financial analysis ppt
TRANSCRIPT
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Financial Analysis & Ratios
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Comparative Analysis
There are three types of comparisons to provide decision usefulness of financial information:
• Intra-company basis • Inter-company basis • Industry averages
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Comparative Analysis
• Intra-company basis – comparisons within the company.
• Inter-company basis – comparisons with other companies.
• Industry averages – comparisons with other companies in the same industry.
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Financial Statement Analysis Three basic tools are used in financial statement analysis :
1. Horizontal analysis 2. Vertical analysis 3. Ratio analysis
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Horizontal Analysis • Is a technique for evaluating a series of financial
statement data over a period of time.
• Did an increase or decrease take place?
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Vertical Analysis • Expresses each item in a financial statement as a
percent of a base amount.
• Total Assets is the base amount on a Balance Sheet. • Common-size balance sheet
• Net Sales is the base amount on an Income Statement.
• Common-size income statement
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Ratio Analysis ➨ Five types:
➨ Liquidity ratios ➨ Solvency ratios ➨ Turnover ratios ➨ Profitability ratios ➨ Market value ratios
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Liquidity Ratios Measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
WHO CARES? Short-term creditors such as bankers and suppliers
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Current Ratio
Indicates short-term debt-paying ability
Current Assets Current Liabilities
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Acid-Test Ratio
Indicates immediate short-term debt-paying ability
Current Assets - Inventory Current Liabilities
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Cash Ratio
Indicates short-term debt-paying ability (cash basis)
_ Cash _
Current Liabilities
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Solvency Ratios Measure the ability of the enterprise to survive over a long period of time
WHO CARES? Long-term creditors and stockholders
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Debt to Assets Ratio
Indicates % of total assets provided by creditors
Total Liabilities Total Assets
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Times Interest Earned Ratio
Indicates company’s ability to meet interest payments as they come due
_ EBIT _ Interest Expense
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Cash Debt Coverage Ratio Indicates long-term debt-paying ability (cash basis)
Cash provided by operations Average total liabilities
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Turnover Ratios Measure how efficiently, or intensively, a firm uses its assets to generate sales
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WHO CARES?
Short-term creditors such as bankers and suppliers
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Inventory Turnover Ratio
Indicates liquidity of inventory
Cost of Goods Sold Inventory
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Average Days in Inventory
Indicates liquidity of inventory and inventory management
365 days
Inventory Turnover Ratio
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Receivables Turnover Ratio Indicates liquidity of receivables
Net Sales
Accounts Receivable
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Average Collection Period Indicates liquidity of receivables and
collection success
365 days Receivables Turnover
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Asset Turnover Ratio
Indicates how efficiently assets are used to generate sales
Net Sales Total Assets
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Profitability Ratios Measure the income or operating success of an enterprise for a given period of time
WHO CARES? Everybody
WHY? A company’s income affects: ➩ its ability to obtain debt and equity financing ➩ its liquidity position ➩ its ability to grow
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Profit Margin Ratio Indicates net income generated by each dollar of sales
Net Income Net Sales
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Return On Assets
Reveals the amount of net income generated by each dollar invested
Net Income Average Total Assets
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Return on Equity Indicates profitability of common
stockholders’ investment
Net Income Average Total Equity
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Market Value Ratios Deals with market value of stock.
.
WHO CARES? Stockholder’s
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Earnings Per Share (EPS) Indicates net income earned on each
share of common stock sales
Net Income Shares Outstanding
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Price Earnings Ratio Indicates relationship between market
price per share and earnings per share
Stock Price Earnings Per Share
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Payout Ratio
Indicates % of earnings distributed in the form of cash dividends
Dividends Net Income
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Retention Ratio
Indicates % of earnings plowed back into the corporation.
Addition to Retained Earnings Net Income
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Limitations Of Financial Analysis
• Horizontal, vertical, and ratio analysis are frequently used in making significant business decisions.
• One should be aware of the limitations of these tools and the financial statements.