1. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 19 Financial Statement Analysis

2. 19-2 Purpose Tools Used Statements Ratio Analysis Limitations Overview

3. 19-3 Balance Sheet Common Sized Trend or Indexed Income Statement Common Sized Trend or Indexed Statement of Cash Flows Financial Statements

4. 19-4 Purpose of Ratio Analysis Uses Trend analysis Comparative analysis Combination Use by External Analysts Important information for investment community Important for credit markets Ratio Analysis

5. 19-5 Liquidity Ratios Activity or Mgmt Efficiency Ratios Leverage Ratios Profitability Ratios Market Price Ratios Type of Financial Ratios

6. 19-6 Current Ratio Current Assets Current Liabilities Quick Ratio Current Assets - Inventory Current Liabilities Liquidity Ratios

7. 19-7 Inventory Turnover Sales or Cost of Goods Sold Inventory Total Asset Turnover Sales Total Assets Activity or Management Efficiency Ratios

8. 19-8 Average Collection Period Accounts Receivable Sales Per Day Days to Sell Inventory Inventory Sales Per Day Activity or Management Efficiency Ratios

9. 19-9 Times Interest Earned Earnings Before Int. & Taxes Interest Expense Fixed Charge Coverage Ratios Lease Payments Principal Repayments Preferred Dividends Leverage Ratios

10. 19-10 Debt to Assets Long Term Debt Assets Debt to Equity Long Term Debt Shareholders Equity Leverage Ratios

11. 19-11 Net Profit Margin % Net Income Sales Return on Assets Net Income Total Assets Profitability Ratios

12. 19-12 Return on Equity Net Income Common Equity Operating Margin After Depr. Operating Profit Sales Profitability Ratios

13. 19-13 Price to Earnings Market Price of Stock Earnings Market-to-Book-Value Market Price of Stock Book Value Per Share Market Price Ratios

14. 19-14 ROE = Net Profit Pretax Profit x EBIT x Sales Assets xx Equity (1) x (2) x (3) x (4) x (5) x Margin x Turnover x Leverage Tax Burden Interest Burden Decomposition of ROE x

15. 19-15 Economic Value Added Difference between return on assets (ROA) and the opportunity cost of capital (k) EVA = above difference time the invested capital EVA can be positive or negative for firms that have positive earnings

16. 19-16 Accounting Differences Inventory Valuation Depreciation Inflation International Accounting Conventions Comparability Problems

17. 19-17 International Accounting Differences Reserves – many other countries allow more flexibility in use of reserves. Depreciation – US allows separate tax and reporting presentations. Intangibles – treatment varies widely.