1. Financial Statement Analysis
Vertical and horizontal analysis
Ratio analysis

2. Percentage Change Analysis
Vertical
Horizontal
Common-size statements
One set of statements needed
Each item is a:
% of main source of revenue
% of total assets
% of total liabilities & stockholder’s equity (equities)
Easier to compare large and small companies
Trend analysis
Two sets of statements needed
Change in balance between periods for each item compared to last period’s balance
Can’t prepare if last period’s balance is zero

3. Ratio Analysis
Profitability, stock market, liquidity and solvency

4. Analysis concerning debt-paying ability
Liquidity-short-term debt paying ability
Solvency-long-term debt paying ability
Current ratio-# of dollars of current assets compared to 1 dollar of current liabilities
Quick ratio-acid test – worst case scenario if can’t sell inventory, can current bills still be paid
Accounts receivable turnover –how many times in an accounting period is AR collected (or # of days)
Inventory turnover-how many times in an accounting period is inventory sold off (or # of days)
Debt to assets- What % of assets are financed by debt
Debt to (stockholder’s) equity- if 100% (or 1 to 1), means equal debt and equity financing
Times interest earned- How does interest expense compare to profits (EBIT)?

5. Profits and commonly quoted ratios
Profitability ratios
Stock market ratios
Net margin (return on sales) ROS –for each sales dollar, how many cents does the business keep?
Asset turnover –amount of sales revenue generated from average assets
Return on Assets (or investments) ROA, ROI – how efficiently are assets being used to generate profits
Return on equity ROE - Profitability of the stockholder’s investment
Earnings per share EPS – profits available to common stockholders per share of common stock outstanding
Book value per share – (historical cost assets –liabilities) divided by shares of common stock outstanding
Price-Earnings PE – how does selling price of stock compare to EPS (future versus past)?
Dividend Yield – what % return is the investor making on the current market price of the stock?