1. “How Well Am I Doing?” Financial Statement Analysis
Chapter 16
“How Well Am I Doing?” Financial Statement Analysis

2. Objectives Objectives differ for investors and creditors
Investors - concerned with profitability, dividends and future stock prices
Creditors - concerned with liquidity and solvency
Short-term creditors - also concerned with short-term liquidity and solvency
Risks are evaluated

3. Financial Statement Analysis
Trend Analysis
Horizontal Analysis
Trend percentages
Vertical Analysis
Percentages
Common-size statements
Ratio Analysis

4. Horizontal Analysis Compare year to year Actual dollar change
Percentage change: Actual dollar change
Base year
Trend Analysis: Annual amount
Compare percentage changes and trend analyses to industry averages

5. Vertical Analysis Compare figures within the same year
Income statement - all items divided by net sales: Cost of goods sold/Net sales, Operating expenses/Net sales, Net income/Net sales, etc.
Balance sheet - all items divided by total assets: Cash/Total assets, Accounts payable/total assets, etc.

6. Vertical Analysis Common-size statements
Balance sheet:
Only percentages shown.
All items divided by total assets to get percentages
Income Statement:
Only percentages shown
All items divided by net sales to get percentages
Benchmark - compare figures to key competitors
Compare to industry averages

7. Industry Averages Ratios and trend percentages will vary by industry
Check a particular company’s ratios to the industry averages
Sources: EDGAR, Almanac of Business and Industrial Financial Ratios, AMA Annual Statement Studies, FreeEdgar, Hoover’s Online, Industry Norms & Key Business Ratios, Mergent Industrial Manual and Mergent Bank and Finance Manual, Standard & Poor’s Industry Survey, YahooFinance.com

8. Ratio Analysis
Categories depend on who is analyzing financial statements
Common Stockholders
Short-term Creditors
Long-term Creditors

9. Common Stockholders Earnings per share (Basic and diluted)
Price/earnings ratio (Market price/EPS)
Dividend payout (Divs. Per share/EPS)
Dividend yield (Divs. per share/Mkt price)
Return on total assets (Net income + interest expense x (1-tax rate)/Avrg.assets)
Return on stockholders’ equity (Net income - pref. divs./Average common S/E
Book value per share

10. Financial Leverage
Acquiring assets with funds that have been obtained from creditors or from preferred stockholders at a fixed rate of return.
Positive financial leverage: ROE > ROA
Negative financial leverage: ROE < ROA

11. Short-term Creditors Working capital (CA-CL) Current ratio(CA/CL)
Acid-test (quick) ratio (Quick assets/CL)
Accounts receivable turnover (Credit sales/Average receivables)
Inventory turnover (COGS/Avg. Inventory)

12. Long-term Creditors
Times-interest earned (Operating income/interest expense)
Debt-to-equity ratio (Total liabs/total assets)