Different Comparisons Financial performance analysis allows us to make several comparisons...

Different Comparisons

Financial performance analysis allows us to make several comparisons•Year-to-Year.

– Use Horizontal AnalysisUse Horizontal Analysis•vs. a Competing Company.

– Use Vertical AnalysisUse Vertical Analysis•with the industry or other companies in the industry.

– Use Ratio AnalysisUse Ratio Analysis

©2014 Pearson Education, Inc. Publishing as Prentice Hall

15-1

Horizontal Analysis

• Defined: Defined: The study of percentage changes in The study of percentage changes in comparative financial statements.comparative financial statements.

• Requires two steps:Requires two steps:1.1. Compute the $-amount of the change from the Compute the $-amount of the change from the

earlier period to the later period.earlier period to the later period.2.2. Divide the $-amount of change by the earlier Divide the $-amount of change by the earlier

period amount (base period).period amount (base period).


15-2

Horizontal Analysis

Assume Smart Touch Learning has net sales in Assume Smart Touch Learning has net sales in 2016 of $858,000 and $803,000 in 2015. 2016 of $858,000 and $803,000 in 2015.

Prepare the horizontal analysis:Prepare the horizontal analysis:


15-3

Step Step

2016 2015 Amount PercentageNet Sales 858,000$ 803,000$ 55,000$ 6.8%Cost of Goods Sold 513,000 509,000 4,000 0.8%Gross Profit 345,000 294,000 51,000 17.3%Operating Expenses: Selling Expenses 126,000 114,000 12,000 10.5% Administrative Expenses 118,000 123,000 (5,000) -4.1% Total Expenses 244,000 237,000 7,000 3.0%Operating Income 101,000 57,000 44,000 77.2%Other Revenues and Expenses Interest Revenue 4,000 - 4,000 - Interest Expense 24,000 14,000 10,000 71.4% Total Other Revenue & Expenses (20,000) (14,000) (6,000) 42.9%Income Before Income Taxes 81,000 43,000 38,000 88.4%Income Tax Expense 33,000 17,000 16,000 94.1%Net Income 48,000$ 26,000$ 22,000$ 84.6%

Increase (Decrease)

SMART TOUCH LEARNINGIncome Statement

Years Ended December 31, 2015 and 2016


15-4

Trend Analysis

• Defined: Defined: A special form of horizontal A special form of horizontal analysis that looks at how ratios change over analysis that looks at how ratios change over time.time.

• Requires two steps:Requires two steps:1.1. Identify a base period amount.Identify a base period amount.2.2. All subsequent amounts are stated as a % of All subsequent amounts are stated as a % of

the base period amount.the base period amount.


15-5

Trend Analysis

Smart Touch Learning’s Net Sales were Smart Touch Learning’s Net Sales were $750,000 for 2012 and rose to $858,000 in $750,000 for 2012 and rose to $858,000 in

2016. 2016.

An assessment of the increase in sales, as a An assessment of the increase in sales, as a percentage of 2012 sales can show whether sales are percentage of 2012 sales can show whether sales are

moving in the desire direction.moving in the desire direction.©2014 Pearson Education, Inc.

Publishing as Prentice Hall15-6

2016 2015 2014 2013 2012Net Sales $858,000 $803,000 $780,000 $748,000 $750,000Trend Percentages 114% 107% 104% 99.7% 100%

Vertical Analysis

• Defined: Defined: shows the percentage relationship shows the percentage relationship of each item in the financial statement to its of each item in the financial statement to its base amount.base amount.

• Requires two steps:Requires two steps:1.1. Identify the base amount on the statement. Identify the base amount on the statement. 2.2. Divide all other amounts in the statement by Divide all other amounts in the statement by

the base amount.the base amount.


15-7

2016Percent of

Total 2015Percent of

TotalNet Sales 858,000$ ? 803,000$ ?Cost of Goods Sold 513,000 ? 509,000 ?Gross Profit 345,000 ? 294,000 ?Operating Expenses: Selling Expenses 126,000 ? 114,000 ? Administrative Expenses 118,000 ? 123,000 ? Total Expenses 244,000 ? 237,000 ?Operating Income 101,000 ? 57,000 ?Other Revenues and Expenses Interest Revenue 4,000 ? - ? Interest Expense (24,000) ? (14,000) ? Total Other Revenue & Expenses (20,000) ? (14,000) ?Income Before Income Taxes 81,000 ? 43,000 ?Income Tax Expense 33,000 ? 17,000 ?Net Income 48,000$ ? 26,000$ ?




15-8

Use Net Sales as the base Use Net Sales as the base amount.amount.

2016Percent of

Total 2015Percent of

TotalNet Sales 858,000$ 100.0% 803,000$ 100.0%Cost of Goods Sold 513,000 59.8% 509,000 63.4%Gross Profit 345,000 40.2% 294,000 36.6%Operating Expenses: Selling Expenses 126,000 14.7% 114,000 14.2% Administrative Expenses 118,000 13.8% 123,000 15.3% Total Expenses 244,000 28.4% 237,000 29.5%Operating Income 101,000 11.8% 57,000 7.1%Other Revenues and Expenses Interest Revenue 4,000 0.5% - 0.0% Interest Expense (24,000) -2.8% (14,000) -1.7% Total Other Revenue & Expenses (20,000) -2.3% (14,000) -1.7%Income Before Income Taxes 81,000 9.4% 43,000 5.4%Income Tax Expense 33,000 3.8% 17,000 2.1%Net Income 48,000$ 5.6% 26,000$ 3.2%




15-9

Common-Size Statements

• Defined: Defined: Compares companies by looking Compares companies by looking only at the vertical analysis percentages for only at the vertical analysis percentages for each company.each company.

• Requires two steps:Requires two steps:1.1. Identify two companies for comparison. Identify two companies for comparison. 2.2. Compute the vertical analysis percentages for Compute the vertical analysis percentages for

each company.each company.


15-10


15-11

Common-size

statements allow

comparison of different

sized companies.

Ratios Analysis

• Ratios you can use to compare your company to other companies. Standards are created within industries and by independent analysts.


15-12

Working Capital

Measures the ability to meet short-term Measures the ability to meet short-term obligations with current assets.obligations with current assets.


15-13

Current Ratio

Measures a company’s ability to pay its current Measures a company’s ability to pay its current liabilities with its current assets.liabilities with its current assets.


15-14

current ratio

http://www.investopedia.com/video/play/current-ratio/

Acid-test or Quick Ratio

Measures whether a company can pay all its Measures whether a company can pay all its current liabilities if they came due current liabilities if they came due

immediately.immediately.


15-15

NO INVENTORY OR PREPAIDS!

Inventory Turnover

Measures the number of times a company sells Measures the number of times a company sells its average level of merchandise inventory its average level of merchandise inventory

during a year.during a year.


15-16

(Beginning Inventory + Ending Inventory) ÷ 2

Inventory Turnover

http://www.investopedia.com/video/play/reading-inventory-turnover/

Days’ Sales in Inventory

Measures the average number of days Measures the average number of days merchandise inventory is held by the company.merchandise inventory is held by the company.


15-17

Gross Profit Percentage

Measures the profitability of each net sales Measures the profitability of each net sales dollar above the cost of goods sold.dollar above the cost of goods sold.


15-18

Accounts Receivable Turnover Ratio

Measures the number of times the company Measures the number of times the company collects the average receivables balance in a collects the average receivables balance in a

year.year.


15-19

(Beginning A/R + Ending A/R) ÷ 2

Days’ Sales in Receivables

Indicates how many days it takes to collect the Indicates how many days it takes to collect the average level of receivables.average level of receivables.


15-20

Debt Ratio

Shows the proportion of assets financed with Shows the proportion of assets financed with debt and is calculated by dividing total debt and is calculated by dividing total

liabilities by total assets.liabilities by total assets.


15-21

Rate of Return on Common Stockholders’ Equity

Shows the relationship between net income Shows the relationship between net income available to common stockholders and their available to common stockholders and their

average common equity invested in the average common equity invested in the company.company.


15-22

ROE

http://www.investopedia.com/video/play/return-on-equity/

Different Comparisons Financial performance analysis allows us to make several comparisons...

Documents

Transcript of Different Comparisons Financial performance analysis allows us to make several comparisons...