1 Financial Statement Analysis 1. Short-Term Solvency 2. Activity 3. Financial Leverage 4. Profitability 5. Value

2 1. Short-Term Solvency Current Ratio Current Ratio Quick Ratio Quick Ratio

3 2. Activity Total Asset Turnover Total Asset Turnover Receivables Turnover Receivables Turnover Inventory Turnover Inventory Turnover a. A large increase in the ratio of days in inventory: a. A large increase in the ratio of days in inventory: high inventory of unsold goods or high inventory of unsold goods or a change in the firm’s product mix, etc. a change in the firm’s product mix, etc. b. The method of inventory valuation can b. The method of inventory valuation can materially affect the computed inventory ratios. materially affect the computed inventory ratios.

4 Operating Cycle = Accounts Receivable Turnover in Days + Inventory Turnover in Days Operating Cycle = Accounts Receivable Turnover in Days + Inventory Turnover in Days Operating Cycle Operating Cycle The inventory turnover in days is understated, and the liquidity of the inventory overstated, if the company uses LIFO inventory. The inventory turnover in days is understated, and the liquidity of the inventory overstated, if the company uses LIFO inventory.

5 The Operating Cycle of Merchandising Concerns

6 進貨 銷貨 收現 進貨 銷貨 收現 平均銷售天數 平均收現天數 平均銷售天數 平均收現天數 營 業 週 期 營 業 週 期 進貨 付現 收現 進貨 付現 收現 平均付款天數 現金週期 平均付款天數 現金週期

7 3. Financial Leverage Debt Ratio Debt Ratio Interest Coverage Interest Coverage a. Interest is an obstacle that a firm must a. Interest is an obstacle that a firm must surmount if it is to avoid default. surmount if it is to avoid default. b. “The standard deviation of cash flows b. “The standard deviation of cash flows relative to the average cash flow” proxies relative to the average cash flow” proxies for the uncertainty of future cash flows. for the uncertainty of future cash flows.

8 4. Profitability Two problems: current profits could be a poor Two problems: current profits could be a poor reflection of true future profitability; ignoring risk. reflection of true future profitability; ignoring risk. Profit Margin: not direct measures of profitability. Profit Margin: not direct measures of profitability. Return on Assets Return on Assets Return on Equity: the most important difference between ROA and ROE is due to financial leverage. Financial leverage not always magnifies ROE. Return on Equity: the most important difference between ROA and ROE is due to financial leverage. Financial leverage not always magnifies ROE. Payout Ratio: dividend per share/earnings per share Payout Ratio: dividend per share/earnings per share

9 Du Pont Equation ROE =Net Income/Average Stockholders’ Equity =(Net Income/Total Operating Revenue) * (Total Operating Revenue/Average Total Assets) * (Average Total Assets/Average Stockholders’ Equity) =Profit Margin (Net) * Total Asset Turnover * Equity Multiplier

10 5. Market Value Ratios Market Price Market Price Price-to- Earnings (P/E) Ratio Price-to- Earnings (P/E) Ratio Dividend Yield Dividend Yield Market-to-Book (M/B) Value and Tobin’s Q: Firms with high Q ratios tend to be those firms with attractive investment opportunities or a significant competitive advantage. Market-to-Book (M/B) Value and Tobin’s Q: Firms with high Q ratios tend to be those firms with attractive investment opportunities or a significant competitive advantage.

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