Financial Statement Analysis

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Presentation transcript:

Financial Statement Analysis Chapter 13 Financial Statement Analysis

Overview Purpose Tools Used Limitations

Financial Statements Balance Sheet Income Statement Statement of Cash Flows

Ratio Analysis Purpose of Ratio Analysis Uses Use by External Analysts

Type of Financial Ratios Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios

Liquidity Ratios Current Ratio Quick Ratio

Activity or Management Efficiency Ratios Inventory Turnover Asset Turnover

Activity or Management Efficiency Ratios Average Collection Period Days to Sell Inventory

Leverage Ratios Times Interest Earned Fixed Charge Coverage Ratios

Leverage Ratios Debt to Assets Debt to Equity

Profitability Ratios Net Profit Margin % Return on Assets

Profitability Ratios Return on Equity Operating Margin After Depreciation

Market Price Ratios Price to Earnings Book Value Per Share

Decomposition of ROE (1) x (2) x (3) x (4) x (5) ROE = Net Profit Pretax Profit Pretax Profit EBIT EBIT Sales Sales Assets Assets Equity ROE = x x x (1) x (2) x (3) x (4) x (5) Tax Burden Interest Burden x x Margin x Turnover x Leverage

Economic Value Added Approach to compare accounting profitability with the cost of capital Definition Ties accounting to return by investors

Comparability Problems Accounting Differences Inflation International Accounting Conventions

Quality of Earnings: Areas of Accounting Choices Allowance for bad debts Non-securing items Reserves management Stock options Revenue recognition Off-balance sheet assets and liabilities