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Chapter IITutorial
Financial
Statements
Ratio Analysis
Financial Statements- The Income Statement (financial summary of the
firm‘s operating result during a specified period)- The Balance Sheet (summary statement of the
firm‘s financial position at a given point in time)- The Statement of Cash Flows (summary of the
cash flows over a specified period)
- The Statement of Retained Earnings (reconciles the net income during a year, and any dividends paid, with the change in retained earnings between the start and the endof that year)
The Income Statement
- Provides a financial summary of the firm‘s operating result during a specified period.
- Most common are income statements covering a 1-year period ending December 31. Monthly statements are prepared for use by management. Quaterly statements must be made available to the stockholders of publicly owned corporations.
The Income StatementGeneral form:
Revenue
-Cost of goods sold
= Gross profit
-Operating expenses
= Operating profit (EBIT)
-Financial cost
= Earning Before Taxes (EBT)
-Taxes
= Earning After Taxes (EAT)
The Balance Sheet
- Balances the firm‘s assets against its financing (debt or equity)
- Short-term x Long-term assets and liabilities
Shotr-term (current assets and liabilities) – they are expected to be converted into cash or paid within 1 year or less.
Long-term (fixed assets, equity, long term debt) – they are expected to remain on the firm‘s books far more than 1 year.
The Balance Sheet
As is customary, the assets are listed from the
most liquid (cash) down to the least liquid.
AssetsCurrent assets
Fixed assets
Liabilities and EquityCurrent liabilities
Long term debt / liabilities
Equity
The Statement of Cash Flows• Analyses the firm’s ability to generate cash
and cash equivalents
• Statement of CF shows:
– Where did the cash come from?
– What was it used for?
– What was the change in the cash balance?
• Operating, Investing and Financing activities
• Sources vs. Usage of funds
Financial Analysis
- Evaluation of firm’s performance- Users: investors, stockholders,
management, creditors, business partners
- Types of Ratio Comparisons- Cross-Sectional Analysis (benchmarking)- Time-Series Analysis- Combined Analysis
Categories of Financial Ratios:
- Liquidity ratios
- Activity ratios
- Debt ratios
- Profitability ratios
- Market ratios
Liquidity Ratios
Measure the ability of a firm to satisfy its short-term obligations.
Current Ratio = Current Assets / Current Liabilities
(acceptable = 2, depends on industry)
Quick Ratio = (Current Assets – Inventory) /
Current Liabilities
(acceptable = 1, depends on industry)
Activity Ratios
Measure the speed with which various accounts are converted into sales or cash.
Inventory Turnover = Cost of Goods Sold / Inventory
Average Collection Period = Accounts receivable / (Annual sales/365)
Average Payment Period = Accounts payable / (Annual purchases/365)
Total Assets Turnover = Sales / Total Assets
Debt Ratios
measure how much of the firm is financed with other people’s money and the firm’s ability to meet fixed charges.
Debt Ratio = Total Liabilities / Total Assets
Interest Coverage Ratio or Times Interest Earned = EBIT / Interest
Profitability Ratios
measure a firm’s return with respect to sales, assets, or equity.
Common-size Income Statement – each item is expressed as % of sales.
Gross Profit Margin = Gross Profit / Sales
Operating Profit Margin = EBIT / Sales
EPS = Earnings available for comm. Stockh. / number of shares
ROA = Earnings available for comm. Stockh. / Total Assets
ROE = Earnings available for comm. Stockh. / Common stock Equity
Market Ratios
insight into how well investors in the marketplace feel the firm is doing in terms of return and risk.
PE = Market price per share / EPS
Market/Book Ratio = Market price per share / Book value per share
Book value per share = Equity / Number of shares
Questions?
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