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Financial Statement Analysis (Powerpoint)

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Explains what is Financial Statement Analysis, its uses and users, and some tools necessary in FS analysis - horizontal, vertical and financial ratio analyses.

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Financial Statement Analysis (Powerpoint)

  1. 1. Analysis and Interpretation of Financial Statements TABOBO, Quennie SABINO, Chesca GO, Willesa CASTRO, Dave Michael BUEN, Ma. Hanna Louize AGOOT, Ma. Regel BCFMA3-1 1st Semester, SY 2013-2014
  2. 2. Financial Statement Analysis OIs a process which examines past and current financial data for the purpose of evaluating performance and estimating future risks and potential OMeans different things to different people depending on their individual interest
  3. 3. Uses of Financial Statement Analysis O identify major changes or turning points in trends, amounts, and relationships O yield valuable information about trends and relationships, the quality of a company’s earnings, and the strengths and weaknesses of its financial position O assessment of past performance and current position O assessment of future potential and related risk
  4. 4. Uses of Financial Statement Analysis O assist investors and creditors in finding the type of information they require for making decisions relating to their interests in a particular company (such as risk, return, dividend or interest yield, safety, liquidity, growth, and others) • Whether to continue or discontinue its main operation or part of its business; • What to make or to purchase certain materials in the manufacture of its product;
  5. 5. Uses of Financial Statement Analysis • What to acquire or to rent/lease certain machineries and equipment in the production of its goods; • Whether to issue stocks or negotiate for a bank loan to increase its working capital; • What and when to make decisions regarding investing or lending capital; • Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.
  6. 6. Users of Financial Statement Analysis O Corporate - Creditors - Investors - Management - Security Analysts - Bank Lending Officers - Auditors - Taxing authorities - Regulatory Agencies - Labor Unions - Customers
  7. 7. Users of Financial Statement Analysis O Cooperative - Members - Creditors [debt-paying ability - Management - Bank Lending Officers - Auditors - Taxing authorities - Regulatory Agencies - Labor Unions
  8. 8. Various tools necessary in Financial Statement Analysis OHorizontal / Dynamic Analysis OVertical / Static Analysis OFinancial Ratio Analysis
  9. 9. Horizontal Analysis OComparison of 2 or more years’ financial data. OConcentrates on trends in the accounts in peso value and % terms OPresented in comparative form
  10. 10. Vertical Analysis (Common-size Statement) O Are that reveals each item in percentage terms. O A material financial statement item is used as a base value and all other accounts of financial statement are compared to it.
  11. 11. Financial Ratio Analysis The results of the ratio analysis will allow us to: OAppraise the position of a business OIdentify trouble spots that need attention OMake projections and forecasts about the course of future operations
  12. 12. Financial Ratio Analysis OLiquidity Ratio OAsset Utilization Ratio OInventory Ratio OSolvency Ratio OProfitability Ratio
  13. 13. Liquidity Ratio OAbility to satisfy maturing short-term debt 3 BASIC MEASURE OF LIQUIDITY ONet Working Capital OCurrent Ratio OQuick Ratio
  14. 14. Liquidity Ratio: Net Working Capital (NWC) NWC = Current Assets – Current Liabilities
  15. 15. Liquidity Ratio: Current Ratio (CR) OIndicates the organization’s ability to meet its current liabilities (those due within a year) with its current assets Current Ratio = Current Assets Current Liabilities
  16. 16. Liquidity Ratio: Quick Ratio OIndicates the organization’s ability to meet its current liabilities with current assets other than inventory Quick Asset or Acid Test Ratio = Cash + Marketable Security Current Liabilities
  17. 17. Asset Utilization Ratios OReflect the way in which a business enterprise uses its assets to obtain revenue and profit. One example is how well receivables are turned into cash. The higher the ratio, the more efficiently the business manages its assets.
  18. 18. Asset Utilization Ratio: Accounts Receivable Turnover OAccounts Receivable turnover is the number of times accounts receivable are collected in the year. It is derived by dividing net credit sales by average accounts receivable. Account Receivable Turnover = Net Credit Sales Average Accounts Receivable
  19. 19. Asset Utilization Ratio: Accounts Collection Period Accounts Collection Period = 365 days Accounts Receivable Turnover
  20. 20. Asset Utilization Ratio: No. of Days Sales in Receivable No. of Days Sales in Receivable = Average Account Receivable Average Daily Credit Sales
  21. 21. Asset Utilization Ratio: Total Asset Turnover OIndicates how efficiently the organization is utilizing its assets to make money Total Asset Turnover = Net Sales Average Total Assets
  22. 22. Inventory Ratios OAre especially useful when a build up in inventory exists. Inventory ties up cash; holding large amounts of inventory can result in both lost opportunities for profit and increased storage costs. Before you extend credit or lend money to a business enterprise, you should examine its inventory turnover and average age of inventory.
  23. 23. Inventory Ratio: Inventory Turnover OIndicates how often the organization sells and replaces its inventory over a specified period of time Inventory Turnover = Cost of Goods Sold Average Inventory
  24. 24. Inventory Ratio: Average Age of Inventory Average Age of Inventory = 365 days Inventory Turnover
  25. 25. Solvency Ratios OProvide data about the long-term solvency of a firm Solvency Ratio = Net Worth Long-Term Debt
  26. 26. Solvency Ratio: Debt to Total Assets OIndicates the proportion of assets that are financed with debt (short and long-term debt) Debt to Total Assets = Total Liabilities Total Assets
  27. 27. Profitability Ratios OUsed to examine how successful a firm is in using its operating processes and resources to earn income
  28. 28. Profitability Ratio: Gross Margin (Profit) Rate OIndicates how much of every dollar of sales is left after costs of good sold Gross Margin (Profit) Rate = Gross Margin Net Sales
  29. 29. Profitability Ratio: Surplus Margin on Sales OIndicates how much of each dollar of sales is left over after all expenses Surplus Margin on Sales = Net Surplus Net Sales

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