CHAPTER 4 The Analysis of Financial Statements (lanjutan)

Profitability Ratios: Overall Efficiency and Performance Measures profit generated after consideration of cost of products sold Gross Profit Margin

Profitability Ratios: Overall Efficiency and Performance Con’t. Measures profit generated after consideration of operating expenses Operating Profit Margin

Profitability Ratios: Overall Efficiency and Performance Con’t. Measures profit generated after consideration of all expenses and revenues Net Profit Margin

Profitability Ratios: Overall Efficiency and Performance Con’t. Measures overall efficiency of firm in managing investment in assets and generating profits Return on Total Assets (ROA) or Return on Investment (ROI)

Analyzing the Data Now that some of the “tools” of financial analysis have been illustrated, where does one go from here? Taking a general approach to financial statement analysis, one might proceed as follows...

Five Steps of a Financial Statement Analysis Who are you and why are you interested in this company? Who are you and why are you interested in this company? What questions would you like to have answered? What questions would you like to have answered? What info is vital to the decision at hand? What info is vital to the decision at hand? Establish objectives of the analysis Step 1

Five Steps of a Financial Statement Analysis Con’t. Study the industry in which the firm operates and relate industry climate to current and projected economic developments Step 2

Five Steps of a Financial Statement Analysis Con’t How well does this firm seem to be run? How well does this firm seem to be run? Are they taking advantage of opportunities? Are they taking advantage of opportunities? Are they innovative, forward-looking, etc? Are they innovative, forward-looking, etc? Step 3 Develop knowledge of firm and quality of management

Five Steps of a Financial Statement Analysis Con’t Tools: Common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors Tools: Common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors Step 4 Evaluate financial statements

Five Steps of a Financial Statement Analysis Con’t Reach conclusions about the firm relevant to your established objectives Reach conclusions about the firm relevant to your established objectives Step 5 Summarize findings

Relating the Ratios —The Du Pont System It is helpful to complete the evaluation of a firm by considering the interrelationship among the individual ratios

Relating the Ratios —The Du Pont System Continued The Du Pont System helps the analyst see how the firm’s decisions and activities over the course of an accounting period interact to produce an overall return to the firm’s shareholders, the return on equity

Relating the Ratios —The Du Pont System Continued The summary ratios are: (1) Net profit margin (2) Total asset turnover (3) Return on investment (3) Return on investment (4) Financial leverage (5) Return on equity

Four Market Ratios 1. Earnings per common share 2. Price-to-earnings 3. Dividend payout 4. Dividend yield

Market Ratios Continued Market Ratios Continued Provides the investor with a common denominator to gauge investment returns Earnings per Common Share

Market Ratios Continued Market Ratios Continued Relates earnings per common share to the market price at which the stock trades, expressing the “multiple” that the stock market places on a firm’s earnings Price-to-Earnings

Market Ratios Continued Market Ratios Continued This ratio is determined by the formula cash dividends per share divided by earnings per share Dividend Payout

Market Ratios Continued Market Ratios Continued Shows that relationship between cash dividends and market price Dividend Yield