Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

10

560 views

Published on

  • Be the first to comment

  • Be the first to like this

10

  1. 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. 2. Ratio Analysis <ul><li>Used to evaluate performance. </li></ul><ul><ul><li>Trend analysis </li></ul></ul><ul><ul><li>Comparative analysis </li></ul></ul><ul><li>Derived from financial statements. </li></ul><ul><li>Simple to calculate. </li></ul><ul><li>Not always simple to interpret. </li></ul>
  3. 3. Ratio Categories <ul><li>Liquidity. </li></ul><ul><ul><li>Ability to meet short-term obligations </li></ul></ul><ul><ul><li>Management of working capital </li></ul></ul><ul><li>Financial Strength. </li></ul><ul><ul><li>Risk </li></ul></ul><ul><ul><li>Leverage </li></ul></ul><ul><li>Operating Performance. </li></ul><ul><ul><li>Profitability </li></ul></ul><ul><ul><li>Asset management </li></ul></ul>
  4. 4. Liquidity <ul><li>Current Ratio </li></ul><ul><li>Quick Ratio </li></ul><ul><li>Days Sales Outstanding </li></ul><ul><li>Receivables Turnover </li></ul><ul><li>Inventory Turnover </li></ul><ul><li>Days Inventory </li></ul><ul><li>Operating Cycle </li></ul><ul><li>Accounts Payable Turnover </li></ul><ul><li>Days Payable </li></ul>
  5. 5. Current Ratio <ul><li>Current Assets / Current Liabilities </li></ul><ul><li><1.0 suggests liquidity problems </li></ul>
  6. 6. Quick Ratio <ul><li>Also called the “acid test” ratio </li></ul><ul><li>Same as current ratio except that it excludes inventory because inventory is not as easy to liquidate </li></ul>
  7. 7. Financial Strength <ul><li>Debt to Total Assets </li></ul><ul><li>Equity to Total Assets </li></ul><ul><li>Debt to Capitalization </li></ul><ul><li>Debt to Equity </li></ul>
  8. 8. Operating Performance <ul><li>Profit Margin </li></ul><ul><li>Gross Margin </li></ul><ul><li>Asset Turnover </li></ul><ul><li>Return on Assets (ROA) </li></ul><ul><li>Return on Equity (ROE) </li></ul><ul><li>Earnings per Share (EPS) </li></ul><ul><li>Price/Earnings Ratio (P/E) </li></ul><ul><li>Payout Ratio </li></ul><ul><li>Times Interest Earned </li></ul>
  9. 9. DuPont Formula <ul><li>ROE = ROS x ATO x LF </li></ul><ul><ul><li>ROE = net income / total equity </li></ul></ul><ul><ul><li>ROS = net income / total sales </li></ul></ul><ul><ul><li>ATO = total sales / total assets </li></ul></ul><ul><ul><li>LF = total assets / total equity </li></ul></ul><ul><li>ROE = ROA x LF </li></ul><ul><ul><li>Because ROA = ROS x ATO </li></ul></ul>
  10. 10. FRICTO Analysis <ul><li>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? </li></ul><ul><li>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? </li></ul><ul><li>Income – How will various financing alternatives affect ROE and EPS? </li></ul><ul><li>Control – How will the sale of additional stock affect ownership / control of the firm? What are the risks? </li></ul><ul><li>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? </li></ul><ul><li>Other – What other considerations should be factored into this decision? Owners’ attitudes regarding debt? Firm’s bond rating? </li></ul>

×