Ch.13 Financial Statement Analysis. Stockholders Financial Statement Analysis Creditors Will I be...
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Transcript of Ch.13 Financial Statement Analysis. Stockholders Financial Statement Analysis Creditors Will I be...
F/S Analysis Requires Proper Comparisons Over time for the same company
Trend/horizontal analysis With other companies in the same industry
Ratio analysis With industry average
Trend Analysis
Return on Average Equity2004 2003 2002 2001 2000
24.7% 26.7% 28.7% 30.1% 29.0%
Wm. Wrigley Jr. Company
Tracking items over a series of years
Working Capital
Excess of current assets over current liabilities Lacks meaningful comparisons for companies
of different size
–
Current Ratio
Measure of short-term financial health Consider composition of current assets
Rule of thumb2:1
Acid-Test (Quick) Ratio
Stricter test of ability to pay debts Excludes inventories and prepaid assets
Quick AssetsCurrent Liabilities
Cash Flow from Operations to Current Liabilities
Focuses on cash only Can be used to indicate the flow
of cash during the year to cover the debts due
Net Cash Provided by Operating ActivitiesAverage Current Liabilities
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Accounts Receivable Turnover Ratio
Net Credit SalesAverage Accounts Receivable
Indicates how quickly a company is collecting (i.e., turning over) its receivables
Number of Days’ Sales in Receivables
Represents the average number of days an account is outstanding
Number of Days in the PeriodAccounts Receivable Turnover
Inventory Turnover Ratio
Represents the number of times per period inventory is turned over (i.e., sold).
Cost of Goods SoldAverage Inventory
Number of Days’ Sales in Inventory
Represents the average number of days inventory is on hand before it’s sold
Number of Days in the PeriodInventory Turnover
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
Cash Operating Cycle
Time between the purchase of merchandise and the collection of the from the sale
Number of Days’ Sales in Inventory +
Number of Days’ Sales in Receivables
Part II: Solvency Analysis
Ability to stay in business over the long-term. That is, the ability to pay all the liabilities
LO5
Debt-to-Equity Ratio
Total Liabilities Total Assets = .60
60% of the company’s assets were borrowed,
and only 40% were provided by owners.
Times Interest Earned
Measures ability to meet current interest payments
The greater the coverage the better
Net Income + Interest Expense + Income Tax ExpenseInterest Expense
Part III: Profitability Analysis Rate of Return on Assets Return on Common Stockholders’ Equity Earnings per Share Price/Earnings Ratio Dividend Ratios
LO6
Return on Assets Ratio
Measures return to all providers of capital (creditors and owners)
Net Income + Interest Expense, Net of TaxAverage Total Assets
Return on Common Stockholders’ Equity
Net Income – Preferred DividendsAverage Common Stockholders’ Equity
The owners earned 15%on their investment
in ABC Co... Not bad!
Earnings per Share
Presents profits on a per-share basis
Net Income – Preferred DividendsWeighted Average Number of Common Shares Outstanding
Certificate of Stock
Price/Earnings Ratio
Relates earnings to the market price of the stock
Current Market PriceEarnings per Share
very high P/Every low P/E
possibly overpricedpossibly underpriced
Price/Earnings Ratio
Both companies have earnings of $2 per share. So why the different P/E
ratios?
P/E Ratios
Co. A = 10 to 1Co. B = 7 to 1
Dividend Payout Ratio
Common Dividends per ShareEarnings per Share
We need to decide what
percentage of the firm’s income we
can return to owners
LIFO FIFO
Limitations of Financial Statement Analysis
Use of different accounting methods Changes in accounting methods
LO1
Limitations of Financial Statement Analysis
Difficulty of making industry comparisons (i.e., conglomerates)
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