1. The Financial Statements
ANALYZING A COMPANY
The Financial Statements

2. SIZE
TOTAL ASSETS
TOTAL SALES/REVENUES
NET INCOME

3. LIQUIDITY
WORKING CAPITAL
CURRENT RATIO
QUICK RATIO

4. WORKING CAPITAL Current assets - current liabilities Larger the better
Can only be a positive number
C/A 40,000,000
C/L -20,000,000
W/C 20,000,000

5. CURRENT RATIO CURRENT ASSETS CURRENT LIABILITIES LESS THAN 1:1 IS BAD
MORE THAN 2:1 IS GOOD
40,000, ?
20,000,000

6. QUICK RATIO
SAME AS CURRENT RATIO BUT EXCLUDES INVENTORY FROM CURRENT ASSETS

7. HOW MUCH HAS COMPANY BORROWED RELATIVE TO ITS EQUITY?
LEVERAGE
HOW MUCH HAS COMPANY BORROWED RELATIVE TO ITS EQUITY?

8. LEVERAGE RATIOS
DEBT-TO-EQUITY RATIO
DEBT-TO-ASSETS RATIO

9. DEBT-TO-EQUITY RATIO
TOTAL LIABILITIES/EQUITY
1.0 TO 2.0 NORMAL
>2.0 NOT SAFE

10. DEBT-TO-ASSETS RATIO TOTAL LIABILITIES/ASSETS 50% TO 66% NORMAL
>66% NOT SAFE

11. WHY BORROW AT ALL?!
To Increase Profits!!

12. NO LEVERAGE Assume Assets = $10,000,000
Assume 10% Return on Assets ($1,000,000)
Assume Liabilities = $0
Return on equity = ??
1,000, %
10,000,000

13. BORROW HALF OF CAPITAL Assume Assets = $10,000,000
Assume 10% Return on Assets ($1,000,000)
Assume 7% = $5,000,000
Assume Equity = $5,000,000

14. BORROW HALF OF CAPITAL Interest expense = $350,000
Income before interest $1,000,000
Less: Interest expense ,000
Net Income $ 650,000
Return on equity = ??
650, %
5,000,000

15. BORROW 80% OF CAPITAL Assume Assets = $10,000,000
Assume 10% Return on Assets ($1,000,000)
Assume 7% = $8,000,000
Assume Equity = $2,000,000

16. BORROW 80% OF CAPITAL Interest expense = $560,000
Income before interest $1,000,000
Less: Interest expense ,000
Net Income $ 440,000
Return on equity = ??
440, %
2,000,000

17. PROFITABILITY
Net Income (Loss)
Earnings per Share
Return on Equity
Return on Assets