Different Comparisons Financial performance analysis allows us to make several comparisons Year-to-Year. – Use Horizontal Analysis vs. a Competing Company. – Use Vertical Analysis with the industry or other companies in the industry. – Use Ratio Analysis ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-1

Horizontal Analysis Defined: The study of percentage changes in comparative financial statements. Defined: The study of percentage changes in comparative financial statements. Requires two steps: Requires two steps: 1.Compute the $-amount of the change from the earlier period to the later period. 2.Divide the $-amount of change by the earlier period amount (base period). ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-2

Horizontal Analysis Assume Smart Touch Learning has net sales in 2016 of $858,000 and $803,000 in Prepare the horizontal analysis: ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-3 Step  Step 

©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-4

Trend Analysis Defined: A special form of horizontal analysis that looks at how ratios change over time. Defined: A special form of horizontal analysis that looks at how ratios change over time. Requires two steps: Requires two steps: 1.Identify a base period amount. 2.All subsequent amounts are stated as a % of the base period amount. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-5

Trend Analysis Smart Touch Learning’s Net Sales were $750,000 for 2012 and rose to $858,000 in An assessment of the increase in sales, as a percentage of 2012 sales can show whether sales are moving in the desire direction. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-6

Vertical Analysis Defined: shows the percentage relationship of each item in the financial statement to its base amount. Defined: shows the percentage relationship of each item in the financial statement to its base amount. Requires two steps: Requires two steps: 1.Identify the base amount on the statement. 2.Divide all other amounts in the statement by the base amount. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-7

©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-8 Use Net Sales as the base amount.

©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-9

Common-Size Statements Defined: Compares companies by looking only at the vertical analysis percentages for each company. Defined: Compares companies by looking only at the vertical analysis percentages for each company. Requires two steps: Requires two steps: 1.Identify two companies for comparison. 2.Compute the vertical analysis percentages for each company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-10

©2014 Pearson Education, Inc. Publishing as Prentice Hall Common- size statements allow comparison of different sized companies.

Ratios Analysis Ratios you can use to compare your company to other companies. Standards are created within industries and by independent analysts. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-12

Working Capital Measures the ability to meet short-term obligations with current assets. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-13

Current Ratio Measures a company’s ability to pay its current liabilities with its current assets. ©2014 Pearson Education, Inc. Publishing as Prentice Hall current ratio

Acid-test or Quick Ratio Measures whether a company can pay all its current liabilities if they came due immediately. ©2014 Pearson Education, Inc. Publishing as Prentice Hall NO INVENTORY OR PREPAIDS!

Inventory Turnover Measures the number of times a company sells its average level of merchandise inventory during a year. ©2014 Pearson Education, Inc. Publishing as Prentice Hall (Beginning Inventory + Ending Inventory) ÷ 2 Inventory Turnover

Days’ Sales in Inventory Measures the average number of days merchandise inventory is held by the company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-17

Gross Profit Percentage Measures the profitability of each net sales dollar above the cost of goods sold. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-18

Accounts Receivable Turnover Ratio Measures the number of times the company collects the average receivables balance in a year. ©2014 Pearson Education, Inc. Publishing as Prentice Hall (Beginning A/R + Ending A/R) ÷ 2

Days’ Sales in Receivables Indicates how many days it takes to collect the average level of receivables. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-20

Debt Ratio Shows the proportion of assets financed with debt and is calculated by dividing total liabilities by total assets. ©2014 Pearson Education, Inc. Publishing as Prentice Hall 15-21

Rate of Return on Common Stockholders’ Equity Shows the relationship between net income available to common stockholders and their average common equity invested in the company. ©2014 Pearson Education, Inc. Publishing as Prentice Hall ROE