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What is financial statement analysis?
Tearingapart the financial statements
and looking
at the relationships
Financial Statement AnalysisFinancial Statement Analysis
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Who analyes financial statements? !nternal "sers #i$e$% management&
'(ternal "sers #emphasis of chapter&'(amples?
!n)estors% creditors% reg"latory agencies * +
stock market analysts and
a"ditors
Financial Statement AnalysisFinancial Statement Analysis
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17-,
What do internal "sers "se it for?
lanning% e)al"ating and controllingcompany operations
What do e(ternal "sers "se it for?
Assessing past performance and c"rrentfinancial position and making predictions
a.o"t the f"t"re profita.ility and sol)encyof the company as /ell as e)al"ating theeffecti)eness of management
Financial Statement AnalysisFinancial Statement Analysis
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!nformation is a)aila.le from ".lished ann"al reports
#1& Financial statements
#2& otes to financial statements
#3& etters to stockholders
#,& A"ditors report #!ndependent
acco"ntants& 4anagements disc"ssion and
analysis
5eports filed /ith the go)ernment
Financial Statement AnalysisFinancial Statement Analysis
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!nformation is a)aila.le from ther so"rces
#1& e/spapers
#2& eriodicals
#3& ther ."siness p".lications
Financial Statement AnalysisFinancial Statement Analysis
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8oriontal Analysis
9ertical Analysis
:ommon-Sie Statements
Trend ercentages
5atio Analysis
4ethods of4ethods of
Financial Statement AnalysisFinancial Statement Analysis
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8oriontal Analysis8oriontal Analysis
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9ertical Analysis9ertical Analysis
For a single financialstatement% each item
is e(pressed as apercentage of asignificant total%
e$g$% all incomestatement items aree(pressed as a
percentage of sales
For a single financialstatement% each item
is e(pressed as apercentage of asignificant total%e$g$% all income
statement items aree(pressed as a
percentage of sales
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:ommon-Sie Statements:ommon-Sie Statements
Financial statements that sho/only percentages and no
a.sol"te dollar=r"pee amo"nts
Financial statements that sho/only percentages and no
a.sol"te dollar=r"pee amo"nts
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Trend ercentagesTrend ercentages
Sho/ changes o)er time ingi)en financial statement items
#can help e)al"ate financialinformation of se)eral years&
Sho/ changes o)er time ingi)en financial statement items
#can help e)al"ate financialinformation of se)eral years&
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5atio Analysis5atio Analysis
'(pression of logical relationships.et/een items in a financialstatement of a single period#e$g$% percentage relationship
.et/een re)en"e and net income&
'(pression of logical relationships.et/een items in a financialstatement of a single period
#e$g$% percentage relationship.et/een re)en"e and net income&
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8oriontal Analysis '(ample8oriontal Analysis '(ample
The management of :lo)er :ompanypro)ides yo" /ith comparati)e .alancesheets of the years ended @ecem.er 31%
1>>> and 1>>;$ 4anagement asks yo" toprepare a horiontal analysishoriontal analysis on the
information$
17 1,
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:alc"lating :hange in @ollar Amo"nts
@ollar
:hange
:"rrent ear
Fig"re
Base ear
Fig"reC D
8oriontal Analysis '(ample8oriontal Analysis '(ample
17 16
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:alc"lating :hange in @ollar Amo"nts
Since /e are meas"ring the amo"nt ofthe change .et/een 1>>; and 1>>>% the
dollar amo"nts for 1>>; .ecome theE.ase year fig"res$
@ollar
:hange
:"rrent ear
Fig"re
Base ear
Fig"reC D
8oriontal Analysis '(ample8oriontal Analysis '(ample
17 17
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17-17
:alc"lating :hange as a ercentage
ercentage
:hange
@ollar :hange
Base ear Fig"re 1C G
8oriontal Analysis '(ample8oriontal Analysis '(ample
17 1;
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H12% D H23%0 C H#11%0&
8oriontal Analysis '(ample8oriontal Analysis '(ample
17 1>
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#H11%0 I H23%0& G 1 C ,;$>
8oriontal Analysis '(ample8oriontal Analysis '(ample
17-2
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8oriontal Analysis '(ample8oriontal Analysis '(ample
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:9'5 :55AT!
:omparati)e Balance Sheets
@ecem.er 31% 1>>> and 1>>;
!ncrease #@ecrease&1>>> 1>>; Amo"nt
ia.ilities and StockholdersJ 'K"ity
:"rrent lia.ilitiesL
Acco"nts paya.le 67%???H ,,%???H 23%???H 02$3
otes paya.le 3%??? 6%??? #3%???& #0?$?&
Total c"rrent lia.ilities 7?%??? 0?%??? 2?%??? ,?$?
ong-term lia.ilitiesL
Bonds paya.le% ; 70%??? ;?%??? #0%???& #6$3&
Total lia.ilities 1,0%??? 13?%??? 10%??? 11$0
StockholdersJ eK"ityL
referred stock 2?%??? 2?%??? - ?$?
:ommon stock 6?%??? 6?%??? - ?$?
Additional paid-in capital 1?%??? 1?%??? - ?$?
Total paid-in capital >?%??? >?%??? - ?$?
5etained earnings ;?%??? 6>%7?? 1?%3?? 1,$;
Total stockholdersJ eK"ity 17?%??? 10>%7?? 1?%3?? 6$,
Total lia.ilities and stockholdersJ eK"ity 310%???H 2;>%7??H 20%3??H ;$7
17-22
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:9'5 :55AT!
:omparati)e !ncome StatementsFor the ears 'nded @ecem.er 31% 1>>> and 1>>;
!ncrease #@ecrease&
1>>> 1>>; Amo"nt
et sales 02?%???H ,;?%???H ,?%???H ;$3
:ost of goods sold 36?%??? 310%??? ,0%??? 1,$3
Mross margin 16?%??? 160%??? #0%???& #3$?&
perating e(penses 12;%6?? 126%??? 2%6?? 2$1
et operating income 31%,?? 3>%??? #7%6??& #1>$0&
!nterest e(pense 6%,?? 7%??? #6??& #;$6&
et income .efore ta(es 20%??? 32%??? #7%???& #21$>&
ess income ta(es #3?& 7%0?? >%6?? #2%1??& #21$>&et income 17%0??H 22%,??H #,%>??&H #21$>&
17-23
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:9'5 :55AT!
:omparati)e !ncome StatementsFor the ears 'nded @ecem.er 31% 1>>> and 1>>;
!ncrease #@ecrease&
1>>> 1>>; Amo"nt
et sales 02?%???H ,;?%???H ,?%???H ;$3
:ost of goods sold 36?%??? 310%??? ,0%??? 1,$3
Mross margin 16?%??? 160%??? #0%???& #3$?&
perating e(penses 12;%6?? 126%??? 2%6?? 2$1
et operating income 31%,?? 3>%??? #7%6??& #1>$0&
!nterest e(pense 6%,?? 7%??? #6??& #;$6&
et income .efore ta(es 20%??? 32%??? #7%???& #21$>&
ess income ta(es #3?& 7%0?? >%6?? #2%1??& #21$>&et income 17%0??H 22%,??H #,%>??&H #21$>&
Sales increased .y ;$3 /hile net
income decreased .y 21$>$
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:9'5 :55AT!
:omparati)e !ncome StatementsFor the ears 'nded @ecem.er 31% 1>>> and 1>>;
!ncrease #@ecrease&
1>>> 1>>; Amo"nt
et sales 02?%???H ,;?%???H ,?%???H ;$3
:ost of goods sold 36?%??? 310%??? ,0%??? 1,$3
Mross margin 16?%??? 160%??? #0%???& #3$?&
perating e(penses 12;%6?? 126%??? 2%6?? 2$1
et operating income 31%,?? 3>%??? #7%6??& #1>$0&
!nterest e(pense 6%,?? 7%??? #6??& #;$6&
et income .efore ta(es 20%??? 32%??? #7%???& #21$>&
ess income ta(es #3?& 7%0?? >%6?? #2%1??& #21$>&et income 17%0??H 22%,??H #,%>??&H #21$>&
There /ere increases in .oth cost of goodssold #1,$3& and operating e(penses #2$1&$These increased costs more than offset the
increase in sales% yielding an o)eralldecrease in net income$
17-20
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9ertical Analysis '(ample9ertical Analysis '(ample
The management of Sample :ompany asksyo" to prepare a )ertical analysis)ertical analysis for the
comparati)e .alance sheets of the
company$
17-26
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9ertical Analysis '(ample9ertical Analysis '(ample
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9ertical Analysis '(ample9ertical Analysis '(ample
H;2% I H,;3% C 17 ro"nded
H3% I H3;7% C ; ro"nded
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9ertical Analysis '(ample9ertical Analysis '(ample
H76% I H,;3% C 16 ro"nded
17-2>
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Trend ercentages '(ampleTrend ercentages '(ample
Wheeler% !nc$ pro)ides yo" /ith the follo/ingoperating data and asks that yo" prepare a
trend analysis$
17-3
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Trend ercentages '(ampleTrend ercentages '(ample
Wheeler% !nc$ pro)ides yo" /ith the follo/ingoperating data and asks that yo" prepare a
trend analysis$
H1%>>1 - H1%;2 C H171H1%>>1 - H1%;2 C H171
17-31
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Trend ercentages '(ampleTrend ercentages '(ample
>0 as the .ase year% /e de)elop thefollo/ing percentage relationships$
H1%>>1 - H1%;2 C H171H1%>>1 - H1%;2 C H171
H171 I H1%;2 C > ro"ndedH171 I H1%;2 C > ro"nded
17-32
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Trend line
for Sales
17-33
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5atios can .e e(pressed in three different/aysL
1$ 5atio#e$g$% c"rrent ratio of 2L1&
2$ #e$g$% profit margin of 2&
3$ H #e$g$% 'S of H2$20&
:A
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Ratio Analysis:Ratio Analysis:
Ratio analysis: an analytical technique that
typically involves a comparison o the
relationship !et"een t"o inancial items#
17-30
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$!%ectives o Ratio Analysis:$!%ectives o Ratio Analysis:
Stan&ar&i'e inancial inormation or
comparisons
Evaluate current operations Compare perormance "ith past
perormance
Compare perormance a(ainst other irmsor in&ustry stan&ar&s
Stu&y the eiciency o operations
17-36
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Ratio Analysis:Ratio Analysis:
Ratio analysis !e(ins:
"ith the calculation o a set o inancial ratios
&esi(ne& to sho" the relative stren(ths an&
"ea)nesses o a company as compare& to:$ther irms in the in&ustry
Lea&in(s irms in the in&ustry
The previous year o the same irm Ratio analysis helps to sho" "hether the irm*s
position has !een improvin( or &eterioratin(
Ratio analysis can also help plan or the uture
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Five Types o Financial Ratios:Five Types o Financial Ratios:
Liqui&ity Ratios#
Asset Mana(ement Ratios +Activity Ratios,#
-e!t Mana(ement Ratios +Levera(eRatios,#
.roita!ility Ratios#
Mar)et /alue Ratios#
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Liqui&ity Ratios:Liqui&ity Ratios:
A liqui& asset is one that can !e easily
converte& into cash at a air mar)et value
Liqui&ity question &eals "ith this question0ill the irm !e a!le to meet its current
o!li(ations1
T"o measures o liqui&ityCurrent Ratio
2uic)3Aci& Test Ratio
17-3>
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Liqui&ity Ratios:Liqui&ity Ratios:
Current ratio 4
Current assets 3 Current lia!ilities
Purpose: Measures a irm*s a!ility to pay its
current lia!ilities rom its current assets#
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5T :55AT!
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5T :55AT!
1>>>
:ash 3?%???H
Acco"nts recei)a.le% net
Beginning of year 17%???
'nd of year 2?%???
!n)entory
Beginning of year 1?%???
'nd of year 12%???
Total c"rrent assets 60%???Total c"rrent lia.ilities ,2%???
Sales on acco"nt ,>,%???
:ost of goods sold 1,?%???
17-,,
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:"rrent 5atio:"rrent 5atio
:"rrent5atio
H60%H,2%
C C 1$00 L 1
4eas"res the a.ilityof the company to pay c"rrent
de.ts as they .ecome d"e$
:"rrent5atio
:"rrent Assets:"rrent ia.ilities
C
17-,0
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Liqui&ity Ratios:Liqui&ity Ratios:
2uic) +Aci& Test, Ratio 4
Current assets 5 Inventories 3 Current
lia!ilities
Purpose: Measures a irm*s a!ility to pay itscurrent lia!ilities "ithout relyin( on the
sale o its inventory#
17-,6
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O"ick Assets:"rrent ia.ilities
CAcid-Test
5atio
orton :orporations K"ickassets consist of cash of
H3% and acco"nts
recei)a.le of H2%$
Acid-Test #O"ick& 5atioAcid-Test #O"ick& 5atio
17-,7
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O"ick Assets:"rrent ia.ilities
CAcid-Test
5atio
H0%H,2%
C 1$1> L 1CAcid-Test
5atio
Acid-Test #O"ick& 5atioAcid-Test #O"ick& 5atio
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Asset Mana(ement Ratios:Asset Mana(ement Ratios:
Asset mana(ement ratio measures ho" eectively
the irm is mana(in(3usin( its assets
-o "e have too much investment in assets or too
little investment in assets in vie" o current an&pro%ecte& sales levels1
0hat happens i the irm has
Too much investment in assets Too little investment in assets
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Asset Mana(ement Ratios:Asset Mana(ement Ratios:
The Inventory Turnover Ratio#
The -ays Sales $utstan&in(#
The Fi6e& Assets Turnover Ratio# The Total Assets Turnover Ratio#
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Asset Mana(ement Ratios:Asset Mana(ement Ratios:
The Inventory Turnover Ratio4
Sales3 Inventory#
Purpose: In&icates the num!er o times that airm sells its inventory each year#
Measures the eiciency o Inventory
Mana(ement A hi(h ratio in&icates that inventory &oes not
remain in "arehouses or on shelves7 !ut rather
turns over rapi&ly into sales
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!n)entory T"rno)er!n)entory T"rno)er
:ost of Moods SoldA)erage !n)entory
!n)entoryT"rno)er
C
4eas"res the n"m.er of timesin)entory is sold and
replaced d"ring the year$
C 12$73 times H1,%
#H1% P H12%& I 2!n)entoryT"rno)er
C
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Sales on Acco"ntA)erage Acco"nts 5ecei)a.le
Acco"nts5ecei)a.le
T"rno)er
C
Acco"nts 5ecei)a.le T"rno)erAcco"nts 5ecei)a.le T"rno)er
C 26$7 times H,>,%
#H17% P H2%& I 2
Acco"nts5ecei)a.leT"rno)er
C
This ratio meas"res ho/ manytimes a company con)erts its
recei)a.les into cash each year$
A)erage% net acco"ntsrecei)a.le
et% credit sales
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Asset Mana(ement Ratio:Asset Mana(ement Ratio:
-ays Sales $utstan&in( +-S$,
To appraise the quality o accounts receiva!les
Avera(e len(th o time that the irm must "ait
ater ma)in( a sale !eore receivin( cash romcustomers
Measures eectiveness o a irm cre&it policy
In&icates the level o investment nee&e& in
receiva!les to maintain irm*s sales level 0hat happens i this ratio is
Too hi(h7 or
Too lo"
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Asset Mana(ement Ratios:Asset Mana(ement Ratios:
The -ays Sales $utstan&in( +-S$,4
Accounts Receiva!les3+Sales389,#
Purpose: In&icates the len(th o timenormally require& to collect a receiva!le
resultin( rom a cre&it sale#
17-00
"m.er of @ays Sales"m.er of @ays Sales
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"m.er of @ays Sales"m.er of @ays Sales
in Acco"nts 5ecei)a.lein Acco"nts 5ecei)a.le
4eas"res% on a)erage% ho/ manydays it takes to collect an
acco"nt recei)a.le$
@ays Salesin Acco"nts
5ecei)a.les
C 36 @aysAcco"nts 5ecei)a.le T"rno)er
C 13$,; daysC 36 @ays26$7 Times
@ays Salesin Acco"nts5ecei)a.les
17-06
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Asset Mana(ement Ratio:Asset Mana(ement Ratio:
The Fi6e& Assets Turnover Ratio4
Sales3 Net Fi6e& Assets#
Purpose: to measure ho" eectively the irmuses its plant an& equipment to (enerate sales#
Fi6e& Assets Turnover Ratio
Measures eiciency o lon(5term capital
investment
;o" much i6e& assets are nee&e& to achieve a
particular level o sales1
17-07
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Asset Mana(ement Ratio:Asset Mana(ement Ratio:
Total Asset Turnover Ratio4
Sales3 Total Assets#
Purpose: Measure eiciency o total assets or
the company as a "hole or or a &ivision o
the irm#
17-0;
-e!t Mana(ement Ratios +Levera(e-e!t Mana(ement Ratios +Levera(e
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-e!t Mana(ement Ratios +Levera(e-e!t Mana(ement Ratios +Levera(e
Ratios,:Ratios,:
Implications o use o !orro"in(s
Cre&itors loo) to Stoc)hol&ers* equity as a
saety mar(in
Interest on !orro"in(s is a le(al lia!ility o the
irm
Interest is to !e pai& out o operatin( income
-e!t ma(niies return an& ris) to commonstoc)hol&ers
17-0>
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-e!t Mana(ement Ratios:-e!t Mana(ement Ratios:
Total -e!t to Total Assets#
Times Interest Earne& Ratio +Covera(e
Ratio,
E
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-e!t Mana(ement Ratios:-e!t Mana(ement Ratios:
Total -e!t to Total Assets Ratio4
Total &e!ts3Total assets#
Purpose: Measures a irm*s inancial levera(e# Measures percenta(e o assets !ein( inance&throu(h !orro"in(s
Too hi(h a num!er means increase& ris) o
!an)ruptcy 0hat percenta(e o total assets are !ein(
inance& throu(h &e!ts1
17-61
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-e!t Mana(ement Ratios:-e!t Mana(ement Ratios:
Times Interest Earne& +TIE,4
E
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.roita!ility Ratios:.roita!ility Ratios:
Net .roit Mar(in on Sales#
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.roita!ility Ratios:.roita!ility Ratios:
.roit Mar(in on Sales4
Net Income3 Sales#
Purpose: In&icates the percenta(e o each sales
&ollar that contri!utes to net income#
Relates net income availa!le to commonstoc)hol&ers to sales
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.roita!ility Ratios:.roita!ility Ratios:
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.roita!ility Ratios:.roita!ility Ratios:
Return on Assets +R$A,4
Net Income3 Total Assets#
Purpose: Measures the rate o return a irm reali'es
on its investment in assets#
Relates net income availa!le to common
stoc)hol&ers to total assets
17-66
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.roita!ility Ratios:.roita!ility Ratios:
Return on Common Equity +R$E,4
Net Income3 Common Equity#
Purpose: Measures the rate o return on a irm*s
stoc)hol&ers* equity#
Relates net income availa!le to common
stoc)hol&ers to common stoc)hol&ers equity
17-67
'K"ity% or ongDTerm'K"ity% or ongDTerm
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'K"ity% or ong Term'K"ity% or ong TermSol)ency 5atiosSol)ency 5atios
This is part of the information tocalc"late the eK"ity% or long-term
sol)ency ratios of orton :orporation$
5T :55AT!
1>>>
et operating income ;,%???H
et sales ,>,%???
!nterest e(pense 7%3??
Total stockholdersJ eK"ity 23,%3>?
17-6;
5T :55AT!
1>>>
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1>>>
:ommon shares o"tstanding
Beginning of year 17%
'nd of year 27%,
et income 03%6>H
StockholdersJ eK"ity
Beginning of year 1;%
'nd of year 23,%3>
@i)idends per share 2
@ec$ 31 market price=share 2
!nterest e(pense 7%3
Total assets
Beginning of year 3%
'nd of year 3,6%3>
17-6>
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'K"ity 5atio'K"ity 5atio
'K"ity5atio
CStockholders 'K"ity
Total Assets
'K"ity5atio
C H23,%3>
H3,6%3>67$7C
4eas"res the proportionof total assets pro)ided .y
stockholders$
17-7
et !ncome to et Saleset !ncome to et Sales
7/18/2019 Fin Statement Analysis MANAC(14 17)
70/73
et !ncome to et Saleset !ncome to et SalesA=Q=A 5et"rn on Sales or rofit 4arginA=Q=A 5et"rn on Sales or rofit 4argin
et !ncometo
et Sales
C et !ncome
et Sales
et !ncometo
et SalesC
H03%6>H,>,%
C 1$>
4eas"res the proportion of the sales dollar/hich is retained as profit$
17-71
5et"rn on A)erage :ommon5et"rn on A)erage :ommon
7/18/2019 Fin Statement Analysis MANAC(14 17)
71/73
ggStockholders 'K"ity #5'&Stockholders 'K"ity #5'&
5et"rn on
Stockholders'K"ity
C
et !ncome
A)erage :ommonStockholders 'K"ity
C H03%6>
#H1;% P H23,%3>& I 2C 20$>
5et"rn onStockholders
'K"ity
!mportant meas"re of theincome-prod"cing a.ility
of a company$
17-72
7/18/2019 Fin Statement Analysis MANAC(14 17)
72/73
'arnings
per Share
'arnings A)aila.le to :ommon StockholdersWeighted-A)erage "m.er of :ommon
Shares "tstanding
C
'arningsper Share
H03%6>#17% P 27%,& I 2
C C H2$,2
The financial press reg"larly p".lishesact"al and forecasted 'S amo"nts$
'arnings er Share'arnings er Share
17-73
rice-'arnings 5atiorice-'arnings 5atio
7/18/2019 Fin Statement Analysis MANAC(14 17)
73/73
rice 'arnings 5atiorice 'arnings 5atio=' 5atio=' 5atio
rice-'arnings
5atio
4arket rice er Share
'S
C
rice-'arnings5atio
C H2$
H 2$,2C ;$3 L 1
ro)ides some meas"re of /hether thestock is "nder or o)erpriced$