1. Financial Statement Analysis
Chapter 13
Financial Statement Analysis

2. Overview
Purpose
Tools Used
Limitations

3. Financial Statements Balance Sheet Income Statement
Statement of Cash Flows

4. Ratio Analysis
Purpose of Ratio Analysis
Uses
Use by External Analysts

5. Type of Financial Ratios
Liquidity Ratios
Activity or Mgmt Efficiency Ratios
Leverage Ratios
Profitability Ratios
Market Price Ratios

6. Liquidity Ratios
Current Ratio
Quick Ratio

7. Activity or Management Efficiency Ratios
Inventory Turnover
Asset Turnover

8. Activity or Management Efficiency Ratios
Average Collection Period
Days to Sell Inventory

9. Leverage Ratios
Times Interest Earned
Fixed Charge Coverage Ratios

10. Leverage Ratios
Debt to Assets
Debt to Equity

11. Profitability Ratios
Net Profit Margin %
Return on Assets

12. Profitability Ratios Return on Equity
Operating Margin After Depreciation

13. Market Price Ratios
Price to Earnings
Book Value Per Share

14. Decomposition of ROE (1) x (2) x (3) x (4) x (5) ROE = Net Profit
Pretax Profit
Pretax Profit
EBIT
EBIT
Sales
Sales
Assets
Assets
Equity
ROE = x x x
(1) x (2) x (3) x (4) x (5)
Tax
Burden
Interest
Burden x
x Margin x Turnover x Leverage

15. Economic Value Added
Approach to compare accounting profitability with the cost of capital
Definition
Ties accounting to return by investors

16. Comparability Problems
Accounting Differences
Inflation
International Accounting Conventions

17. Quality of Earnings: Areas of Accounting Choices
Allowance for bad debts
Non-securing items
Reserves management
Stock options
Revenue recognition
Off-balance sheet assets and liabilities