market-to-Book (M/B) Value and Tobin’s

Q: Firms with high Q ratios tend to be those Q: Firms with high Q ratios tend to be those firms with attractive investment firms with attractive investment opportunities or a significant competitive opportunities or a significant competitive advantage.advantage.

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