…compares each item in a financial statement to a base number set to 100%.
Every item on the financial statement is then reported as a percentage of that base.
% = each financial stmt item base number
Vertical Analysis 2005 % Revenues $38,303 100.0 Cost of sales 19,688 51.4 Gross profit $18,615 48.6 Total operating expenses 13,209 34.5 Operating income $ 5,406 14.1 Other income 2,187 5.7 Income before taxes $ 7,593 19.8 Income taxes 2,827 7.4 Net income $ 4,766 12.4
Vertical Analysis Assets 2005 % Current assets: Cash $ 1,816 4.7 Receivables net 10,438 26.9 Inventories 6,151 15.9 Prepaid expenses 3,526 9.1 Total current assets $21,931 56.6 Plant and equipment, net 6,847 17.7 Other assets 9,997 25.7 Total assets $38,775 100.0
Vertical Analysis Liabilities 2005 % Current liabilities: Accounts Payable $ 2,055 5.3 Other current liab 13,455 34.7 Total current liab 15,510 40.0 Long term liab 10,624 27.4 Total liabilities 26,134 67.4 Owner’s Equity Capital 12,641 32.6 Total Liabilities & OE $38,775 100.0
Measuring ability to sell inventory and collect receivables
Measuring ability to pay short-term and long-term debt
Analyzing stock as an investment
Palisades Furniture Example Net sales ( Year 2005 ) $858,000 Cost of goods sold 513,000 Gross profit $345,000 Total operating expenses 244,000 Operating income $101,000 Interest revenue 4,000 Interest expense (24,000) Income before taxes $ 81,000 Income taxes 33,000 Net income $ 48,000
Palisades Furniture Example Assets 20x5 20x4 Current assets: Cash $ 29,000 $ 32,000 Receivables net 114,000 85,000 Inventories 113,000 111,000 Prepaid expenses 6,000 8,000 Total current assets $262,000 $236,000 Long-term investments 18,000 9,000 Plant and equipment, net 507,000 399,000 Total assets $787,000 $644,000
Palisades Furniture Example Liabilities 20x5 20x4 Current liabilities: Notes payable $ 42,000 $ 27,000 Accounts payable 73,000 68,000 Accrued liabilities 27,000 31,000 Total current liabilities $142,000 $126,000 Long-term debt 289,000 198,000 Total liabilities $431,000 $324,000
Palisades Furniture Example Stockholders’ Equity 20x5 20x4 Common stock, no par $186,000 $186,000 Retained earnings 170,000 134,000 Total stockholders’ equity $356,000 $320,000 Total liabilities and stockholders’ equity $787,000 $644,000
Measuring Ability to Pay Current Liabilities Current ratio = Total current assets ÷ Total current liabilities The current ratio measures the company’s ability to pay current liabilities with current assets.
Measuring Ability to Pay Current Liabilities Acid-test ratio = (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities The acid-test ratio shows the company’s ability to pay all current liabilities if they come due immediately.
The company’s acid-test ratio improved considerably during 20x5.
Measuring Ability to Sell Inventory Inventory turnover = Cost of goods sold ÷ Average inventory Inventory turnover is a measure of the number of times the average level of inventory is sold during a year.
A high number indicates an ability to quickly sell inventory.
Measuring Ability to Collect Receivables Accounts receivable turnover = Net credit sales ÷ Average accounts receivable Accounts receivable turnover measures a company’s ability to collect cash from credit customers.
Palisades’ receivable turnover is much lower than the industry average.
The company is a home-town store that sells to local people who tend to pay their bills over a lengthy period of time.
Measuring Ability to Collect Receivables One day’s sales = Net sales ÷ 365 days Days’ sales in Accounts Receivable = Average net Accounts Receivable ÷ One day’s sales Days’ sales in receivable ratio measures how many day’s sales remain in Accounts Receivable.
Palisades Furniture expanded operations during 20x5 by financing through borrowing.
Measuring Ability to Pay Debt Times-interest-earned = Income from operations ÷ Interest expense Times-interest-earned ratio measures the number of times operating income can cover interest expense.
Palisades’ rate of return on total assets for 20x5:
The industry average is 0.078.
How does Palisades compare to the industry?
Measuring Profitability Rate of return on common stockholders’ equity = (Net income – preferred dividends) ÷ Average common stockholders’ equity Common equity includes additional paid-in capital on common stock and retained earnings.
Price/earning ratio is the ratio of market price per share to earnings per share.
Given Palisades Furniture’s 20x5 P/E ratio of ____, we would say that the company’s stock is selling at ____ times earnings.
Analyzing Stock as an Investment Dividend per share of common (or preferred) stock ÷ Market price per share of common (or preferred) stock Dividend yield shows the percentage of a stock’s market value returned as dividends to stockholders each period.