1. Chapter 4 Financial Statements Analysis Tools

2. Outline Demand and supply of financial analysis
Basic analytical procedures
Analysis methods
Comprehensive analysis of financial ratios
The limitations of financial analysis

3. Demand and supply of financial analysis
Investors
Managers
Employees
Customers
auditors
Government/regulatory agencies
Demand
Internal analysts
Intermediaries
Financial analysts
Bond rating agencies
Supply

4. Basic Analytical Procedures
Conclude
Contrive
analysis
scheme
Analyze
data
Determine
objective
Collect

5. Techniques of Financial Statement Analysis
Horizontal analysis
Comparative financial statements are presented side by side
Trend analysis
Vertical analysis
Common-size financial statement
Ratio analysis

6. Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements
Liquidity Analysis
Efficiency Analysis
Leverage Ratios
Coverage Ratios
Profitability Ratios

7. Liquidity Ratios analysis
Current ratio
Current Assets
Current Liabilities
Quick ratio
Current Assets- Inventory
Cash ratio
Cash

8. Activity or Efficiency Ratios Analysis
Fixed Asset Turnover
Sales
Net Fixed Assets
Accounts Receivable Turnover
Accounts Receivable
Average collection period
Accounts receivable turnover
Sales/360
Inventory turnover
Inventory

9. Activity or Efficiency Ratios Analysis
Total Assets Turnover
Sales
Total Assets

10. The Long-Term Debt Ratio LTD to Total Capitalization
Leverage Ratios
Total Debt Ratio
Total Debt
Total Assets
The Long-Term Debt Ratio
Long Term Debt
Total Asset
LTD to Total Capitalization
LTD
LTD + Total Equity

11. Preferred Equity + Common Equity
Leverage Ratios
Debt to Equity Ratio
Total Debt
Total Equity
LTD to Equity Ratio
LTD
Preferred Equity + Common Equity

12. Times Interest Earned Ratio
Coverage Ratios
Times Interest Earned Ratio
EBIT
Interest Expense
Cash Coverage Ratio
EBIT + Non Cash Expenses
Interest Expense

13. Profitability analysis
Gross Profit Margin
Gross Profit
Sales
Operating Profit Margin
Net Operating Income
Net Profit Margin
Net Income

14. Profitability analysis
Return on Total Assets
Net Income
Total Assets
Return on Equity
Total Equity
Return on Common Equity
Net Income Available to Common Equity
Common Equity

15. ROE=Net Margin X Asset Turnover X Leverage Factor
Du Pond Analysis
Net income
Net Sales
ROE=Net Margin X Asset Turnover X Leverage Factor
owner’s equity
Sales
Assets
Owner’s equity

16. Comparing a company’s financial condition and performance across time
Trend Analysis
Comparing a company’s financial condition and performance across time

17. A Compare of Company’s Profitability

18. Why ratio analysis is useful?
They facilitate inter-company comparison;
They downplay the impact of size and allow evaluation over time or across entities without undue concern for the effects of size difference;
They serve as benchmarks for targets such as financing ratios and debt burden;
They help provide an informed basis for making investment-related decisions by comparing an entity’s financial performance to another; ……

19. How is ratio analysis limited?
It is restricted to information reported in the financial statements;
It is based on past performance.
Comparability is hampered when accounting policies are not uniform across an industry;
The past may not predict the future;

20. How is ratio analysis limited? (cont)
Trends and relationships must be carefully evaluated with reference to industry norms, budgets, and strategic decisions;
Because of some potential problems in standard, comparison must be careful;

21. Potential problems and limitations of financial ratio analysis
Comparison with industry averages is difficult for a conglomerate firm that operates in many different divisions.
“Average” performance is not necessarily good, perhaps the firm should aim higher.
Seasonal factors can distort ratios.
“Window dressing” techniques can make statements and ratios look better.

22. More issues regarding ratios
Different operating and accounting practices can distort comparisons.
Sometimes it is hard to tell if a ratio is “good” or “bad”.
Difficult to tell whether a company is, on balance, in strong or weak position.

23. What should an analyst keep in mind about financial analysis?
An overview of all ratios can provide important information concerning the strategic decisions of a company and the nature of its business;
However, accounting information can only provide so much data. An analyst must proceed with caution;

24. Qualitative factors to be considered when evaluating a company’s future financial performance
Are the firm’s revenues tied to 1 key customer, product, or supplier?
What percentage of the firm’s business is generated overseas?
Competition
Future prospects
Legal and regulatory environment

25. Summary
Users of financial statements often gain a clearer picture of the economic condition of an entity by the analysis of accounting information;
The analytical measures obtained from financial statements are usually expressed as ratios or percentages;

26. Summary
Financial analysis techniques work best when they are used to confirm or refute other information. When using analytical tools to evaluate a company, the analyst should keep in mind the limitations of analysis

27. The End of Chapter 4