PPT Analysis of Financial Statements PowerPoint presentation
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Analysis of Financial Statements
See pages 678 & 679 for how horizontal analysis was performed on Best Buy. See page 680 for a Best Buy example (base period is 2001). PowerPoint PPT presentation
Title: Analysis of Financial Statements
Introduction
- This chapter shows how to use information in
financial statements to evaluate a companys
financial performance and condition
tools
Basics of Analysis
- Financial statement analysis applies analytical
tools to financial statements related data for
making business decisions
is to provide strategic information to improve
company efficiency effectiveness in providing
products services
analysis to make better more informed decisions
in pursuing their own goals
Basics of Analysis
- Building blocks of analysis
- Financial statement analysis focuses on one or
Basics of Analysis
- Information for analysis
- Most users rely on general purpose financial
statements
companys SEC 10K report, other filings, press
releases, shareholders meetings, forecasts or
management letters
offer free access screening of companies by key
numbers such as earnings, sales book value
Basics of Analysis
- Standards for comparisons
- When interpreting measures from financial
statement analysis, you need to decide whether
the measures indicate good, bad, or average
performance
(benchmarks) for comparisons that include the
Standard Poors or Moodys
Horizontal Analysis
- Comparison of a companys financial position
performance across time
on a single statement (comparative format)
Horizontal Analysis
- Comparing financial statements over a relatively
short period of time (2-3 years) if often done by
analyzing change in line items
absolute dollar amount changes percent changes
can yield large percent changes inconsistent with
their importance
Horizontal Analysis
- Dollar change
- Analysis period amount base period amount
- Analysis period is the point or period of time
for the financial statements under analysis
time for the financial statements used for
comparison period
Horizontal Analysis
- Percent change
- Analysis period amount-base period amount
- Base period amount
- X 100
- Rules
- When there is a negative amount in the base
period a positive amount in the analysis period
(or vice versa) you cannot compute a meaningful
change (Cases A B)
change is computable (Case C)
compare amounts to either average or median
Horizontal Analysis
was performed on Best Buy
changes then try to identify the reasons for
these changes if possible, determine whether
they are favorable or unfavorable
Horizontal Analysis
- Trend analysis
- A form of horizontal analysis that can reveal
patterns in data across successive periods
of financial numbers is a variation on the use
of percent changes
subtract the base period amount in the numerator
base period a weight of 100
base period number
period amount x 100
is 2001)
percents (see page 680)
Vertical Analysis
- A tool to evaluate individual financial statement
items or a group of items in terms of a specific
base amount
Vertical Analysis
- Common size statements
- Reveals changes in the relative importance of
each financial statement item
are redefined in terms of common size percents
each individual financial statement amount under
analysis by its base amount
x 100
Ratio Analysis
- Ratios are among the more widely used tools of
financial analysis because they provide clues to
symptoms of underlying conditions
difficult to detect by inspecting individual
components making up the ratio
two quantities. It can be expressed as a percent,
rate or proportion
building blocks of financial statement analysis
Ratio Analysis-Liquidity Efficiency
- Liquidity refers to the availability of resources
to meet short term cash requirements the
analysis of liquidity is aimed at a companys
funding requirements
in using its assets is usually measured
relative to how much revenue is generated from a
certain level of assets
Ratio Analysis-Liquidity Efficiency
- Working Capital
- Current Assets Current Liabilities
- A company needs adequate working capital to meet
current debts, to carry sufficient inventories
to take advantage of cash discounts
less likely to meet current obligations or to
continue operating
Ratio Analysis-Liquidity Efficiency
- Current Ratio
- Current Assets/Current Liabilities
- Many users apply a guideline (minimum) of between
1.51 to 21
ratio must recognize at least 3 additional
factors
(discussed a little later)
Ratio Analysis-Liquidity Efficiency
- Acid test (quick) ratio
- Reflects on ST liquidity
- Cash ST Investments Current Receivables/Current
Liabilities
at least 11
into cash
Ratio Analysis-Liquidity Efficiency
- Inventory Turnover
- How long a company holds inventory before selling
it
investment in inventory than one producing the
same sales with a lower turnover
Ratio Analysis-Liquidity Efficiency
- Days Sales Uncollected
- AR turnover provides insight into how frequently
a company collects it accounts
activity
uncollected should not exceed 1 1/3 times the
days in its (1) credit period if discounts are
not offered or (2) the discount period if
favorable discounts are offered
Ratio Analysis-Liquidity Efficiency
- Days Sales in Inventory
- Ending Inventory/CGS x 36
- The resulting figure will be the number of days a
companys inventory will be converted into
receivables or cash
generate sales is an important indication of
operating efficiency
Ratio Analysis-Solvency
- Solvency refers to a companys long run financial
viability its ability to cover long term
obligations
(financing, investing operating) affect its
solvency
analysis is the composition of a companys
capital structure (a companys financing
sources-equity vs debt)
Ratio Analysis-Solvency
- Debt Equity Ratios
- Assess the portion of a companys assets
contributed by its owners the portion
contributed by creditors
Ratio Analysis-Solvency
- Debt to Equity ratio
- TL/SE
- A higher ratio indicates a capital structure that
have relatively more debt than equity and
consequently more risk
through use of debt financing
Ratio Analysis-Solvency
- Times Interest Earned
- Reflects the creditors risk of loan repayments
with interest
taxes/interest expense
company for creditors
Ratio Analysis-Profitability
- Refers to a companys ability to generate an
adequate return on invested capital
sales
the industry
Ratio Analysis-Profitability
- Return on Total Assets
- NI/Average total assets
- Another way to express the above is
- Profit margin x total asset turnover
- Return on Common Stockholders Equity
- Measures a companys success in reaching the goal
of earning NI for its owners
equity
stock are subtracted whether they are declared or
are in arrears. If it is noncumulative, its
dividends are subtracted only if declared
Ratio Analysis-Market Prospects
- These ratios are useful for analyzing
corporations with publicly traded stock
is often used in the denominator
growth risk of a companys earnings as
perceived by the stocks buyers sellers
