ANALYSIS OF FINANCIAL STATEMENTS Using Ratios Presented by the Arkansas Securities Department

HOW ARE YOU DOING? What is your financial condition? Can you compute your financial ratios?

BALANCE SHEET Assets --- LIABILITIES = OWNER’S EQUITY

INCOME STATEMENT REVENUES --- EXPENSES = NET PROFIT/LOSS

Types of Ratios  Liquidity – measures the short-run ability of a company to pay its debts  Profitability – measures the success or failure of a company for a given time period  Coverage – measures the degree of protection for long term creditors and investors

5 IMPORTANT ANALYTICAL RATIOS Current Ratio Current Assets Current Liabilities Profit Margin Net Income Net Sales Price/Earnings Market Price of Stock Earnings Per Share Yield Dividend Per Share Market Price of Stock Debt to Equity Debt Total Equity Compare to Industry Averages

What do these ratios tell you about the financial condition of the corporation? Current Ratio—the dollars of current assets available to pay current debts—expressed as a coverage of so many times. Profit Margin on Sales – indicates the profit on each sale dollar received. Price/Earnings – statistic used by analysts in discussing the investment possibility of a corporation---- Yield – determines the rate of return that will be received from the investment Debt to Equity – has an effect on the co’s ability to obtain future financing (low fig. is good) How well protected are the creditors in the case of possible bankruptcy of the co. (LEVERAGE)

Income Statement Revenues (sales) $100, Expenses Payroll 50, Interest 2, Depreciation 3, total exp. 55, Net Income (loss) $ 45,000.00

Balance Sheet ASSETS Current Assets Cash $ 20, Accounts Receivable Fixed Assets Property, Plant & Equip 500, Total Assets 620, LIABILITIES Current Liabilities Accts. Pay 40, Long term Debt Bonds Payable 250, Total Liabilities 290, Equity Common Stock (100,000 outstanding-$1 par) 100, Retained Earnings 230, Total Equity $330,000.00

Additional information Earnings per share 45,000/100,000=$.45 Dividends (paid qtrly) $.25 Market Price-Stock $25.00 Shares outstanding 100,000