Financial analysis ppt

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Financial analysis ppt

  1. 1. Financial Analysis & Ratios
  2. 2. Comparative Analysis There are three types of comparisons to provide decision usefulness of financial information: •  Intra-company basis •  Inter-company basis •  Industry averages
  3. 3. Comparative Analysis •  Intra-company basis – comparisons within the company. •  Inter-company basis – comparisons with other companies. •  Industry averages – comparisons with other companies in the same industry.
  4. 4. Financial Statement Analysis Three basic tools are used in financial statement analysis : 1. Horizontal analysis 2. Vertical analysis 3. Ratio analysis
  5. 5. Horizontal Analysis •  Is a technique for evaluating a series of financial statement data over a period of time. •  Did an increase or decrease take place?
  6. 6. Vertical Analysis •  Expresses each item in a financial statement as a percent of a base amount. •  Total Assets is the base amount on a Balance Sheet. •  Common-size balance sheet •  Net Sales is the base amount on an Income Statement. •  Common-size income statement
  7. 7. Ratio Analysis ➨ Five types: ➨ Liquidity ratios ➨ Solvency ratios ➨ Turnover ratios ➨ Profitability ratios ➨ Market value ratios
  8. 8. Liquidity Ratios Measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. WHO CARES? Short-term creditors such as bankers and suppliers
  9. 9. Current Ratio Indicates short-term debt-paying ability Current Assets Current Liabilities
  10. 10. Acid-Test Ratio Indicates immediate short-term debtpaying ability Current Assets - Inventory Current Liabilities
  11. 11. Cash Ratio Indicates short-term debt-paying ability (cash basis) Cash _ Current Liabilities _
  12. 12. Solvency Ratios Measure the ability of the enterprise to survive over a long period of time WHO CARES? Long-term creditors and stockholders
  13. 13. Debt to Assets Ratio Indicates % of total assets provided by creditors Total Liabilities Total Assets
  14. 14. Times Interest Earned Ratio Indicates company’s ability to meet interest payments as they come due _ EBIT _ Interest Expense
  15. 15. Cash Debt Coverage Ratio Indicates long-term debt-paying ability (cash basis) Cash provided by operations Average total liabilities
  16. 16. Turnover Ratios Measure how efficiently, or intensively, a firm uses its assets to generate sales . WHO CARES? Short-term creditors such as bankers and suppliers
  17. 17. Inventory Turnover Ratio Indicates liquidity of inventory Cost of Goods Sold Inventory
  18. 18. Average Days in Inventory Indicates liquidity of inventory and inventory management 365 days Inventory Turnover Ratio
  19. 19. Receivables Turnover Ratio Indicates liquidity of receivables Net Sales Accounts Receivable
  20. 20. Average Collection Period Indicates liquidity of receivables and collection success 365 days Receivables Turnover
  21. 21. Asset Turnover Ratio Indicates how efficiently assets are used to generate sales Net Sales Total Assets
  22. 22. Profitability Ratios Measure the income or operating success of an enterprise for a given period of time WHO CARES? Everybody WHY? A company’s income affects: ➩ its ability to obtain debt and equity financing ➩ its liquidity position ➩ its ability to grow
  23. 23. Profit Margin Ratio Indicates net income generated by each dollar of sales Net Income Net Sales
  24. 24. Return On Assets Reveals the amount of net income generated by each dollar invested Net Income Average Total Assets
  25. 25. Return on Equity Indicates profitability of common stockholders’ investment Net Income Average Total Equity
  26. 26. Market Value Ratios Deals with market value of stock. . WHO CARES? Stockholder’s
  27. 27. Earnings Per Share (EPS) Indicates net income earned on each share of common stock sales Net Income Shares Outstanding
  28. 28. Price Earnings Ratio Indicates relationship between market price per share and earnings per share Stock Price Earnings Per Share
  29. 29. Payout Ratio Indicates % of earnings distributed in the form of cash dividends Dividends Net Income
  30. 30. Retention Ratio Indicates % of earnings plowed back into the corporation. Addition to Retained Earnings Net Income
  31. 31. Limitations Of Financial Analysis •  Horizontal, vertical, and ratio analysis are frequently used in making significant business decisions. •  One should be aware of the limitations of these tools and the financial statements.

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