© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin FINANCIAL STATEMENT ANALYSIS – part 2.

Slides:



Advertisements
Similar presentations
Ratio Analysis Chapter 5 Ratio Analysis - Help for Users n n Is There Sufficient Cash to Meet the Establishment’s Obligations for a Given Time Period?
Advertisements

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.
“How Well Am I Doing?” Financial Statement Analysis
MGT 497 Financial, Trends, Ratios
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Financial Statement Analysis © The McGraw-Hill Companies, Inc., Part One: Financial Accounting.
Analyzing Financial Statements
1 © Copyrright Doug Hillman 2000 Analysis and Interpretation of Financial Statements.
Strategic Management Financial Ratios
Analyzing Financial Statements 9/01/03
MSE608C – Engineering and Financial Cost Analysis
Financial Statement Analysis
Learning Objectives Understand the Business – LO1 Describe the purposes and uses of horizontal, vertical and ratio analyses. Study the accounting methods.
This week its Accounting Theory
Financial Ratio Analysis
Chapter Thirteen Financial Statement Analysis Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
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 CHAPTER.
“How Well Am I Doing?” Financial Statement Analysis
Module 3: Financial Statement Analysis ACG 2071 Fall 2007 Created by M. Mari.
FINANCIAL STATEMENT ANALYSIS UNIT 12 Analysing financial statements involves evaluating three characteristics of a company: 1. its liquidity 2. its profitability.
© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Chapter Thirteen Financial Statement Analysis.
Financial Statement Analysis
Hospitality Financial Management By Robert E. Chatfield and Michael C. Dalbor ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ.
The McGraw-Hill Companies, Inc. 2008McGraw-Hill/Irwin CHAPTER 13 Financial Statement Analysis.
Accounting Principles, Ninth Edition
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 1 Accounting and Business.
Financial Statements Ratio Analysis
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 CHAPTER.
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statement Analysis Chapter 14 McGraw-Hill/Irwin.
FINANCIAL PERFORMANCE ACCOUNTING RATIOS. Accounting Ratio Analysis Information contained in financial statements is of major significant to internal and.
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statement Analysis Chapter 14.
© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Financial & Managerial Accounting The Basis for Business Decisions FOURTEENTH EDITION Williams.
Managerial Accounting Wild and Shaw Third Edition Wild and Shaw Third Edition McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All.
Chapter 18-1 LO 5 Identify and compute ratios used in analyzing a firm’s liquidity, profitability, and solvency. Ratio Analysis Illustration.
McGraw-Hill/Irwin Slide 1 Preliminary Press Releases Releasing Financial Information Quarterly and Annual Reports Securities and Exchange Commission (SEC)
Chapter 9: Financial Statement Analysis
HFT 2403 Financial Statement Analysis & Presentation Chapter 18 Chapter 18.
© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin FINANCIAL STATEMENT ANALYSIS.
1 Chapter 9 Analysis of Financial Statements. 2 VII. Ratio Analysis  Builds on firm's financial statements  Easy to understand  Used by both equity.
Copyright  2006 Pearson Education Canada Inc
Previous Lecture Purpose of Analysis; Financial statement analysis helps users make better decisions Financial Statements Are Designed for Analysis Tools.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Analyzing Financial Statements Chapter 14.
Interested parties  Shareholders - to measure management’s performance  Investors - to make their investment decisions  Management - to plan and control.
HFT 2401 Financial Statement Analysis & Presentation Chapter 18.
© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Financial Statements Analysis and Interpretation.
The Analysis of Financial Statements
Financial Statement Analysis. Limitations of Financial Statement Analysis Differences in accounting methods between companies sometimes make comparisons.
Analyzing Financial Statements Chapter 14 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
©2012 McGraw-Hill Ryerson Limited 1 of 34 Learning Objectives 1.Calculate 13 financial ratios that measure profitability, asset utilization, liquidity.
Analyzing Financial Statements Chapter 13 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
© 2005 Pearson Education Canada Inc. 3-1 Chapter Three Financial Statement Analysis Principles of Corporate Finance Canadian Edition Lawrence J. Gitman.
Chapter Thirteen Financial Statement Analysis McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Analyzing Financial Statements
Ratio Analysis Ratio analysis is a particular type of financial statement analysis where the relationship between two or more items from the financial.
Analyzing Financial Statements
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statement Analysis Chapter 14 McGraw-Hill/Irwin.
Chapter 14 © The McGraw-Hill Companies, Inc., 2007 McGraw-Hill /Irwin “How Well Am I Doing?” Financial Statement Analysis.
Financial Statement Analysis Chapter 9
© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chapter 14 Analyzing Financial Statements.
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Analysis 3.
Chapter Nine Financial Statement Analysis © 2015 McGraw-Hill Education.
Example 16 1 Given income statement Given balance sheet.
“How Well Am I Doing?” Financial Statement Analysis Chapter 17.
Andrew, Damitio, Schmidgall Financial Management for the Hospitality Industry ©2007 Pearson Education, Inc. Upper Saddle River, NJ Chapter 5 Financial.
Book Cover Chapter Thirteen. ©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter Thirteen Financial Statement Analysis.
Financial Statement Analysis
Analysis and Interpretation of Financial Statements
Analysis Example Financial Ratio
Financial statement analysis and interpretation
Chapter 3 Introduction This chapter will provide a review of the major financial statements and selected key ratios used in the industry. Financial statements.
Presentation transcript:

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin FINANCIAL STATEMENT ANALYSIS – part 2

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ratios

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Uses and Limitations of Financial Ratios

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ratio Categories Liquidity Ratio  assess the ability of a company to meet its short term liabilities Solvency Ratio  Measure the ability of a company to meet its long-term liabilities Profitability Ratio  Assess management’s effectiveness in achieving profitability Activity Ratio  Reflects management’s ability in using the assets Operating Ratio  To analyze the operations of a company

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Liquidity Ratio RatiosFormulaUsersComparing StandardsBasic Analysis Current Ratio Current Assets Current Liabilities Creditors Owners Management - Normally 2 : 1 - Hotel 1.5 : 1 and Motel 1 : 1 (less inventory) Creditors prefer higher ratio for safety Owners prefer lower ratio for productivity Management try to satisfy both Acid-Test Ratio (Quick Ratio) (Cash + Receivables + Marketable Securities) Current Liabilities Creditors Owners management Lower than current ratio and most quick ratios are less than 1 : 1 Only consider the assets that can be readily convert to cash. Users’ opinion the same as Current Ratio Receivable Turnover Ratio Revenues Average Receivable Creditors Management Indicate how fast the receivable can be converted into cash Receivable Collection Period 365 Receivable Turnover Ratio Creditors Management Credit Cards less than 10 days Account Receivable from 1 month – 3 months How many days it takes to collect receivables

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Solvency Ratio RatiosFormulaUsersComparing StandardsBasic Analysis Total assets to total liabilities (Solvency Ratio) Total Assets Total Liabilities Creditors2:1 Creditors prefer to see the ratio as high as possible Total liabilities to total assets (Debt Ratio) Total Liabilities Total Assets Creditors Normally <50% Hospitality Industry usually 60% - 90% Creditors prefer lower % for less risk Investors prefer higher % for more profit Total liabilities to total equity (Debt Equity Ratio) Total Liabilities Total Owner’s Equity Creditors Creditors prefer lower one for less risk Investors prefer higher one for more profit Number of interest earned EBIT Interest Expense Creditors Management Owners Greater than 4 All like to see this ratio as high as possible

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Profitability Ratio RatiosFormulaUsersBasic Analysis Profit Margin Net Income / Gross Profit Sales Revenues Creditors Management Owners Indicate management’s ability to generate Sales and control expenses Return on Assets (ROA) Net Income Average Total Assets Mostly Creditors Management Owners Measures the effectiveness of management’s use of the company’s assets Higher is better (>15%) Return on Owner’s Equity (ROE) Net Income Average Owner’s Equity Creditors Management Mostly Owners Measures the effectiveness of management’s use of equity funds Higher is better, usually higher than interest rate Earning per Share (EPS) Net Income Average Common Shares Outstanding Creditors Management Owners Higher is better Price/Earning Ratio (P/E Ratio) Market Price per Share Earning per Share Creditors Management Owners The higher the ratio, the better the investors’ expectation about the company

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Activity Ratio RatiosFormulaUsersComparing StandardsBasic Analysis Inventory Turnover Ratio Cost of Sales Average Inventory Management Food: Turnover from 2 – 4 times a month Beverages: Turnover from 1 – 4 times a month Shows how quickly the inventory is being used. Although high turnover is good, it can be an indication of stockout problems Inventory Holding Period Operating days for the period Inventory turnover for the period Management Food: should be 15 days at most and at least 1 week Beverages: 1 month at most and 1 week at least Fixed Assets Turnover Ratio Sales Revenue Average Fixed Assets Management For hotel, this ratio vary from one half to two or more per year. For food service, usually has a turnover of 4 – 5 times a year if the building is being rented Higher ratio means an effective use of assets

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Operating Ratio RatiosFormulaUsers Comparing Standards Basic Analysis Food (Beverage) cost % Food (Beverage) Cost Food (Beverage) Revenue Management - A standard or a predetermined % The difference should be investigated Average Food (Beverage) Check Food (Beverage) Revenue Number of food covers Management This ratio sometimes are calculated by each menu items. Help to find out the most attractive dishes to guests & decide the menu items Seat Turnover Guest Served Seats Available Management Analyze the trend for further improvement

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Operating Ratio RatiosFormulaUsersBasic Analysis Average Room Rate (Average Daily Rate) ADR Rooms Revenue Rooms Occupied Management Calculate the ratio by each market segment or by each room type. Higher result is better when the occupancy % stay the same Occupancy % Rooms Occupied Total Rooms Management High result is better when the ADR stay the same Revenue per Available Room (REVPAR) Rooms Revenue Total Rooms Management Look at the combined effect of ADR and Occupancy % on the total revenue, an improvement on ADR and Occupancy %

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Restaurant ARestaurant BA%B% Sales Revenue Cost of sales Gross margin Direct Expenses Wages expense Supplies expense Other direct costs Contributory Income Indirect Expenses Rent Expense Insurance expense Other indirect expense Operating Income $ 154,300 60,200 94,100 45,600 12,700 4,500 31,300 6,500 2,000 3,200 $ 19,600 $ 206,100 78, ,200 70,400 16,800 6,100 33,900 9,000 3,000 3,600 $ 18,300 A company owns two restaurants with 100 seats in the same town. Operating results for the first three months of the current year for restaurant A and B are as follows: The owners of the two restaurants are concerned that Restaurant B reports higher sales revenue yet produces a lower operating income than Restaurant Analyze this information by using appropriate tool and comment on the results (what appears to require the attention of the owners?)

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin ANSWER: Restaurant ARestaurant BA%B% Sales Revenue Cost of sales Gross margin Direct Expenses Wages expense Supplies expense Other direct costs Contributory Income Indirect Expenses Rent Expense Insurance expense Other indirect expense Operating Income $ 154,300 60,200 94,100 45,600 12,700 4,500 31,300 6,500 2,000 3,200 $ 19,600 $ 206,100 78, ,200 70,400 16,800 6,100 33,900 9,000 3,000 3,600 $ 18, The difference in Operating Income seems to be the supplies expense. B has 4.51% higher than A. Since both restaurants A&B are in the same town and have the same size, the difference in supplies expense should be evaluated further. The variance might be due to the difference in menu, service style, or supplies.