Analyzing Financial Statements <ul><li>Balance Sheet </li></ul><ul><ul><li>The financial  condition  of the company on a c...
Types of Financial Ratios <ul><li>Liquidity </li></ul><ul><ul><li>Measures a firms ability to meet it near-term obligation...
Liquidity Ratios <ul><li>Liquidity measures the financial strength of an organization and it’s ability to pay it’s debts. ...
Liquidity Ratios <ul><li>Current Ratio </li></ul><ul><ul><li>Current Ratio =  Current Assets </li></ul></ul><ul><ul><li>  ...
Working Capital Ratios <ul><li>Measures how effectively a company utilizes it’s assets to generate profits </li></ul><ul><...
Inventory <ul><li>Inventory Turnover </li></ul><ul><li>Inventory Turnover =  COGS </li></ul><ul><li>  Average Inventory </...
Accounts Receivable <ul><li>Accounts Receivable Turnover </li></ul><ul><li>Accounts Receivable Turnover =  Annual Credit S...
Accounts Payable <ul><li>Accounts Payable Payment Period </li></ul><ul><li>Accounts Payable Payment Period =  Average Acco...
Assets <ul><li>Fixed Asset Turnover </li></ul><ul><li>Fixed Asset Turnover =  Sales Revenue </li></ul><ul><li>  Average Fi...
Capital Structure Ratios <ul><li>Provide indications on how a firms is financing it’s investments in assets. </li></ul><ul...
Total Debt <ul><li>Total Debt to Owners’ Equity </li></ul><ul><li>Total Debt to Owners’ Equity =  Total Debt </li></ul><ul...
Long-term Debt <ul><li>Long-term Debt to Total Capitalization </li></ul><ul><li>Long-term Debt to Total Capitalization =  ...
Interest Expense <ul><li>Times Interest Earned </li></ul><ul><li>Times Interest Earned Ratio =  Earnings Before Interest a...
Profitability Ratios <ul><li>Used to measure if a company is generating sufficient returns on it’s investments. </li></ul>...
Sales <ul><li>Gross Profit Margin </li></ul><ul><li>Gross Profit Margin =  Gross Profit </li></ul><ul><li>    Net Sales Re...
Sales <ul><li>Operating Profit Margin </li></ul><ul><li>Operating Profit Margin =  Net operating income </li></ul><ul><li>...
Equity and Assets <ul><li>Return on Equity (ROE) </li></ul><ul><ul><li>Return on Equity =  Net Income </li></ul></ul><ul><...
Investment/Market Test Ratios <ul><li>Measures used by many investors to compare a company’s earnings and dividend payment...
Investment/Market Test Ratios <ul><li>Earnings per Share (EPS) </li></ul><ul><ul><li>EPS =  Net Income </li></ul></ul><ul>...
Analyzing the Results <ul><li>Ratio analysis is a tool that can provide insights into a company’s performance not readily ...
Financing a Business Entity <ul><li>Equity Financing </li></ul><ul><ul><li>Cash from Owners </li></ul></ul><ul><ul><li>Sto...
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Week 7

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  • .
  • Week 7

    1. 1. Analyzing Financial Statements <ul><li>Balance Sheet </li></ul><ul><ul><li>The financial condition of the company on a certain date (a snapshot on that date) </li></ul></ul><ul><li>Income Statement </li></ul><ul><ul><li>The financial performance of the company over a period of time (the accounting period) </li></ul></ul><ul><li>Cash Flow Statement </li></ul><ul><ul><li>Sources and Uses of Cash over the accounting period </li></ul></ul><ul><li>Financial Ratios </li></ul><ul><ul><li>Compares financial data to create insightful relationships about the company’s financial health and operating performance. </li></ul></ul>
    2. 2. Types of Financial Ratios <ul><li>Liquidity </li></ul><ul><ul><li>Measures a firms ability to meet it near-term obligations. </li></ul></ul><ul><li>Working capital or Efficiency </li></ul><ul><ul><li>Indication of how well a firm is using it’s assets to generate profits. </li></ul></ul><ul><li>Capital Structure or Solvency </li></ul><ul><ul><li>Provide indications on how a firms is financing it’s investment in assets. </li></ul></ul><ul><li>Profitability or Operating </li></ul><ul><ul><li>Used to measure if a company is generating sufficient returns on it’s investments. </li></ul></ul><ul><li>Investment or Market Test </li></ul><ul><ul><li>Measures used by many investors to compare a company’s earnings and dividend payments to it’s stock price. </li></ul></ul>
    3. 3. Liquidity Ratios <ul><li>Liquidity measures the financial strength of an organization and it’s ability to pay it’s debts. </li></ul><ul><li>Liquidity </li></ul><ul><ul><li>The measure of a company’s ability to meet current obligations when they are due. </li></ul></ul><ul><ul><li>Current obligations are all current expenses </li></ul></ul><ul><ul><ul><li>Salaries Payable; Accounts Payable; and Rent Payable </li></ul></ul></ul><ul><ul><li>The two common Liquidity Ratios: </li></ul></ul><ul><ul><ul><li>Current ratio; </li></ul></ul></ul><ul><ul><ul><li>Quick, or Acid Test </li></ul></ul></ul>
    4. 4. Liquidity Ratios <ul><li>Current Ratio </li></ul><ul><ul><li>Current Ratio = Current Assets </li></ul></ul><ul><ul><li> Current Liabilities </li></ul></ul><ul><ul><li>Current Assets include cash; marketable securities; accounts receivable; inventory; and prepaid expenses. </li></ul></ul><ul><li>Quick Ratio </li></ul><ul><li>Quick Ratio = Quick Assets </li></ul><ul><li> Current Liabilities </li></ul><ul><ul><li>Uses only the most liquid assets; cash, marketable securities and accounts receivable. </li></ul></ul>
    5. 5. Working Capital Ratios <ul><li>Measures how effectively a company utilizes it’s assets to generate profits </li></ul><ul><li>Inventory </li></ul><ul><ul><li>Inventory turnover </li></ul></ul><ul><li>Accounts Receivable </li></ul><ul><ul><li>Accounts Receivable Turnover </li></ul></ul><ul><ul><li>Average Collection Period </li></ul></ul><ul><li>Accounts Payable </li></ul><ul><ul><li>Accounts payable payment period </li></ul></ul><ul><li>Assets </li></ul><ul><ul><li>Fixed Asset Turnover </li></ul></ul><ul><ul><li>Total Asset Turnover </li></ul></ul>
    6. 6. Inventory <ul><li>Inventory Turnover </li></ul><ul><li>Inventory Turnover = COGS </li></ul><ul><li> Average Inventory </li></ul><ul><li>This tells how many times the inventory turned-over during the accounting period. The more times the inventory is turned, or used, the more efficient the company. </li></ul><ul><ul><li>Inventory is expensive to purchase and hold. </li></ul></ul><ul><ul><li>Faster turnover means less risk of obsolescence. </li></ul></ul><ul><ul><li>On the other hand, the company must avoid stockouts and lost business. </li></ul></ul>
    7. 7. Accounts Receivable <ul><li>Accounts Receivable Turnover </li></ul><ul><li>Accounts Receivable Turnover = Annual Credit Sales </li></ul><ul><li> Average Accounts Receivables </li></ul><ul><ul><li>Indicator of how well credit sales are collected. The more times Accounts Receivable is turned over, the more efficient the company and more working capital is available. </li></ul></ul><ul><li>Average Collection Period </li></ul><ul><li>Average Collection Period = Average Accounts Receivables </li></ul><ul><li> (Annual Credit Sales  </li></ul><ul><ul><li>Calculates the average number of days it takes to collect payments due. </li></ul></ul><ul><ul><li>Can indicate a problem if higher than the credit terms that are offered. </li></ul></ul><ul><ul><li>A low number may indicate a company is only selling to customers who pay quickly. There may be untapped opportunities for new customers. </li></ul></ul>
    8. 8. Accounts Payable <ul><li>Accounts Payable Payment Period </li></ul><ul><li>Accounts Payable Payment Period = Average Accounts Payable </li></ul><ul><li> (Annual Credit Purchase  </li></ul><ul><ul><li>The amount of credit purchases is not usually available in financial statements; use Cost-of-Goods-Sold or other figure as a replacement. </li></ul></ul><ul><ul><li>Identifies the average number of days from receipt of goods or services until they are paid. </li></ul></ul><ul><ul><li>The longer the Period the more working capital is held and available to the company. </li></ul></ul><ul><ul><li>This is non-interest borrowing except for the loss of Prompt Payment Discounts. </li></ul></ul>
    9. 9. Assets <ul><li>Fixed Asset Turnover </li></ul><ul><li>Fixed Asset Turnover = Sales Revenue </li></ul><ul><li> Average Fixed Assets </li></ul><ul><li>Total Asset Turnover </li></ul><ul><li>Total Asset Turnover = Sales Revenue </li></ul><ul><li> Average Total Assets </li></ul><ul><ul><li>These ratios indicate how effectively a company is utilizing it’s assets, both current assets and non-current assets to generate Revenues. </li></ul></ul>
    10. 10. Capital Structure Ratios <ul><li>Provide indications on how a firms is financing it’s investments in assets. </li></ul><ul><li>Total Debt </li></ul><ul><ul><li>Total Debt to Owners’ Equity </li></ul></ul><ul><ul><li>Total Debt to Total Assets </li></ul></ul><ul><li>Long-term Debt </li></ul><ul><ul><li>Long-term Debt to Total Capitalization </li></ul></ul><ul><li>Interest Expense </li></ul><ul><ul><li>Times Interest Earned </li></ul></ul><ul><li>Debt Financing: requires repayment of the principle and interest. </li></ul><ul><li>Equity Financing: No obligation to repay and no interest. </li></ul>
    11. 11. Total Debt <ul><li>Total Debt to Owners’ Equity </li></ul><ul><li>Total Debt to Owners’ Equity = Total Debt </li></ul><ul><li> Owners’ Equity </li></ul><ul><ul><li>Total Debt = Current liabilities + non-current liabilities </li></ul></ul><ul><ul><li>Measures the relationship between borrowed funds and equity financing </li></ul></ul><ul><ul><li>A company with a higher percentage than similar companies may use too much borrowing compared to owner financing. </li></ul></ul><ul><li>Total Debt to Total Assets </li></ul><ul><li>Total Debt to Total Assets = Total Debt </li></ul><ul><li>Total Assets </li></ul><ul><ul><li>Measures the extent to which total asset are financed by borrowed funds (as opposed to owners equity) </li></ul></ul><ul><ul><li>A company with a higher percentage than similar companies may have problems borrowing more money. </li></ul></ul>
    12. 12. Long-term Debt <ul><li>Long-term Debt to Total Capitalization </li></ul><ul><li>Long-term Debt to Total Capitalization = Non-current liabilities </li></ul><ul><li> Total Capitalization </li></ul><ul><ul><li>Total Capitalization = Long-term Debt + Owners’ Equity </li></ul></ul><ul><ul><li>It measures the percentage of Long-term debt to all permanently invested capital from all sources. </li></ul></ul><ul><ul><li>Some analyst include deferred taxes in total capitalization since it may essentially be a permanent investment in the company. </li></ul></ul><ul><li>The ratio will vary by business and industry. </li></ul><ul><ul><li>A small corporation may have a high ratio due to a high level of borrowed funds and a low amount of equity financing. </li></ul></ul><ul><ul><li>A larger, publicly traded corporation will have a lower ratio due to a high level of equity financing. </li></ul></ul>
    13. 13. Interest Expense <ul><li>Times Interest Earned </li></ul><ul><li>Times Interest Earned Ratio = Earnings Before Interest and Taxes (EBIT) </li></ul><ul><li> Interest Expense </li></ul><ul><ul><li>EBIT is found on the Income Statement as the net Operating Profit before subtracting interest expense and taxes. </li></ul></ul><ul><ul><li>Measures the ratio of the Operating Profit available to service debt. </li></ul></ul><ul><ul><li>The higher the number the greater the safety margin and the lower the risk a company can pay it’s debts. </li></ul></ul>
    14. 14. Profitability Ratios <ul><li>Used to measure if a company is generating sufficient returns on it’s investments. </li></ul><ul><li>Sales </li></ul><ul><ul><li>Gross Profit Margin </li></ul></ul><ul><ul><li>Operating Profit Margin </li></ul></ul><ul><ul><li>Net Profit Margin </li></ul></ul><ul><li>Equity </li></ul><ul><ul><li>Return on Equity (ROE) </li></ul></ul><ul><li>Assets </li></ul><ul><ul><li>Return on Assets (ROA) </li></ul></ul>
    15. 15. Sales <ul><li>Gross Profit Margin </li></ul><ul><li>Gross Profit Margin = Gross Profit </li></ul><ul><li> Net Sales Revenue </li></ul><ul><ul><li>Gross Profit = Nets Sales - COGS </li></ul></ul><ul><ul><li>Net Sales Revenue = Sales Revenues - returns. </li></ul></ul><ul><ul><li>Represents the markup on Cost of Goods Sold </li></ul></ul><ul><ul><li>Represents the amount of net sales that will cover operating expenses, interest and taxes. </li></ul></ul><ul><ul><li>A common measure used by engineering and sales managers. New products or services must almost always must meet a minimum Gross Profit Margin before it is offered. </li></ul></ul>
    16. 16. Sales <ul><li>Operating Profit Margin </li></ul><ul><li>Operating Profit Margin = Net operating income </li></ul><ul><li> Net Sales Revenue </li></ul><ul><ul><li>Used as a measure of operating efficiency in relation to sales revenues. </li></ul></ul><ul><li>Net Profit Margin </li></ul><ul><li>Net Profit Margin = Net Income </li></ul><ul><li> Net Sales Revenue </li></ul><ul><ul><li>Measures the relationship of net profit to sales revenues. </li></ul></ul><ul><ul><li>Will show how many cents on each sales revenue dollar becomes profit. </li></ul></ul>
    17. 17. Equity and Assets <ul><li>Return on Equity (ROE) </li></ul><ul><ul><li>Return on Equity = Net Income </li></ul></ul><ul><ul><li>Owners’ Equity </li></ul></ul><ul><ul><li>Measures the percentage of owners’ equity that becomes profit. </li></ul></ul><ul><ul><li>Measures a company’s return on owner financing. </li></ul></ul><ul><li>Return on Assets (ROA) </li></ul><ul><ul><li>Return on Equity = Net Income </li></ul></ul><ul><ul><li>Total Assets </li></ul></ul><ul><ul><li>Measure a company’s return on it’s investment in total assets. </li></ul></ul>
    18. 18. Investment/Market Test Ratios <ul><li>Measures used by many investors to compare a company’s earnings and dividend payments to stock prices. </li></ul><ul><ul><li>Earnings per Share </li></ul></ul><ul><ul><li>Price to Earnings </li></ul></ul><ul><ul><li>Dividend Yield </li></ul></ul>
    19. 19. Investment/Market Test Ratios <ul><li>Earnings per Share (EPS) </li></ul><ul><ul><li>EPS = Net Income </li></ul></ul><ul><ul><li> Average number of shares of common stock </li></ul></ul><ul><ul><li>Calculating the number of shares of common stock is complicated by stock options, warrants and convertible securities. </li></ul></ul><ul><li>Price to Earnings (P/E) </li></ul><ul><ul><li>P/E = AverageMarket Price per Share </li></ul></ul><ul><ul><li> Earnings per Share </li></ul></ul><ul><ul><li>Indicates how many time Earnings investors are willing to pay for shares. </li></ul></ul><ul><li>Dividend Yield </li></ul><ul><ul><li>Dividend Yield = Dividends per Share </li></ul></ul><ul><ul><li> Market Price per Share </li></ul></ul><ul><ul><li>The percent yield in dividends per dollar paid for a share of stock. </li></ul></ul>
    20. 20. Analyzing the Results <ul><li>Ratio analysis is a tool that can provide insights into a company’s performance not readily available on the financial statements. </li></ul><ul><li>Compare to benchmarks </li></ul><ul><ul><li>Historical benchmarks </li></ul></ul><ul><ul><li>External benchmarks </li></ul></ul>
    21. 21. Financing a Business Entity <ul><li>Equity Financing </li></ul><ul><ul><li>Cash from Owners </li></ul></ul><ul><ul><li>Stock </li></ul></ul><ul><li>Debt Financing </li></ul><ul><ul><li>Borrowed funds </li></ul></ul><ul><ul><ul><li>Bank Loans, Bonds, Leasing </li></ul></ul></ul><ul><ul><li>Leverage </li></ul></ul>
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