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Financial Statement Analysis

Financial Statement Analysis. CHAPTER 13. Why? Financial Ratios. Never answers questions by themselves They do however Raise questions to answer Point to opportunities for further analysis Also include: Industry trends Technological changes Changes in consumer tastes

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Financial Statement Analysis

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  1. Financial Statement Analysis CHAPTER 13

  2. Why? Financial Ratios • Never answers questions by themselves • They do however • Raise questions to answer • Point to opportunities for further analysis • Also include: • Industry trends • Technological changes • Changes in consumer tastes • Changes in broad economic factors • Changes within company

  3. Horizontal (Trend) Analysis • Examines changes in accounts over time • Select a year as the “BASE YEAR” = 100% • Every year is a % of that year. New #/Base Year • Usually over 5 or 10 years • Can compare any account to see how it has changed over the years • Page 586 McDonalds(#s), Graph • When“Super size Me”? • Change over two years in $ and % page 606 13-1 • Exercise 13-10 Trend % pg 610

  4. Common Size (Vertical) Statements • Relationship between accounts • Balance Sheet - % of Total Assets pg 585Income Statement - % of Sales pg 586 • Change over two years in $ and % page 606 13-1

  5. Financial Ratios • Accounting 101 - • Liquidity, Profitability, Long Term Solvency, Market Strength • Accounting 102 – Users • Common Stockholders, Short-Term Creditors, Long Term Creditors • Summary of Ratios Exhibit 13-6 page 600

  6. Numerator • Denomiator • Num goes up ratio goes up • Dem goes up ratio goes down • Num goes down ratio goes down • Dem goes down ratio goes up

  7. Common Stockholders • Gross Margin % • Gross Margin/Sales • Earnings Per share (EPS) • Net Income-Preferred Div/Avg Common Stock O/S • Price Earning Ratio • Market Price/ EPS • Dividend Payout • Dividends per share/ EPS • Dividend Yield • Dividend per share/Market Price per share

  8. Common Stockholders con’t • Return on Assets (simple version) • Net Income / Average Total Assets • Return On Equity (simple version) • Net Income/ Average Total SE • Book Value Per Share • Stockholder’s Equity/ Shares Outstanding EXERCISE 13-2 Page 608

  9. Financial Leverage • Basically--- ability to borrow money at a lower rate 7% (pay your creditors)than your net income percentage 10% (rate of return)

  10. Short Term Creditor- Vendors, Creditors, Suppliers • Working Capital • Current Assets – Current Liabilities • Current Ratio • Current Assets/Current Liabilities • Acid-Test (Quick) Ratio • Cash+Market Sec+A/R+ Short Term Invest/CL • A/R Turnover • Credit Sales/Avg A/R • Avg Collection Period • 365/ A/R Turnover

  11. Short Term Creditors Con’t • Inventory Turnover • Cost of Goods Sold (COGS)/ Avg Inventory • Average Sales Period • 365/ inventory Turnover • Payables Turnover • COGS + or – Change in Inventory/Average A/P • Average days Payables • 365/Payables Turnover • Operating Cycle in days • Average collection period(Days uncollectible) + Average Sales Period (Inventory on hand) • Financing Requirement • Operating Cycle – Average Days Payable • EXERCISE 13-3 PG 608

  12. Long Term Creditors • Times Interest Earned • EBIT/ Interest Expense • Debt to Equity • Total Liabilities/ Stockholder’s Equity • EXERCISE 13-4 PG 608 • SUMMARY OF RATIOS Pg 600

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