Ch. 3: Working with Financial Statements

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Chapter 3 Working with Financial Statements

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Presentation transcript:

Ch. 3: Working with Financial Statements accounting numbers are often just pale reflections of economic reality, but they frequently are the best available information. (p. 50) Contents Standardized Financial Statements Ratio Analysis The Du Pont Identity Internal and Sustainable Growth Using Financial Statement Information

Standardized Financial Statements Common-Size Balance Sheets (p. 51) Common-Size Income Statements (p. 52)

Ratio Analysis Short-Term Solvency (Liquidity) Current Ratio Quick (Acid-Test) Ratio Cash Ratio

Long-Term Solvency (Leverage) Total Debt Ratio Times Interest Earned Cash Coverage

Asset Management (Turnover) Inventory Turnover Receivables Turnover Days’ Sales in Inventory Receivables Turnover Days’ Sales in Receivables Payables Turnover Days to Pay Total Asset Turnover

Profitability Profit Margin Return on Assets Return on Equity

Market Value Price-Earnings Ratio Market-to-Book Ratio

The Du Pont Identity ROE = PM * TAT * EM Profit Margin (PM) is a measure of the firm’s operating efficiency; how well does it control costs? Total Asset Turnover (TAT) is a measure of the firm’s asset use efficiency; how well does it manage its assets? Equity Multiplier (EM) is a measure of the firm’s financial leverage.

Internal & Sustainable Growth Dividend Payout Ratio Retention (Plowback) Ratio Internal Growth Rate Sustainable Growth Rate

Using Financial Statement Information Why Evaluate Financial Statements? internal uses external uses Benchmarking time-trend analysis peer group analysis Problems with Financial Statement Analysis

Recommended Practice Self-Test Problems 3.1 - 3.4, pp. 73-5 Questions 1-4, 7, pp. 75-6 Problems on pp. 77-82: 3, 5, 7, 9, 11, 13, 19, 21, 29, 37, 39 (answers are on p. 547)