Cluster 3 Financial Statements and analysis

Net Sales Less Cost of goods Sold = Gross Profit from Sales Less Fixed Operating Expenses Less Depreciation Expense = Operating Income (EBIT) Less Interest Expense = Pre-tax Income (EBT) Less Taxes = Net Income (EAT) Less Dividend to Preferred Stockholders = Earnings Available to Common Stockholders Less Dividend to Common Stockholders = Addition to Retained Earnings. The Corporate Income Statement

Assets: A: Current Assets:  Cash  Marketable Securities (investments in government securities. Up to 100% redeemable)  Accounts Receivable  Inventory (Raw materials, Work-in-process and Finished goods) Prepaid and advances B: Fixed Assets:  Property, Plant and Equipment  Natural Resources  Long-Term Investments (money used in procuring assets that are not used for the company’s main operations). The Corporate Balance Sheet

LIABILITIES: A: Current Liabilities:  Accounts Payable  Short-term Notes Payable  Short-term Loans Accruals B: Long-Term Liabilities:  Long-term Notes Payable  Bonds and Debenture  Long-term loans  Mortgaged Loans. The Corporate Balance Sheet

SHAREHOLDERS’ EQUITY  Common Stock  Paid-In Capital  Preferred Stock  Retained Earnings  THE CORPORATE BALANCE SHEET

ANALYSIS OF FINANCIAL STATEMENTS FINANCIAL RATIOS Financial ratios are indicators of a company’s performance as discernable from the company’s Balance Sheet and income Statement. We will discuss some of the simple ratios of a company and talk about their significance.

Areas of Financial Analysis Liquidity The company’s ability to pay of its current liabilities from its current assets. Asset Management The company’s efficiency in using its assets in generating sales. Debt Management The optimum amount of the firm’s Debt compared to its assets and equity.

Areas of Financial Analysis Profitability The company’s ability to earn different types of profits and return compared to the capital employed. Market Value How the company’s share price is appealing the current and potential investors

Liquidity Ratios Current Ratio Current assets should be significantly higher than current liabilities so that the current ratio is higher than 2:1.

Liquidity Ratios Quick Ratio Reduces the numerator of the current ratio formula by deducting Inventory (the least liquid of the current assets). The Numerator should High enough so that the quick ratio is at least 1:1. employed.

Asset Management Ratios Days Sales Outstanding (DSO) Shows the average number of days taken by the company to collect its receivables.

Asset Management Ratios Inventory Turnover Ratio (ITO) Tells how quickly inventory is converted to sales. The higher the ITO, the better.

Asset Management Ratios Fixed Asset Turnover (FAT) Tells how efficiently fixed assets are used to generate sales. The higher the FAT, the better.

Asset Management Ratios Total Asset Turnover (FAT) Tells how efficiently all assets are used to generate sales. The higher the TAT, the better.

Debt Management Ratios Debt-Asset Ratio Debt should be low enough to be covered by its total asset because if incomes are too low assets may have to be sold off to repay the debt.

Debt Management Ratios Debt-Equity Ratio

Debt Management Ratios Times Interest Earned Tells how much decline in operating income the company can withstand before it is no longer able to pay off its interest expense.

Profitability Ratios a. Gross Profit Margin (GPM) b. Operating Profit Margin (OPM) c. Net Profit Margin (NPM) GPM/Sales EBIT/Sales EAT/Sales A comparative analysis can show where the company should earn more and where the company should cut more spending.

Profitability Ratios Return on Assets Shows how much the company is earning after tax compared to total investment in assets.

Profitability Ratios Return on Equity Shows how much the company is earning after tax compared to total investment made by the owners

Market-Value Ratios Earnings Per Share (EPS) Tells how much a stockholder earns per share of common stock

Market-Value Ratios Price-Earnings Ratio (P/E) Tells how much a potential investor would be willing to pay for a currency unit (e.g. Taka, dollar, etc.) of the company’s reported profit.

Analysis Methods Cross-sectional Analysis Trend Analysis Group Analysis

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