PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin A NALYSIS OF F INANCIAL S TATEMENTS Chapter 17

17- 2 B UILDING B LOCKS OF A NALYSIS C 1 Liquidity and efficiency Solvency Market prospects Profitability

17- 3  Intracompany  Competitors  Industry  Guidelines S TANDARDS FOR C OMPARISON C 1 When we interpret our analysis, it is essential to compare the results we obtained to other standards or benchmarks.

17- 4 Horizontal Analysis Comparing a company’s financial condition and performance across time. T OOLS OF A NALYSIS Vertical Analysis Comparing a company’s financial condition and performance to a base amount. Ratio Analysis Measurement of key relations between financial statement items. C 2

17- 5 H ORIZONTAL A NALYSIS P 1

17- 6 V ERTICAL A NALYSIS Common-Size Statements Common-size Percent Analysis Amount Base Amount 100 = × Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues Financial StatementBase Amount Balance SheetTotal Assets Income StatementRevenues P 2

17- 7 ($1,550,861 ÷ $10,204,409) × 100 = 15.2% ($835,546 ÷ $8,101,372) × 100 = 10.3% C OMMON -S IZE B ALANCE S HEET P 2

17- 8 R ATIO A NALYSIS P 3 Liquidity and efficiency Solvency Market prospects Profitability

17- 9CurrentRatioCurrentRatio Acid-testRatioAcid-testRatio Accounts Receivable Turnover Inventory Turnover Days’ Sales Uncollected Days’ Sales in Inventory Total Asset Turnover L IQUIDITY AND E FFICIENCY P 3

This ratio measures the short-term debt- paying ability of the company. A higher current ratio suggests a strong liquidity position. C URRENT R ATIO Current Ratio = Current Assets Current Liabilities P 3

17- 11DebtRatioDebtRatio EquityRatioEquityRatio Pledged Assets to Secured Liabilities Times Interest Earned S OLVENCY P 3

D EBT - TO -E QUITY R ATIO Debt-to-equity ratio = Total liabilities Total equity This ratio measures what portion of a company’s assets are contributed by creditors. A larger debt-to- equity ratio implies less opportunity to expand through use of debt financing. P 3

17- 13ProfitMarginProfitMargin Return on Total Assets Return on Common Stockholders’ Equity P ROFITABILITY P 3

P ROFIT M ARGIN Profit margin = Net income Net sales This ratio describes a company’s ability to earn net income from each sales dollar. P 3

Price-Earnings Ratio Dividend Yield M ARKET P ROSPECTS P 3

P RICE -E ARNINGS R ATIO Price-earnings ratio = Market price per common share Earnings per share This measure is often used by investors as a general guideline in gauging stock values. Generally, the higher the price-earnings ratio, the more opportunity a company has for growth. P 3

E ND OF C HAPTER 17