FINANCIAL STATEMENT

ANALYSIS
 FINANCIAL ANALYSIS

• Financial statement analysis is the process of

applying analytical tools to a company’s financial
statements to understand the company’s financial
health and requires:
- Financial Information
- Standards of Comparison
- Analysis Tools
 STANDARDS OF COMPARISON

• When conducting a financial analysis, there should be

benchmarks for comparison.
• A common benchmark is an intracompany comparison
which uses the prior year(s) of the same company as a
benchmark.
• Another common benchmark is intercompany
comparison, that is comparisons among competitors.
• Another benchmark is industry standards (average). Often,
industry benchmarks can be obtained from financial
websites.
 ANALYSIS TOOLS

Two common tools used to conduct financial analysis

are:
• HORIZONTAL ANALYSIS – is a comparison
of a company’s financial results across time.
• VERTICAL ANALYSIS – is a comparison of
financial balances to a base account from the same
company and/or compare against other companies
in the same industry.
 HORIZONTAL ANALYSIS

• Can use more than just 2 years of data to perform trend analysis.
• Trend analysis can be used to build prediction models to forecast financial
performance.

Formula:
Horizontal Analysis (absolute) = Amount in Current Year – Amount in Base Year
Horizontal Analysis (percentage) = Amount in Current Year – Amount in Base Year
Amount in Base Year
 VERTICAL ANALYSIS

• Vertical analysis compares company account balances within one year.

• It is normally conducted on both the statement of financial position and the
statement of comprehensive income.

Formula:
Vertical Analysis Income Statement Item Vertical Analysis Balance Sheet Item
(Income Statement) = x 100 (Balance Sheet) = x 100
Total Sales Total Assets
(Liabilities)
 LIMITATIONS OF FINACIAL STATEMENTS
ANALYSIS

Analysts should look beyond the ratios.

Changes within
the Company

Industry
Trends Consumer
Tastes

Technological
Changes Economic
Factors
 RATIO ANALYSIS

• Conducted to understand relationships among

various items reported in one or more of the
financial statements. It shows the evaluation of
the company’s performance given the level of
other company’s resources.
THE RATIO C AN BE C ATEGORIZED AS
FOLLOWS:
 1. PROFITABILITY RATIOS

• Relate to the company’s performance

in the current period. It shows the
company’s ability to generate income.
 PROFIT MARGIN RATIO

• Compares net income to net sales and measures the

ability of a company to generate profits from sales. A
higher ratio indicates a greater ability to generate
profits from sales.

Formula:
Profit Margin = Total Comprehensive Income
Net Sales
 RETURN ON EQUITY (ROE)

• Compares profits to the average balance in

shareholders’ equity, showing how effectively a
company uses the funds provided by shareholders
during the year to generate additional equity for its
owners.

Formula:
Return on Equity = Total Comprehensive Income
Average Shareholders ’ Equity
 RETURN ON ASSETS (ROA)

• Efficiency with which assets are used to

operate a business.

Formula:
Return on Assets = Total Comprehensive Income
Average Total Assets
 EARNINGS PER SHARE

• It indicates the amount of earnings generated for

each share of outstanding common stock.

Formula:
Earnings Per Share = Net Income (for common shares)
Ave. # of Common Shares Outstanding
PRICE EARNINGS (P/E) RATIO

• It indicates the number of pesos required to

buy Php 1.00 of earnings.

Formula:
Price to Earnings = Stock Market Price
Earnings Per Share
 2. LIQUIDITY RATIOS

• Relate to the company’s short term survival. It

shows the company’s ability to use current
assets to repay liabilities as they become due. It
measures the short-term ability of the
enterprise to pay its obligations and to meet
unexpected needs for cash.
 CURRENT RATIO

• It compares assets that should be turned into cash

within one year to liabilities that should be paid
within one year. A higher ratio indicates greater
liquidity.

Formula:
Current Ratio = Current Assets
Current Liabilities
 QUICK RATIO

• The quick ratio (the acid-test ratio) compares a

company’s cash and near-cash assets, or quick assets,
to its current liabilities.

Formula:
Quick Ratio = Quick Assets
Current Liabilities
 CASH RATIO

• It measures the number of times that the current

liabilities could be paid using cash and marketable
securities.

Formula:
Cash Ratio = Cash + Marketable Securities
Current Liabilities
 3. SOLVENCY RATIOS

• Relate to the company’s long-run survival. It

shows the company’s ability to repay lenders
when debt matures and to make the required
interest payments prior to the date of
maturity.
 A. LEVERAGE B. OPERATING TO
SERVICE DEBT AND
• Debt Ratio EQUITY
• Equity Ratio • Times Interest Earned
• Debt to Equity Ratio Ratio
• Equity Multiplier • Dividend Payout Ratio
A. LEVERAGE
 DEBT TO ASSETS

• It indicates the proportion of total assets that

creditors finance. Note that creditors must be paid
regardless of how difficult a year the company may
have had.

Formula:
Debt to Assets Ratio = Total Liabilities
Total Assets
 EQUITY RATIO

• It is an investment leverage or solvency ratio that

measures the amount of assets that are financed by
owners investments by comparing the total equity in
the company to the total assets.

Formula:
Equity Ratio = Total Equity
Total Liabilities
 DEBT TO EQUITY RATIO

• Proportion of assets provided by creditors

compared to that provider by owners.

Formula:
Debt to Equity Ratio = Total Liabilities
Total Equity
 EQUITY MULTIPLIER

• It is a financial leverage ratio that measures the

portion of company’s assets that are financed by
stockholders equity.

Formula:
Equity Multiplier = Ave. Assets
Ave. Equity
B. OPERATING TO SERVICE
DEBT AND EQUITY
 TIMES INTEREST EARNED
RATIO
• It indicates how many times the company’s interest
expense was covered by its net operating income. It
determines the extent to which operations cover
interest expense.

Formula:
Times Interest Earned Ratio = EBIT
Interest Expense
 DIVIDEND PAYOUT RATIO

• It indicates the proportion of earnings

distributed as dividends.

Formula:
Dividend Payout Ratio = Common Dividends
NIAT – Preferred Dividends
4. ASSET QUALITY TURNOVER

• These ratios give us an idea of how

efficiently the firm is using its assets.
Good asset management ratios are
necessary for the firm to keep its
costs and thus, its net income high.
 A. CASH B. SALES
GENERATING GENERATING
• Inventory Turnover
• Fixed Asset Turnover
• Accounts Receivable Turnover
• Total Asset Turnover
• Accounts Payable Turnover
• Average Sales Period / • Capital Intensity Ratio
Average Age n Investment
• Average Collection Period
• Average Payment Period
• Operating Cycle
• Cash Conversion Cycle
A. CASH GENERATING
 INVENTORY TURNOVER

• It indicates hoe frequently inventory is bought and sold

during the year. It measures the number of times that
the inventory is replaced during the period.

Formula:
Inventory Turnover = Cost of Goods Sold
Average Total Inventory
 ACCOUNTS RECEIVABLE
TURNOVER
• Measures how many times a company’s accounts receivable
have been turned into cash during the year.

Formula:
Accounts Receivable Turnover = Net. Credit Sales
Ave. Total Accounts Receivable
 ACCOUNTS PAYABLE
TURNOVER

• Measure efficiency of the company in meeting trade

payable.

Formula:
Accounts Payable Turnover = Net. Credit Purchases
Ave. Total Accounts Payable
 AVERAGE SALE PERIOD

• The number of days being taken to sell the entire

inventory one time is computed by dividing 3 days
by the inventory turnover period.

Formula:
Average Sale Period = 360 or 365 days
Inventory Turnover
 AVERAGE COLLECTION
PERIOD
• Helps evaluate the liquidity of accounts receivable and the
firms credit policies.

Formula:
Average Collection Period = 360 or 365 days
Accounts Receivable Turnover
 AVERAGE PAYMENT PERIOD

• It indicates the length of time during which payables

remain unpaid.

Formula:
Average Payment Period = 360 or 365 days
Accounts Payable Turnover
 OPERATING CYCLE

• Shows how long the operating cycle of the company is. It is

the time needed to turn cash into inventory, inventory into
receivables, and receivables back into cash.

Formula:
Operating Cycle = Average Collection Period
Average Age in Investment
 CASH CONVERSION CYCLE

• It shows the time from when the cash is used in

operations to the time it is converted into cash
again.

Formula:
Cash Conversion Cycle = Average Collection
Period + Average Age in Investment – Average
Payment Period
B. SALES GENERATING
 FIXED ASSET TURNOVER

• Is another approach to assessing managements

effectiveness in generating sales from investments in
fixed assets particularly for a capital-intensive firm.

Formula:
Fixed Asset Turnover = Sales
Ave. Total Fixed Asset
 TOTAL ASSET TURNOVER

• Is a measure of the efficiency of management to

generate sales and thus earn more profit for the
firm.

Formula:
Total Asset Turnover = Sales
Ave. Total Asset
 CAPITAL INTENSITY RATIO

• Is a measure of the amount of capital needed

per dollar of revenue.

Formula:
Capital Intensity Ratio = Ave.Total Asset
Sales
 5. DUPONT
DISAGGREGATION ANALYSIS

• Shows that the rate of return on equity

can be found as the product of profit
margin, total asset turnover and the equity
multiplier. It shows the relationships
among asset management, financial
leverage management and profitability
ratios.
 THE B ASIC DUPONT MODEL
DISAGGREGATES (ROE) AS FOLLOWS:

Net Net Average

Income Income Sales Total Assets
= x x
ROE = Average Average Average
Stockholders Sales Total Stockholders
Equity Assets Equity

Profit Asset Financial

Margin Turnover Leverage
 THESE THREE COMPONENTS ARE
DESCRIBED AS FOLLOWS:

1. PROFIT MARGIN is the amount of profit that the

company earns from each peso of sales.

2. ASSET TURNOVER is a productivity measure that

reflects the volume of sales that a company generates from
each peso invested in assets.

3. FINANCIAL LEVERAGE measure the degree to

which the company finances its assets with debt rather than
equity.
 THE PROFIT MARGIN AND ASSET TURNOVER
RELATES THE COMPANY OPERATIONS AND
COMBINE TO YIELD ON ASSETS (ROA) AS
FOLLOWS:

Net Net
Income Income Sales
ROA = = x
Average Average
Total Assets Sales Total Assets

Profit Asset
Margin Turnover

Return on Assets (ROA)

 RETURN ON ASSET

• Measures the return on investment for the

company without regard to how it financed
(the relative proportion of debt and equity in
its capital structure).
 THOSE RETURNS ARE MAXIMIZED BY A JOINT
FOCUS ON BOTH PROFITABILITY AND
PRODUCTIVITY.

1. PROFITABILITY it is measured by the profit margin (Net Income/Sales).

- Gross Profit Margin. It measures the Gross Profit (Sales less Cost of goods sold) for each
sale. Gross profit margin (Gross Profit/Sales) is affected by both the selling prices of products
and their manufacturing cost.
- Expense Management. Managers focus on reducing manufacturing and administrative
overhead expenses to increase profitability.

2. PRODUCTIVITY it refers to the volume of sales resulting from invested in assets.

When a decline in productivity is observed, managers have two avenues of attack:
Increase in sales volume from the existing asset base, and
Decrease the investment in assets without reducing sales volume.
 PROBLEM 1

Horizontal Analysis and Vertical Analysis

Problem 1

Year 1 Year 2 Year 3

Cash 30,000 40,000 45,000
Accounts Receivable 120,000 100,000 90,000
Merchandise Inventory 80,000 110,000 12,000
Total Current Asset 230,000 250,000 260,000
Property, Plant and 200,000 240,000 250,000
Equipment
TOTAL 430,000 490,000 510,000
 Horizontal Analysis

Year 1 Year 2 Year 3

Amount Change Amount Change Amount Change

Cash 0 0% 10,000 0.33% 15,000 0. 5%

Accounts Receivable 0 0% -20,000 -0.17% -30,000 -0.25%

Merchandise Inventory 0 0% 30,000 0.38% 45,000 0. 56%

Total Current Asset 0 0% 20,000 0.87% 30,000 0.13%
Property, Plant and 0 0% 60,000 0.2% 50,000 0.25%
Equipment
 Vertical Analysis

Year 1 Year 2 Year 3

Cash 0.70 0.82 0.88

Accounts Receivable 0.28 0.20 0.18
Merchandise Inventory 0.19 0.22 0.25
Total Current Asset 0.53 0. 51 0. 51
Property, Plant and Equipment 0.47 0.49 0.49
PROBLEM 2

Financial Ratios
Problem 2
P E R E Z – P E R E Z C O M PA N Y WA S E S TA B L I S H E D O N J A N UA RY 1 , 2 0 1 5 A N D I S E N G AG E D I N
T H E M A N U FAC T U R E O F T H E C L OT H E S A N D OT H E R A P PA R E L . T H E C O M PA N Y M A K E S U S E
O F T H E 3 DAYS I N T H E C O M P U TAT I O N F O R S O M E R AT I O S .

Comparative Financial Position

December 31, 2015-2016

ASSETS 2015 2016

Cash 290,000 400,000
Accounts Receivable 120,000 200,000
Marketable Securities 40,000 20,000
Inventories 60,000 80,000
Prepaid Expenses 10,000 20,000
Total Current Assets 520,000 720,000
Total Non-Current Assets 200,000 300,000
Total Assets 720,000 1,020,000
LIABILITIES 2015 2016
Total Current Liabilities 100,000 150,000
Total Non-Current Liabilities 300,000 450,000

EQUITY 2015 2016

Total Owners Equity 320,000 420,000
Total Liabilities and Owner’s 720,000 1,020,000
Equity
 Income Statement
For the Year Ended December 31, 2016

Net Sales 900,000

(Cost of Goods Sold) (80,000)
Gross Profit 820,000
(Operating Expenses) (120,000)
Earnings before Interest and Taxes 700,000
(Finance Cost) (50,000)
Net Income before Tax 650,000
Tax (195,000)
Net Income 455,000

Compute for the following ratios for the year 2016. Show your solution below.
 FINANCIAL RATIOS ANSWER

WORKING CAPITAL CURRENT RATIO

Working Capital = Current Assets Current Ratio = Current Assets
less Current Liabilities
Current Liabilities

720,000
720,000 – 150,000 =
570,000 150,000 =
4.8:1
 QUICK RATIO A/R TURNOVER RATIO
Quick Ratio = Quick Assets
ARTO = Net. Credit Sales
Current Liabilities
Ave. Total A/R

620, 000 900,000

150, 000 = 160,000 =
4.13:1 5.625 times

200,000 + 120,000 =
320,000 / 2 = 160,000
 INVENTORY AVERAGE COLLECTION
TURNOVER RATIO PERIOD

ITO = COGS
ACP = 365 days
Ave. Total Inventory
ARTO

80,000 365
70,000 = 5. 625 =
1.14 times 65 days
80,000 + 60,000 =
140,000/2 = 70,000
 NUMBER OF DAYS IN
AVERAGE DAYS IN
THE OPERATING
INVENTORY
CYCLE
ASP = 365 days
Operating Cycle = ACP + AAI
ITO

365 65 + 320 =
1.14 = 385 days
320 days
 DEBT TO TOTAL DEBT TO EQUITY
ASSET RATIO RATIO

Debt Ratio = Total Liabilities

Dto ER = Total Liabilities
Total Assets
Total Equity

600,000 600,000
1,020,000 = 420,000 =
58.82% 1.43:1
 TIMES INTEREST GROSS PROFIT
EARNED RATIO RATIO

TIER = EBIT GPR = Gross Profit

Interest Expense Net Sales

700,000 820,000
50,000 = 900,000 =
14 times 0.91%
PROBLEM 3

Debt to Equity Ratio

Problem 3

IF THE TOTAL ASSET OF THE COMPANY AMOUNTED TO

800,000 AND THE TOTAL LIABILITIES AMOUNTED TO
200,000, WHAT IS THE DEBT TO EQUITY RATIO?

Dto ER = Total Liabilities

Total Assets

200,000
800,000 = 0.25
PROBLEM 4

Financial Ratios
The Statements of Financial Position as of December 31, 2014 and 2013, Income Statements and Statements of Cash
Flows of EBC Enterprises, Inc. for years 2014, 2013 and 2012 are given below:
Problem 4

RETURN ON RETURN ON
INVESTMENT ON EQUITY (ROE)
ASSETS (ROA) ROE = NIAT

ROA = NIAT
Ave. Total Equity

Ave. Total Assets

2014: 4,697
2014: 4, 697 + [127.5 (1-45%)] 22, 967.5 + 18, 933.5 = 22.42%
43, 802 = 10.88% 2

2013: 2, 995 + [1, 138.5 (1-43%)]

2013: 2,955
39, 955 = 9.02%
18,933.5 = 15.60%
 PRICE EARNINGS DIVIDEND PAYOUT
RATIO (P/E) RATIO
(P/E) = Market Price of Ordinary Shares DPR = Dividends per Share

Earnings per Share Earnings per Share

2014: 30 2014: 0.33

2 = 15 2 = 16.5 %

2013 : 17
2013 : 0.41
1.27 = 13.39
1.29 = 31.78%
PROBLEM 5

Accounts Receivable Turnover

Problem 5

IF THE NET SALES IS 400,000, STARTING A/R BALANCE IS

60,000 AND A/R TURNOVER IS 2, HOW MUCH IS THE ENDING
BALANCE OF THE ACCOUNTS RECEIVABLE

A/R Ending Balance = Net Sales less Starting A/R Balance

400,000 - 60,000 = 340, 000

 PROBLEM 6

Average Collection Period

Problem 6

IF THE COMPANY MAKES USE OF 365 DAYS AND

THEIR A/R TURNOVER RATIO IS 7, HOW LONG IS THE
AVERAGE COLLECTION PERIOD?

ACP = 365 days

ARTO

365
7 = 52.14 days
PROBLEM 7

Operating Cycle
Problem 7

IF THE COLLECTION PERIOD IS 19 DAYS AND THE

AVERAGE AGE IN INVENTORY IS 12 DAYS, HOW
LONG IS THE NUMBER OF DAYS IN OPERATING
CYCLE?

Operating Cycle = ACP + AAI

19 + 12 = 90 days
Thank You!