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Topic 7

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  • 1. Chapter Seven FINANCIAL STATEMENT ANALYSIS KAL1013 Chapter Seven
  • 2. Outline <ul><li>Users of financial statement </li></ul><ul><li>The importance of financial statement analysis </li></ul><ul><li>Types of analysis: </li></ul><ul><ul><li>Percentage Analysis: </li></ul></ul><ul><ul><ul><li>Vertical </li></ul></ul></ul><ul><ul><ul><li>Horizontal </li></ul></ul></ul><ul><ul><li>Ratio Analysis </li></ul></ul><ul><ul><ul><li>Liquidity </li></ul></ul></ul><ul><ul><ul><li>Profitability </li></ul></ul></ul><ul><ul><ul><li>Efficiency </li></ul></ul></ul><ul><ul><ul><li>Solvency </li></ul></ul></ul>KAL1013 Chapter Seven
  • 3. Users of financial statement <ul><li>Managers </li></ul><ul><li>Investors / Shareholders </li></ul><ul><li>Potential Investors </li></ul><ul><li>Creditors </li></ul><ul><li>Regulatory Agencies </li></ul><ul><li>Inland Revenue </li></ul><ul><li>Consumers </li></ul>KAL1013 Chapter Seven
  • 4. The importance of financial statement analysis <ul><li>Helps interested users in making economic decisions: </li></ul><ul><ul><li>Provide the trend of the business for a certain period of time. </li></ul></ul><ul><ul><li>Provide comparability among companies in the same industry. </li></ul></ul><ul><li>Helps in forecasting the business’s future performance </li></ul>KAL1013 Chapter Seven
  • 5. <ul><li>Comparison basis </li></ul><ul><li>Benchmarking for performance evaluation </li></ul>KAL1013 Chapter Seven
  • 6. Financial Analysis: Comparison Basis KAL1013 Chapter Seven 1 intracompany basis 2 industry averages Year 1 Year 2 Company XYZ Co. A Co. B Co. D Co. E Co. C Co. ABC Co. XYZ 3 intercompany basis
  • 7. Types of analysis KAL1013 Chapter Seven Financial Statement Analysis Percentage Ratio  Horizontal Analysis  Vertical Analysis  Liquidity Ratio  Profitability Ratio  Efficiency Ratio  Solvency Ratio
  • 8. Horizontal analysis KAL1013 Chapter Seven  Also known as trend analysis .  Evaluates a series of financial statement data over a period of time.  Purpose: to determine the increase or decrease that has taken place This change may be expressed as either an amount or a percentage.
  • 9. Horizontal analysis KAL1013 Chapter Seven Evaluates: Income Statement Balance Sheet Formula: Current Year Amount – Base Year Amount Base Year Amount
  • 10. KAL1013 Chapter Seven Selamat Company Comparative Balance Sheet As At Dec. 31, 2001 and 2002 Fixed Asset : Office Equipment (net) 55,000 63,000 Current Asset : Cash 7,000 9,700 Accounts Receivable 10,000 18,000 Current Liabilities : Accounts Payable 9,000 7,000 <ul><ul><li>2001 2002 Inc. (Dec) </li></ul></ul><ul><ul><ul><ul><li> Amount % </li></ul></ul></ul></ul>63,000 83,700 Owner’s Equity 63,000 83,700 63,000 83,700 8,000 14.5 2,700 38.6 8,000 80.0 (2,000) (22.2) 20,700 32.9 20,700 32.9 20,700 32.9
  • 11. KAL1013 Chapter Seven Selamat Company Comparative Income Statement For the Years Ended Dec. 31, 2001 and 2002 <ul><ul><li>2001 2002 Inc. (Dec) </li></ul></ul><ul><ul><ul><ul><li> Amount % </li></ul></ul></ul></ul>Net Sales 99,000 115,000 Cost of Goods Sold 44,500 57,700 Gross Profit 54,500 57,300 Selling Expenses 16,800 15,000 Admin Expenses 12,000 20,900 Net Income 25,700 21,400 16,000 16.2 13,200 29.7 2,800 5.1 (1,800) (10.7) 8,900 74.2 (4,300) (16.7)
  • 12. Vertical Analysis KAL1013 Chapter Seven  Evaluates financial statement data expressing each item in a financial statement as a percent of a base amount.  Vertical analysis enables you to compare companies of different sizes.
  • 13. KAL1013 Chapter Seven Selamat Company Comparative Balance Sheet As At Dec. 31, 2001 and 2002 Fixed Asset : Office Equipment (net) 55,000 63,000 Current Asset : Cash 7,000 9,700 Accounts Receivable 10,000 18,000 Current Liabilities : Accounts Payable 9,000 7,000 63,000 83,700 Owner’s Equity 33,000 38,700 63,000 83,700 <ul><ul><li> 2001 2002 </li></ul></ul><ul><ul><li>Amt % Amt % </li></ul></ul>Long Term Liabilities 30,000 45,000 100 87.3 11.1 15.9 14.3 100 100 100 47.6 52.4 75.3 11.6 21.5 8.4 53.8 46.2
  • 14. KAL1013 Chapter Seven Selamat Company Comparative Income Statement For the Years Ended Dec. 31, 2001 and 2002 <ul><ul><li> 2001 2002 </li></ul></ul><ul><ul><li>Amt % Amt % </li></ul></ul>Net Sales 99,000 115,000 Cost of Goods Sold 44,500 57,700 Gross Profit 54,500 57,300 Selling Expenses 16,800 15,000 Admin Expenses 12,000 20,900 Net Income 25,700 21,400 100 100 45.0 55.0 17.0 12.0 26.0 50.2 49.8 13.0 18.2 18.6
  • 15. Ratio Analysis KAL1013 Chapter Seven  Expresses the relationship among selected items of financial statement data.  Classifications: Liquidity Ratios Profitability Ratios Efficiency Ratios Solvency Ratios
  • 16. Liquidity Ratios KAL1013 Chapter Seven The ratios are:  Current Ratio / Working capital ratio  Acid test ratio / quick ratio Measures of short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
  • 17. Liquidity Ratio – Current ratio / Working capital ratio KAL1013 Chapter Seven <ul><li>measure for evaluating a company’s liquidity and </li></ul><ul><li>short-term debt-paying ability . </li></ul>Current ratio = Current Assets Current Liabilities
  • 18. KAL1013 Chapter Seven Eg: Current Assets 20,500 26,700 Current Liabilities 17,200 29,600 2001 2002 Current ratio = 20,500 17,200 26,700 29,600 = 1.19 : 1 = 0.90 : 1
  • 19. Liquidity Ratio – Acid Test Ratio / Quick Ratio KAL1013 Chapter Seven  is a measure of a company’s short-term liquidity . Acid test ratio = Quick Assets Current Liabilities  Quick asset includes cash, marketable securities and accounts receivable.
  • 20. KAL1013 Chapter Seven Eg: Current Assets Current Liabilities 17,200 29,600 2001 2002 Acid test ratio = 17,700 17,200 20,700 29,600 = 1.03 : 1 = 0.70 : 1 Cash 7,900 8,700 Accounts Receivable 9,800 12,000 Inventories 2 ,800 6,000 20,500 26,700
  • 21. Profitability Ratios KAL1013 Chapter Seven The ratios are:  Profit margin  Gross profit margin  Return on Assets  Return on Equity  Return on Common Equity  Earnings Per Share  Price - Earnings ratio Measures of the income or operating success of a company for a given period of time.
  • 22. Profitability Ratio – Profit Margin KAL1013 Chapter Seven  is a measure of the percentage of each dollar of sales that results in net income . Profit margin = Net income Net sales
  • 23. KAL1013 Chapter Seven Eg: Net Sales 45,000 52,700 Less: Cost of Goods Sold 20,200 23,600 2001 2002 Profit margin = 10,600 45,000 14,500 52,700 = 23.56% = 27.51% 24,800 29,100 Less: Operating Expenses 14,200 14,600 Net income 10,600 14,500
  • 24. Profitability Ratio – Gross Profit Margin KAL1013 Chapter Seven  is a measure of the percentage of each dollar of sales that results in gross profit . Gross profit margin = Gross Profit Net Sales
  • 25. KAL1013 Chapter Seven Eg: Net Sales 45,000 52,700 Less: Cost of Goods Sold 20,200 23,600 2001 2002 Gross profit margin = 24,800 45,000 29,100 52,700 = 55.11% = 55.22% Gross Profit 24,800 29,100 Less: Operating Expenses 14,200 14,600 Net income 10,600 14,500
  • 26. Profitability Ratio – Return on Assets KAL1013 Chapter Seven  To assess the ability of the company in using its assets to earn net income without consideration in the financing of such assets. Return on assets = Net income + Interest expense Average total assets  Average total assets = Total assets year 1 + total assets year 2 2
  • 27. KAL1013 Chapter Seven Eg: 2001 2002 Return on Assets = = 15.89% Net income 10,600 14,500 Interest Expense 910 760 Total Assets (2000 = 69,900) 75,000 82,000 10,600 + 910 (69,900 + 75,000 ) / 2 14,500 + 760 (75,000 + 82,000 ) / 2 = 19.44%
  • 28. Profitability Ratio – Return on Equity KAL1013 Chapter Seven  To assess the ability of the company in managing the investments by shareholders to earn income. Return on equity = Net income Average total stockholders’ equity  Average total stockholders’ equity = Total equity year 1 + total equity year 2 2
  • 29. KAL1013 Chapter Seven Eg: 2001 2002 Return on Equity ( year 2002 ) = Net income 10,600 14,500 Total Equities: 14,500 (100,000 + 106,000 ) / 2 = 14.08% Common Shares 80,000 86,000 Preference Shares 20,000 20,000 100,000 106,000
  • 30. Profitability Ratio – Return on Common Equity KAL1013 Chapter Seven  To assess the ability of the company in managing the investments by common shareholders to earn its net income. Return on common equity = Net income Average common stockholders’ equity  Average common stockholders’ equity = Common equity year 1 + common equity year 2 2
  • 31. KAL1013 Chapter Seven Eg: 2001 2002 Return on Common Equity ( year 2002 ) Net income 10,600 14,500 Total Equities: 14,500 (80,000 + 86,000 ) / 2 = 17.47% Common Shares 80,000 86,000 Preference Shares 20,000 20,000 100,000 106,000 =
  • 32. Profitability Ratio – Earnings Per Share KAL1013 Chapter Seven  a measure of net income earned on each share of common stock. Earnings Per Share / EPS Net income average common shares outstanding (unit) =
  • 33. KAL1013 Chapter Seven Eg: 2001 2002 Earnings per share ( year 2002 ) Net income 10,600 14,500 Total Equities: 14,500 (80,000 + 86,000 ) / 2 = RM0.17 per share Common Shares (RM1.00 per share) 80,000 86,000 =
  • 34. Profitability Ratio – Price Earnings Ratio KAL1013 Chapter Seven  M easures the ratio of the market price of each share of common stock to the earnings per share. Price Earnings Ratio / PE Ratio = Market price of common stock Earnings Per Share
  • 35. KAL1013 Chapter Seven Eg: 2001 2002 Average market price for common stock RM3.25 RM4.62 Earnings Per Share RM0.11 RM0.17 Price Earnings Ratio / PE Ratio = RM3.25 RM4.62 RM0.11 RM0.17 = 30 times = 27 times
  • 36. Efficiency Ratios KAL1013 Chapter Seven The ratios are:  Inventory Turnover  Asset Turnover  Debtors Turnover / Receivable Turnover Measures of the efficiency and the ability of the company in managing its resources.
  • 37. Efficiency Ratio – Inventory Turnover KAL1013 Chapter Seven  measures the number of times, on average, the inventory is sold during the period .  P urpose : to measure the liquidity of the inventory. Inventory Turnover = Cost of goods sold Average inventory  Average inventory = Opening inventory + closing inventory 2
  • 38. KAL1013 Chapter Seven Eg: 2001 2002 = Cost of goods sold 20,200 23,600 Inventories 2 ,800 6,000 Inventory turnover (2002) 23,600 ( 2,800 + 6,000 ) / 2 = 5.4 times
  • 39. Efficiency Ratio – Assets Turnover KAL1013 Chapter Seven  measures how efficiently a company uses its assets to generate sales . Assets turnover = Net sales Average total assets  Average assets = Total assets year 1 + total assets year 2 2
  • 40. KAL1013 Chapter Seven Eg: 2001 2002 = Assets turnover (2002) 52,700 ( 75,000 + 82,000 ) / 2 = 0.67 times Net Sales 45,000 52,700 Total Assets 75,000 82,000
  • 41. Efficiency Ratio – Receivables Turnover KAL1013 Chapter Seven  U sed to assess the liquidity of the receivables.  It measures the number of times , on average , receivables are collected during the period . Receivables turnover = Net credit sales Average net receivables  Average net receivables = A. R year 1 + A. R year 2 2
  • 42. KAL1013 Chapter Seven Eg: 2001 2002 = Receivables turnover (2002) 45,700 ( 9,800 + 12,000 ) / 2 = 4.2 times Net Credit Sales 3 5,000 45,700 Accounts Receivable 9,800 12,000
  • 43. Solvency Ratios KAL1013 Chapter Seven The ratios are:  Debt ratio  Equity ratio  Times Interest Earned Measures of the ability of the company to survive over a long period of time.
  • 44. Solvency Ratio – Debt Ratio KAL1013 Chapter Seven  measures the percentage of total assets provided by creditors. Debt ratio = Total liabilities Total assets
  • 45. KAL1013 Chapter Seven Eg: 2001 2002 Total assets 75 ,000 82,000 Total liabilities 39,000 52,000 Debt ratio = 39,000 75,000 = 52 % 52,000 82,000 = 63 %
  • 46. Solvency Ratio – Equity Ratio KAL1013 Chapter Seven  measures the percentage of total assets provided by shareholders. Equity ratio = Total owner’s equity Total assets
  • 47. KAL1013 Chapter Seven Eg: 2001 2002 Total assets 75 ,000 82,000 Equity ratio = 69,000 75,000 = 92 % 69,000 82,000 = 84 % Total equities 69,000 69,000
  • 48. Solvency Ratio – Times Interest Earned KAL1013 Chapter Seven  provides an indication of the company’s ability to meet interest payments as they come due. Times interest earned = Income before tax and interest expense Interest expense
  • 49. KAL1013 Chapter Seven Eg: 2001 2002 Income before tax and interest 10,600 14,500 = 11.65 times Interest Expense 910 760 Times interest earned = 10,600 910 14,500 760 = 19.1 times
  • 50. KAL1013 Chapter Seven Thank you

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