Post on 24-Dec-2015
Horizontal and Percentage Analysis
Horizontal analysis (or trend analysis) refers to studying the behavior of
individual financial statement items over several accounting periods.
Absolute Amounts
Percentage Analysis
9-3
Vertical Analysis
Vertical analysis uses percentages to compare
individual components of financial statements to a key statement figure. A common-size financial statement is a vertical analysis in which
each financial statement item is expressed as a
percentage. 9-5
Ratio Analysis
Ratio analysis involves studying
various relationships
between different items reported in a
set of financial statements.
9-8
Liquidity Ratios
Liquidity ratios indicate a company’s ability to pay short-
term debts. They focus on current assets and current
liabilities.
1. Working Capital
2. Current Ratio
3. Quick Ratio
4. Accounts Receivable Ratios
5. Inventory Ratios
9-9
Solvency Ratios
Solvency ratios are used to analyze a company’s long-term debt-
paying ability and its financing structure.
1. Debt to Assets Ratio
2. Debt to Equity Ratio
3. Number of Times Interest Earned
4. Plant Assets to Long-Term Liabilities
9-10
Profitability Ratios
Profitability ratios measure a company’s ability to generate
earnings.
1. Net Margin (or Return on Sales)
2. Asset Turnover Ratio
3. Return on Investment
4. Return on Equity
9-11
Stock Market Ratios
Stock market ratios analyze the earnings and dividends of a
company.
1. Earnings Per Share
2. Book Value
3. Price-Earnings (PE) Ratio
4. Dividend Yield
9-12
Earnings Per Share
Earnings per
Share
Net Earnings Available for Common Stock Average Number of Outstanding Common
Shares
=
This measure indicates how muchincome was earned for each share of
common stock outstanding.
9-13
Earnings Per Share
$25,000 (net income) - $3,000 (preferred dividend) = $1.60 per share(15,000 + 12,500)/2 (average outstanding common shares)
9-14
Book Value Per Share
This ratio measures the amount that would be distributed to holders of each share of common
stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.
Book Value per Share
Stockholders’ Equity - Preferred Dividends Outstanding Common Shares=
9-15
Price-Earnings Ratio
Price-EarningsRatio
Market Price Per Share
Earnings Per Share=
This ratio compares the earnings of a company to the market price for a share
of the company’s stock.
9-17
Dividend Yield
DividendYield
Dividends Per ShareMarket Price Per Share=
This ratio identifies the return, in terms of cash dividends, on the current
market price of the stock.
9-18
Limitations of Financial Statement Analysis
Different Industries
Changing Economic
Environment
Accounting Principles
9-19