Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statement Analysis Chapter 14 McGraw-Hill/Irwin

14-2 Dollar & Percentage Changes Trend Percentages Component Percentages Ratios Tools of Analysis

14-3 Ratios

14-4 Current Assets – Current Liabilities = Working Capital Working Capital

14-5 Current Ratio Current Assets Current Liabilities = This ratio measures the short-term debt-paying ability of the company. Current Ratio

14-6 Quick assets are cash, marketable securities, and receivables. This ratio excludes current assets such as inventories and prepaid assets that may be difficult to quickly convert into cash. Quick Assets Current Liabilities = Quick Ratio Quick Ratio

14-7 An income statement can be prepared in either a multiple-step or single-step format. The single-step format is simpler. The multiple-step format provides more detailed information. Measures of Profitability

14-8 Proper Heading Expenses & Losses Revenues & Gains Income Statement (Single-Step) Remember to compute EPS.

14-9 Proper Heading Gross Margin Operating Expenses Non-operating Items Remember to compute EPS. Income Statement (Multiple-Step)

14-10 Earnings Per Share Net Income – Preferred Dividends Average Shares of Capital Stock Outstanding = EPS

14-11 Price-Earnings Ratio Current Market Price of one Share of Stock Earnings Per Share = P/E The measure shows us the relationship between earning of the company and the market price of its stock.

14-12 This ratio is generally considered the best overall measure of a company’s profitability. This ratio is generally considered the best overall measure of a company’s profitability. Return On Assets (ROA)

14-13 This measure indicates how well the company employed the owners’ investments to earn income. Return On Equity (ROE)

14-14 Dividend Yield This ratio identifies the return, in terms of cash dividends, on the current market price of the stock. Dividend Yield Ratio Dividends Per Share Market Price Per Share =

14-15 Accounts Receivable Turnover Rate This ratio measures how many times a company converts its receivables into cash each year. Net Sales Average Accounts Receivable Accounts Receivable Turnover = Days to Collect = 365 / Turn

14-16 Inventory Turnover Rate This ratio measures the number of times merchandise inventory is sold and replaced during the year. Cost of Goods Sold Average Inventory Inventory Turnover = Days to Sell = 365 / Turn

14-17 Operating Cycle Cash Inventory Accounts Receivable 1. Purchase of Merchandise 2. Sale of merchandise on account 3. Collection of accounts receivable

14-18 A measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. A measure of creditor’s long-term risk. The smaller the percentage of assets that are financed by debt, the smaller the risk for creditors. Debt Ratio Total Liabilities / Total Assets

14-19 Interest Coverage Ratio This is the most common measure of the ability of a firm’s operations to provide protection to the long-term creditor. Times Interest Earned Income before Interest and Income Taxes Interest Expense =

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14-23 Dollar and Percentage Changes Dollar Change: Analysis Period Amount Base Period Amount Dollar Change =– Percentage Change: Dollar Change Base Period Amount Percent Change = ÷

14-24 Dollar and Percentage Changes

14-25 Trend Percentages Trend analysis is used to reveal patterns in data covering successive periods. Trend Percentages Analysis Period Amount Base Period Amount =

14-26 Trend Percentages Base Year 2010

14-27 Component /Common Sized Percentages Examines the relative size of each item in the financial statements compared to the base amount. Component Percentage Analysis Amount Base Amount = Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues

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