FINANCIAL STATEMENT ANALYSIS

CHAPTER 6
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FINANCIAL STATEMENTS
Financial statement Analyisi
-It is the art of transforming data from financial statements into information that is
useful to informed decision making.

Balance sheet/ Statement of Financial Position

- Summarizes the assets, liabilities, and equity of a business in a at a moment in time.

ASSET = LIABLITY + EQUITY

Income Statement
- Summarizes the revenues and expenses of the firm over a particular period of time.
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Balance Sheet Information

Asset = Liability + Equity

Current Non Current Current Non Current Capital Stock

APIC (excess in par)
Retained Earnings
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Income Statement Information

Sales xxxx
Less : Cos of sales (xxxx)
Net sales xxxx
Less : Other Expenses (xxxx)
Income before tax xxxx
Less : Tax (xxxx)
Net Income xxxx
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Income statement Information

Statement of Retained Earnings

Net Sales xxxx

Less : Dividends (xxxx)
Retained Earnings xxxx
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Using of Financial Ratios

Financial Ratio
- An index that relates two accounting numbers and is obtained by dividing one
number by the other.

2 Types of Ratio Comparison

Internal Comparison
- A comparison of a present ratio with past and expected future ratios for the same
comoany.

External Comparison and Sources of Industry Ratio

- A comparison of one firm with those of similar firms or with industry averages at
the same point in time.
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Types of Ratio
Balance Sheet Ratio
- Liquidity Ratio
- Financial Leverage ( or debt)
Income statement or income statement/ balance
sheet ratio
- Coverage
- Activity
-Profitability Ratio
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Balance Sheet Ratio

Liquidity Ratio - Ratios that measures a firms ability to meet short term
obligations.

Current Ratio - Measures ability to meet the current debts with current asset
= Current Asset
Current Liability

Acid test Ratio (Quick Asset) - Measures ability to meet current debts
with most liquid(quick) current asset.

= Current Asset less inventories

Current Liablities
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Balance Sheet Ratio

Leverage - Ratios that show the extent to which the firm is financed by debt.
Debt to Equity Ratio - Indicates the extent to which debt financing is used
relative to equity financing.

= Total Debt / Shareholders Equity

Debt- To- Total- Asset Shows the relative extent to which the firm is
using borrowed money.

= Total debt/ Total asset

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Income statement or income statement/ balance sheet ratio

Coverage Ratio - Ratios that relate the fianacial charges of a firm to its
ability to service or cover them.

Interest Coverage - It indicates a firms ability to cover interest charges. It is

also called times interest earned.

= Earnings before interest and taxes/ Interest Expense

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Income statement or income statement/

balance sheet ratio
Activity Ratio - Ratios that measures how effective the firm is using its asset.
Receivable Turnover - Measures how many times the receivables have been
turned over ( into cash) during the year; provides insight into quality of the receivables.
= Annual net credit sales/ Average receivables

Receivables Turnover in Days - Average number of days receivables are

outstanding before being collected.
= 365/Receivable Turnover

Inventory Turnover - Measures how many times the inventory has been
turned over (sold) during the year; provides insight into liquidity of inventory and
tendency to overstock
= Cost of Goods Sold/ Average Inventory
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Income statement or income statement/
balance sheet ratio
Inventory Turnover in Days - Average number of days the
inventory is held before it is turned into accounts receivable through sales.

= 365/ Inventory Turnover

Total Asset Turnover - Measures relative effeciency of total asset to

generate sales.

= Net sales/ total asset (average)

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Income statement or income statement/
balance sheet ratio
Profitability - Ratios that relates profit to sales and investment

Net Profit Margin Measures profitability with respect to the sales

generated; net income per sales.
= Net Profitafter taxes/ net sales

Return of Investement - Measures overall effectiveness in generating profits

which available assets; earning power of invested capital.
= Net Profit/ Total asset ( Average)

= Net profit margin x Total asset turn over

= Net profitafter taxes/ nrt sales x net sales/total assets (average)

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Income statement or income statement/
balance sheet ratio
Return on Equity - Measures earning power on shareholders book
value investment.

= Net profit after taxes/ shareholders equity (average)

= net profit margin x total asset turnover x equity multiplier

= Net profit after taxes/ net sales x netsales/total asset

x total asset(average) / shareholders equity (average)

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Trend Analysis
In the analysis of financial information, trend
analysis is the presentation of amounts as a
percentage of a base year.
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Common sized and Index Analysis

Common- sized analysis - An analysis of
percentage financial statements where all
balance sheet items are divided by total assets
and all income statement items are divided by
net sales or revenues.
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Common sized and Index Analysis

Index Analysis An analysis of percentage
financial statements whwre all balance sheet or
income statement figures for a base year equal
100.0 percent and subsequent financial
statement items expressed as percentages of
their values in the base year.
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