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  • 1. Financial Statement Analysis Donald S. Appleby Adjunct Assistant Professor Dept. of Electrical and Computer Engineering The University of Alabama at Birmingham © Donald S. Appleby, 2010. All rights reserved.
  • 2. Ratio Analysis
    • Used to evaluate performance.
      • Trend analysis
      • Comparative analysis
    • Derived from financial statements.
    • Simple to calculate.
    • Not always simple to interpret.
  • 3. Ratio Categories
    • Liquidity.
      • Ability to meet short-term obligations
      • Management of working capital
    • Financial Strength.
      • Risk
      • Leverage
    • Operating Performance.
      • Profitability
      • Asset management
  • 4. Liquidity
    • Current Ratio
    • Quick Ratio
    • Days Sales Outstanding
    • Receivables Turnover
    • Inventory Turnover
    • Days Inventory
    • Operating Cycle
    • Accounts Payable Turnover
    • Days Payable
  • 5. Current Ratio
    • Current Assets / Current Liabilities
    • <1.0 suggests liquidity problems
  • 6. Quick Ratio
    • Also called the “acid test” ratio
    • Same as current ratio except that it excludes inventory because inventory is not as easy to liquidate
  • 7. Financial Strength
    • Debt to Total Assets
    • Equity to Total Assets
    • Debt to Capitalization
    • Debt to Equity
  • 8. Operating Performance
    • Profit Margin
    • Gross Margin
    • Asset Turnover
    • Return on Assets (ROA)
    • Return on Equity (ROE)
    • Earnings per Share (EPS)
    • Price/Earnings Ratio (P/E)
    • Payout Ratio
    • Times Interest Earned
  • 9. DuPont Formula
    • ROE = ROS x ATO x LF
      • ROE = net income / total equity
      • ROS = net income / total sales
      • ATO = total sales / total assets
      • LF = total assets / total equity
    • ROE = ROA x LF
      • Because ROA = ROS x ATO
  • 10. FRICTO Analysis
    • Flexibility – To what extent will a decision to increase debt restrict the firm’s flexibility? Will it violate existing loan covenants (or place the firm at risk of violating loan covenants) as a result of poor performance?
    • Risk – What is the financial risk of this decision? Can the firm meet interest and principal payments, even if earnings and cash flow targets are not achieved?
    • Income – How will various financing alternatives affect ROE and EPS?
    • Control – How will the sale of additional stock affect ownership / control of the firm? What are the risks?
    • Timing – Based on interest rates and trends, is this a good time to borrow? Based on current stock price, is this a good time to issue stock? How soon will the funds be needed?
    • Other – What other considerations should be factored into this decision? Owners’ attitudes regarding debt? Firm’s bond rating?

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