This document provides an overview of analyzing financial statements through ratio analysis. It discusses calculating and interpreting various ratios to evaluate a company's liquidity, efficiency, leverage, profitability, and market value from the perspectives of managers, stockholders, and creditors. Ratios are calculated using data from the income statement and balance sheet, and multi-year trend analysis of ratios is recommended. The DuPont system for analyzing return on equity and return on assets is also introduced.
This document presents a project work on ratio analysis as a tool for financial analysis. It discusses ratio analysis as a technique for evaluating a company's financial condition and performance by calculating and comparing various financial ratios. The document defines key terms related to ratio analysis and outlines its objectives and procedures. It also classifies common financial ratios into five main categories: leverage ratios, liquidity ratios, profitability ratios, turnover/asset utilization ratios, and valuation ratios. Examples of important ratios under each category are provided.
Profitability ratios measure a company's ability to generate earnings compared to its expenses and costs. Some examples are profit margin, return on assets, and return on equity. Higher ratios typically indicate better performance. The document then discusses various profitability ratios in more detail like gross profit margin, net profit margin, return on assets, return on equity, and return on capital employed. It provides the formulas to calculate each ratio.
This document provides learning objectives and lecture suggestions for a chapter on analyzing financial statements. The key learning objectives are to explain ratio analysis, calculate and interpret key ratios from five groups, discuss how ratios relate to the balance sheet and income statement, and use ratios to analyze a firm's performance over time and compare to other firms. The lecture suggestions focus on using ratios to determine a firm's strengths and weaknesses and pitching concepts to non-accounting students.
This chapter discusses key accounting concepts including what accounting is, its users and uses, and generally accepted accounting principles. Accounting identifies, records, and communicates the economic events of an organization. It has both internal and external users, and is used to make decisions about financing, investing, and operating the business. Generally accepted accounting principles (GAAP) are standards that provide consistency in financial reporting. The chapter also covers the basic accounting equation, which shows the relationship between assets, liabilities, and owner's equity, and how business transactions affect this equation.
This document analyzes the financial ratios of Sample Company using its financial statements from December 31, 2000. Various profitability ratios are calculated, including return on investment (ROI), return on equity (ROE), operating margin, net profit margin, and price-earnings ratio. Sample Company's ROI of 4.8% and ROE are below industry averages. Liquidity, activity, and financial leverage ratios are also examined but not discussed in detail. Historical trends and comparisons to industry benchmarks are used to evaluate Sample Company's financial performance. Recommendations for improvement are not provided.
This document outlines key concepts for analyzing financial statements. It discusses three perspectives to view statements from (stockholders, managers, creditors), how to prepare and use common-size statements and financial ratios to evaluate performance, and the DuPont system for linking the income statement and balance sheet using return on equity. Benchmarks are described as important references for interpreting ratio analysis results. Limitations include analysis not being exact and relying on historical accounting data.
Financial ratios and their use in understanding Financial StatementsPranav Dedhia
An introduction and in-depth understanding on the importance of Financial ratios in understanding financial statements of business entities along with relevant examples
This document presents a project work on ratio analysis as a tool for financial analysis. It discusses ratio analysis as a technique for evaluating a company's financial condition and performance by calculating and comparing various financial ratios. The document defines key terms related to ratio analysis and outlines its objectives and procedures. It also classifies common financial ratios into five main categories: leverage ratios, liquidity ratios, profitability ratios, turnover/asset utilization ratios, and valuation ratios. Examples of important ratios under each category are provided.
Profitability ratios measure a company's ability to generate earnings compared to its expenses and costs. Some examples are profit margin, return on assets, and return on equity. Higher ratios typically indicate better performance. The document then discusses various profitability ratios in more detail like gross profit margin, net profit margin, return on assets, return on equity, and return on capital employed. It provides the formulas to calculate each ratio.
This document provides learning objectives and lecture suggestions for a chapter on analyzing financial statements. The key learning objectives are to explain ratio analysis, calculate and interpret key ratios from five groups, discuss how ratios relate to the balance sheet and income statement, and use ratios to analyze a firm's performance over time and compare to other firms. The lecture suggestions focus on using ratios to determine a firm's strengths and weaknesses and pitching concepts to non-accounting students.
This chapter discusses key accounting concepts including what accounting is, its users and uses, and generally accepted accounting principles. Accounting identifies, records, and communicates the economic events of an organization. It has both internal and external users, and is used to make decisions about financing, investing, and operating the business. Generally accepted accounting principles (GAAP) are standards that provide consistency in financial reporting. The chapter also covers the basic accounting equation, which shows the relationship between assets, liabilities, and owner's equity, and how business transactions affect this equation.
This document analyzes the financial ratios of Sample Company using its financial statements from December 31, 2000. Various profitability ratios are calculated, including return on investment (ROI), return on equity (ROE), operating margin, net profit margin, and price-earnings ratio. Sample Company's ROI of 4.8% and ROE are below industry averages. Liquidity, activity, and financial leverage ratios are also examined but not discussed in detail. Historical trends and comparisons to industry benchmarks are used to evaluate Sample Company's financial performance. Recommendations for improvement are not provided.
This document outlines key concepts for analyzing financial statements. It discusses three perspectives to view statements from (stockholders, managers, creditors), how to prepare and use common-size statements and financial ratios to evaluate performance, and the DuPont system for linking the income statement and balance sheet using return on equity. Benchmarks are described as important references for interpreting ratio analysis results. Limitations include analysis not being exact and relying on historical accounting data.
Financial ratios and their use in understanding Financial StatementsPranav Dedhia
An introduction and in-depth understanding on the importance of Financial ratios in understanding financial statements of business entities along with relevant examples
The document discusses key elements of financial statement analysis including the four main financial statements, understanding the industry and company strategies, assessing the quality of financial statements, and analyzing current profitability and risk. It provides examples of various techniques used in financial statement analysis such as horizontal analysis, vertical analysis, common-size analysis, and calculating financial ratios to evaluate liquidity, asset management, debt, and profitability.
This document provides an overview of financial statement analysis. It discusses the objectives of ratio analysis, which involves calculating ratios to analyze a company's profitability, liquidity, asset management, financial leverage, and investor returns. Specific profitability, liquidity, and leverage ratios are defined. The document also covers cash flow analysis, interpreting ratio results, drivers of profitability and growth, and the importance of considering both financial and non-financial accounting information in analysis.
- The document provides an overview of key financial statements including the balance sheet, income statement, statement of cash flows, and statement of changes in shareholders' equity.
- The balance sheet lists a company's assets, liabilities, and shareholders' equity at a point in time. Assets are divided into current and long-term categories.
- The income statement reports revenues, expenses, and net income over a period of time. It is used to analyze a company's profitability.
The document provides an overview of a mentorship program on financial review. It discusses key steps in conducting a financial review, including analyzing financial statements, calculating financial ratios, and identifying trends over time. The objective is for participants to gain practical insights on evaluating business performance, operations, managers, and capital investments using information from financial statements. This will allow them to forecast conditions and make informed decisions. The mentorship method involves interactive discussions with practical examples and reviews.
This document discusses the accounting communication process and key players involved, including regulators, managers, directors, auditors, and financial statement users. It covers the roles and guidance these players receive, as well as common financial statements, reports, and disclosures used to communicate accounting information, such as annual reports, quarterly reports, and SEC filings. It also summarizes guidelines for ensuring useful financial reporting and analyzing company performance based on return on equity and its components.
This document provides an overview of various financial analysis metrics for evaluating company performance, including return on equity (ROE), return on assets (ROA), DuPont analysis, operating profitability analysis, liquidity ratios, and other related topics. It includes definitions of key terms, examples of computations using company financial data, and interpretations of the results. The goal is to help readers understand how to compute and analyze these important profitability and performance metrics.
A comparative analysis of prism cement ltd with jk cementProjects Kart
This document provides an overview of a research study comparing the financial performance of Prism Cement Ltd. and JK Cement Ltd. over the last four years. It outlines the company profiles, objectives and scope of the study, limitations, and research methodology.
The chapter introduces Prism Cement Ltd. and JK Cement Ltd., noting they both operate in northern India but JK Cement has been in business longer. It highlights sections that will examine each company's vision/mission, features, corporate social responsibility, and current performance. Ratios and financial data from annual reports will be analyzed to evaluate aspects like profitability, leverage, liquidity, and shareholder returns.
Bba 2204 fin mgt week 3 financial ratiosStephen Ong
This document provides an overview of financial statements and ratio analysis. It discusses the key financial statements including the income statement, balance sheet, statement of retained earnings, and statement of cash flows. It also covers consolidating international financial statements and how various parties use ratio analysis to evaluate a firm's liquidity, activity, debt, and profitability by comparing financial metrics to industry averages and past performance. Specific examples are provided to demonstrate calculating common ratios like the current ratio, inventory turnover, times interest earned, and gross profit margin for a sample company. The document is intended to help readers understand how to use ratio analysis to evaluate a firm's financial health.
The document provides an overview of financial analysis and planning. It discusses key financial statements like the balance sheet, income statement, and cash flow statement as sources of financial information. It also covers various types of financial ratios used in analysis, including liquidity, activity, leverage, profitability, and market value ratios. Specific ratios discussed include the current ratio, quick ratio, inventory turnover, accounts receivable turnover, and average payment period. The document emphasizes the importance of financial analysis for decision making and evaluating a firm's financial health.
The document discusses various methods for analyzing financial statements, including the use of ratios to evaluate different aspects of a company's financial health and performance. It describes ratio analysis as using calculations and interpretations of financial ratios to assess a firm. It then provides details on specific ratios to analyze liquidity, activity, debt, and profitability. These include current ratio, inventory turnover, debt-to-equity ratio, and return on equity. Finally, it discusses the DuPont analysis system for a more integrated approach to evaluate a firm's overall financial condition using ratios from the income statement and balance sheet.
This document provides an overview and learning objectives for Chapter 1 of a study guide on financial statements. It discusses key concepts such as the role of accounting, the elements of financial statements including assets, liabilities, equity, revenues and expenses, and the accounting equation. It also covers classifying business transactions, preparing financial statements, recording transactions using a horizontal model, and the importance of ethics for accountants. Finally, it identifies three types of business organizations as service, merchandising, or manufacturing.
Strategic control systems involve financial analysis and financial ratio analysis. Financial analysis assesses business viability, stability, and profitability. Financial ratios mathematically compare financial statement accounts to understand business performance and identify areas for improvement. Ratios allow comparison of companies. Key financial ratios measure liquidity, efficiency, financial leverage, and profitability. Liquidity ratios assess ability to meet current obligations. Efficiency ratios show how effectively assets are used. Leverage ratios assess debt and equity financing. Profitability ratios measure operating and net income generated relative to assets, sales, and equity. Control problems can be identified through executive review, internal audits, and checklists of inadequate control symptoms.
This document provides an introduction to financial statement analysis for small businesses. It discusses the importance of financial statements for business owners and managers. The four main types of financial statements are the income statement, balance sheet, statement of cash flows, and notes to the financial statements. Key terms related to each statement are defined. The document also discusses how financial statement analysis can be used as a management tool to evaluate past performance, diagnose problems, and forecast the future.
Analysis and Interpretation of Financial Statement.pptxmarvinrosel4
The document discusses various techniques for analyzing financial statements, including horizontal analysis, vertical analysis, ratio analysis, and calculations. It defines each technique and provides examples of key financial ratios used to evaluate a company's profitability, liquidity, solvency, operational efficiency, and financial health. These ratios include gross profit margin, return on assets, current ratio, debt-to-equity ratio, inventory turnover, and accounts receivable turnover. The document aims to teach learners how to interpret financial statement data using these analytical methods.
The document discusses financial statement analysis. It covers the three main financial statements: the balance sheet, income statement, and cash flow statement.
The balance sheet provides a snapshot of a company's financial position at a point in time, showing assets, liabilities, and shareholders' equity. The income statement indicates profits/losses over a period of time by comparing revenues and expenses. The cash flow statement provides insight into a company's sources and uses of cash.
The document also discusses ratio analysis, which is used to analyze a company's performance and financial position by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios cover areas like debt management, asset utilization, liquidity, profitability, and market
This document provides an overview of financial ratio analysis. It introduces four categories of ratios - liquidity, activity, leverage, and profitability - and discusses specific ratios within each category. These ratios are used to analyze a company's performance in areas like managing working capital and inventory, use of financial leverage, and overall profitability. The document also describes the DuPont system for performing a complete ratio analysis using return on assets and return on equity.
The document discusses various techniques for analyzing financial statements, including horizontal analysis, vertical analysis, and ratio analysis. It provides examples of applying these techniques to sample financial statement data. Specific topics covered include liquidity ratios, profitability ratios, solvency ratios, earnings power, irregular items, discontinued operations, extraordinary items, and quality of earnings. Objectives are to understand how to perform financial statement analysis and calculate common financial ratios.
Explain the various categories of ratio analysis and provide example.pdfarchanenterprises
Explain the various categories of ratio analysis and provide examples of at least two ratios in
each category. If you were an investor, which category would you be most interested in? Why?
Solution
Part-1
Ratios are used by lenders and business analysts to determine a company\'s financial stability and
standing.It\'s important to understand that financial ratios are time sensitive; they can only show
a picture of a business at a given time. There are five catagories of Financial ratios and those are
as follows :
Part-2 :
There are a large variety of ratios out there, but for an investor using financial ratios which are
broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and
valuation ratios. As an investor he should consider Profitability ratio because Profitability ratio is
a key piece of information that should be analyzed when you\'re considering investing in a
company. This is because high revenues alone don\'t necessarily translate into dividends for
investors unless a company is able to clear all of its expenses and costs. In general, the higher a
company\'s profit margin, the better, but as with most ratios, it is not enough to look at it in
isolation. It is important to compare it to the company\'s past levels, to the market average and to
its competitors.
Profitability Ratios : The profitability ratios are just what the name implies. They focus on the
firm\'s ability to generate a profit and an adequate return on assets and equity. They measure how
efficiently the firm uses its assets and how effectively it manages its operations and answers
questions like how efficiency his business and it helps to compare with other competitor.
Examples of Proftitablity ratios are Gross profit ratio, Net profit ratio, Operating profit ratio and
Return on investment ratio.
Market Value Ratios : The market value ratios can be calculated for publicly traded companies
only as they relate to stock price. There are many market value ratios, but a few of the most
commonly used are price/earnings (P/E), book value to share value and dividend yield .
LEVERAGE RATIO /Capital Structure ration : The term capital structure refers to the
relationship between various long term forms of financing such as debentures (long term),
preference share capital and equity share capital including reserves and surpluses. Leverage or
capital structure ratios are calculated to test the long term financial position of a firm. Generally
capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm.
Example of ratios are total debt ratios, the debt/equity ratio, the long-term debt ratio, the times
interest earned ratio, the fixed charge coverage ratio, and the cash coverage ratio.
Asset Efficiency or Turnover Ratios : The asset efficiency or turnover ratios measure the
efficiency with which the firm uses its assets to produce sales. As a result, it focuses on both the
income statement (sales) and the .
New Visa Rules for Tourists and Students in Thailand | Amit Kakkar Easy VisaAmit Kakkar
Discover essential details about Thailand's recent visa policy changes, tailored for tourists and students. Amit Kakkar Easy Visa provides a comprehensive overview of new requirements, application processes, and tips to ensure a smooth transition for all travelers.
The document discusses key elements of financial statement analysis including the four main financial statements, understanding the industry and company strategies, assessing the quality of financial statements, and analyzing current profitability and risk. It provides examples of various techniques used in financial statement analysis such as horizontal analysis, vertical analysis, common-size analysis, and calculating financial ratios to evaluate liquidity, asset management, debt, and profitability.
This document provides an overview of financial statement analysis. It discusses the objectives of ratio analysis, which involves calculating ratios to analyze a company's profitability, liquidity, asset management, financial leverage, and investor returns. Specific profitability, liquidity, and leverage ratios are defined. The document also covers cash flow analysis, interpreting ratio results, drivers of profitability and growth, and the importance of considering both financial and non-financial accounting information in analysis.
- The document provides an overview of key financial statements including the balance sheet, income statement, statement of cash flows, and statement of changes in shareholders' equity.
- The balance sheet lists a company's assets, liabilities, and shareholders' equity at a point in time. Assets are divided into current and long-term categories.
- The income statement reports revenues, expenses, and net income over a period of time. It is used to analyze a company's profitability.
The document provides an overview of a mentorship program on financial review. It discusses key steps in conducting a financial review, including analyzing financial statements, calculating financial ratios, and identifying trends over time. The objective is for participants to gain practical insights on evaluating business performance, operations, managers, and capital investments using information from financial statements. This will allow them to forecast conditions and make informed decisions. The mentorship method involves interactive discussions with practical examples and reviews.
This document discusses the accounting communication process and key players involved, including regulators, managers, directors, auditors, and financial statement users. It covers the roles and guidance these players receive, as well as common financial statements, reports, and disclosures used to communicate accounting information, such as annual reports, quarterly reports, and SEC filings. It also summarizes guidelines for ensuring useful financial reporting and analyzing company performance based on return on equity and its components.
This document provides an overview of various financial analysis metrics for evaluating company performance, including return on equity (ROE), return on assets (ROA), DuPont analysis, operating profitability analysis, liquidity ratios, and other related topics. It includes definitions of key terms, examples of computations using company financial data, and interpretations of the results. The goal is to help readers understand how to compute and analyze these important profitability and performance metrics.
A comparative analysis of prism cement ltd with jk cementProjects Kart
This document provides an overview of a research study comparing the financial performance of Prism Cement Ltd. and JK Cement Ltd. over the last four years. It outlines the company profiles, objectives and scope of the study, limitations, and research methodology.
The chapter introduces Prism Cement Ltd. and JK Cement Ltd., noting they both operate in northern India but JK Cement has been in business longer. It highlights sections that will examine each company's vision/mission, features, corporate social responsibility, and current performance. Ratios and financial data from annual reports will be analyzed to evaluate aspects like profitability, leverage, liquidity, and shareholder returns.
Bba 2204 fin mgt week 3 financial ratiosStephen Ong
This document provides an overview of financial statements and ratio analysis. It discusses the key financial statements including the income statement, balance sheet, statement of retained earnings, and statement of cash flows. It also covers consolidating international financial statements and how various parties use ratio analysis to evaluate a firm's liquidity, activity, debt, and profitability by comparing financial metrics to industry averages and past performance. Specific examples are provided to demonstrate calculating common ratios like the current ratio, inventory turnover, times interest earned, and gross profit margin for a sample company. The document is intended to help readers understand how to use ratio analysis to evaluate a firm's financial health.
The document provides an overview of financial analysis and planning. It discusses key financial statements like the balance sheet, income statement, and cash flow statement as sources of financial information. It also covers various types of financial ratios used in analysis, including liquidity, activity, leverage, profitability, and market value ratios. Specific ratios discussed include the current ratio, quick ratio, inventory turnover, accounts receivable turnover, and average payment period. The document emphasizes the importance of financial analysis for decision making and evaluating a firm's financial health.
The document discusses various methods for analyzing financial statements, including the use of ratios to evaluate different aspects of a company's financial health and performance. It describes ratio analysis as using calculations and interpretations of financial ratios to assess a firm. It then provides details on specific ratios to analyze liquidity, activity, debt, and profitability. These include current ratio, inventory turnover, debt-to-equity ratio, and return on equity. Finally, it discusses the DuPont analysis system for a more integrated approach to evaluate a firm's overall financial condition using ratios from the income statement and balance sheet.
This document provides an overview and learning objectives for Chapter 1 of a study guide on financial statements. It discusses key concepts such as the role of accounting, the elements of financial statements including assets, liabilities, equity, revenues and expenses, and the accounting equation. It also covers classifying business transactions, preparing financial statements, recording transactions using a horizontal model, and the importance of ethics for accountants. Finally, it identifies three types of business organizations as service, merchandising, or manufacturing.
Strategic control systems involve financial analysis and financial ratio analysis. Financial analysis assesses business viability, stability, and profitability. Financial ratios mathematically compare financial statement accounts to understand business performance and identify areas for improvement. Ratios allow comparison of companies. Key financial ratios measure liquidity, efficiency, financial leverage, and profitability. Liquidity ratios assess ability to meet current obligations. Efficiency ratios show how effectively assets are used. Leverage ratios assess debt and equity financing. Profitability ratios measure operating and net income generated relative to assets, sales, and equity. Control problems can be identified through executive review, internal audits, and checklists of inadequate control symptoms.
This document provides an introduction to financial statement analysis for small businesses. It discusses the importance of financial statements for business owners and managers. The four main types of financial statements are the income statement, balance sheet, statement of cash flows, and notes to the financial statements. Key terms related to each statement are defined. The document also discusses how financial statement analysis can be used as a management tool to evaluate past performance, diagnose problems, and forecast the future.
Analysis and Interpretation of Financial Statement.pptxmarvinrosel4
The document discusses various techniques for analyzing financial statements, including horizontal analysis, vertical analysis, ratio analysis, and calculations. It defines each technique and provides examples of key financial ratios used to evaluate a company's profitability, liquidity, solvency, operational efficiency, and financial health. These ratios include gross profit margin, return on assets, current ratio, debt-to-equity ratio, inventory turnover, and accounts receivable turnover. The document aims to teach learners how to interpret financial statement data using these analytical methods.
The document discusses financial statement analysis. It covers the three main financial statements: the balance sheet, income statement, and cash flow statement.
The balance sheet provides a snapshot of a company's financial position at a point in time, showing assets, liabilities, and shareholders' equity. The income statement indicates profits/losses over a period of time by comparing revenues and expenses. The cash flow statement provides insight into a company's sources and uses of cash.
The document also discusses ratio analysis, which is used to analyze a company's performance and financial position by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios cover areas like debt management, asset utilization, liquidity, profitability, and market
This document provides an overview of financial ratio analysis. It introduces four categories of ratios - liquidity, activity, leverage, and profitability - and discusses specific ratios within each category. These ratios are used to analyze a company's performance in areas like managing working capital and inventory, use of financial leverage, and overall profitability. The document also describes the DuPont system for performing a complete ratio analysis using return on assets and return on equity.
The document discusses various techniques for analyzing financial statements, including horizontal analysis, vertical analysis, and ratio analysis. It provides examples of applying these techniques to sample financial statement data. Specific topics covered include liquidity ratios, profitability ratios, solvency ratios, earnings power, irregular items, discontinued operations, extraordinary items, and quality of earnings. Objectives are to understand how to perform financial statement analysis and calculate common financial ratios.
Explain the various categories of ratio analysis and provide example.pdfarchanenterprises
Explain the various categories of ratio analysis and provide examples of at least two ratios in
each category. If you were an investor, which category would you be most interested in? Why?
Solution
Part-1
Ratios are used by lenders and business analysts to determine a company\'s financial stability and
standing.It\'s important to understand that financial ratios are time sensitive; they can only show
a picture of a business at a given time. There are five catagories of Financial ratios and those are
as follows :
Part-2 :
There are a large variety of ratios out there, but for an investor using financial ratios which are
broken up into four major categories: profitability ratios, liquidity ratios, solvency ratios and
valuation ratios. As an investor he should consider Profitability ratio because Profitability ratio is
a key piece of information that should be analyzed when you\'re considering investing in a
company. This is because high revenues alone don\'t necessarily translate into dividends for
investors unless a company is able to clear all of its expenses and costs. In general, the higher a
company\'s profit margin, the better, but as with most ratios, it is not enough to look at it in
isolation. It is important to compare it to the company\'s past levels, to the market average and to
its competitors.
Profitability Ratios : The profitability ratios are just what the name implies. They focus on the
firm\'s ability to generate a profit and an adequate return on assets and equity. They measure how
efficiently the firm uses its assets and how effectively it manages its operations and answers
questions like how efficiency his business and it helps to compare with other competitor.
Examples of Proftitablity ratios are Gross profit ratio, Net profit ratio, Operating profit ratio and
Return on investment ratio.
Market Value Ratios : The market value ratios can be calculated for publicly traded companies
only as they relate to stock price. There are many market value ratios, but a few of the most
commonly used are price/earnings (P/E), book value to share value and dividend yield .
LEVERAGE RATIO /Capital Structure ration : The term capital structure refers to the
relationship between various long term forms of financing such as debentures (long term),
preference share capital and equity share capital including reserves and surpluses. Leverage or
capital structure ratios are calculated to test the long term financial position of a firm. Generally
capital gearing ratio is mainly calculated to analyse the leverage or capital structure of the firm.
Example of ratios are total debt ratios, the debt/equity ratio, the long-term debt ratio, the times
interest earned ratio, the fixed charge coverage ratio, and the cash coverage ratio.
Asset Efficiency or Turnover Ratios : The asset efficiency or turnover ratios measure the
efficiency with which the firm uses its assets to produce sales. As a result, it focuses on both the
income statement (sales) and the .
New Visa Rules for Tourists and Students in Thailand | Amit Kakkar Easy VisaAmit Kakkar
Discover essential details about Thailand's recent visa policy changes, tailored for tourists and students. Amit Kakkar Easy Visa provides a comprehensive overview of new requirements, application processes, and tips to ensure a smooth transition for all travelers.
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck mari...Donc Test
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
TEST BANK Principles of cost accounting 17th edition edward j vanderbeck maria r mitchell.docx
Vicinity Jobs’ data includes more than three million 2023 OJPs and thousands of skills. Most skills appear in less than 0.02% of job postings, so most postings rely on a small subset of commonly used terms, like teamwork.
Laura Adkins-Hackett, Economist, LMIC, and Sukriti Trehan, Data Scientist, LMIC, presented their research exploring trends in the skills listed in OJPs to develop a deeper understanding of in-demand skills. This research project uses pointwise mutual information and other methods to extract more information about common skills from the relationships between skills, occupations and regions.
[4:55 p.m.] Bryan Oates
OJPs are becoming a critical resource for policy-makers and researchers who study the labour market. LMIC continues to work with Vicinity Jobs’ data on OJPs, which can be explored in our Canadian Job Trends Dashboard. Valuable insights have been gained through our analysis of OJP data, including LMIC research lead
Suzanne Spiteri’s recent report on improving the quality and accessibility of job postings to reduce employment barriers for neurodivergent people.
Decoding job postings: Improving accessibility for neurodivergent job seekers
Improving the quality and accessibility of job postings is one way to reduce employment barriers for neurodivergent people.
The Impact of Generative AI and 4th Industrial RevolutionPaolo Maresca
This infographic explores the transformative power of Generative AI, a key driver of the 4th Industrial Revolution. Discover how Generative AI is revolutionizing industries, accelerating innovation, and shaping the future of work.
Economic Risk Factor Update: June 2024 [SlideShare]Commonwealth
May’s reports showed signs of continued economic growth, said Sam Millette, director, fixed income, in his latest Economic Risk Factor Update.
For more market updates, subscribe to The Independent Market Observer at https://blog.commonwealth.com/independent-market-observer.
Dr. Alyce Su Cover Story - China's Investment Leadermsthrill
In World Expo 2010 Shanghai – the most visited Expo in the World History
https://www.britannica.com/event/Expo-Shanghai-2010
China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.
Abhay Bhutada, the Managing Director of Poonawalla Fincorp Limited, is an accomplished leader with over 15 years of experience in commercial and retail lending. A Qualified Chartered Accountant, he has been pivotal in leveraging technology to enhance financial services. Starting his career at Bank of India, he later founded TAB Capital Limited and co-founded Poonawalla Finance Private Limited, emphasizing digital lending. Under his leadership, Poonawalla Fincorp achieved a 'AAA' credit rating, integrating acquisitions and emphasizing corporate governance. Actively involved in industry forums and CSR initiatives, Abhay has been recognized with awards like "Young Entrepreneur of India 2017" and "40 under 40 Most Influential Leader for 2020-21." Personally, he values mindfulness, enjoys gardening, yoga, and sees every day as an opportunity for growth and improvement.
University of North Carolina at Charlotte degree offer diploma Transcripttscdzuip
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An accounting information system (AIS) refers to tools and systems designed for the collection and display of accounting information so accountants and executives can make informed decisions.
1. 1
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Fundamentals of Corporate
Finance
by
Robert Parrino, Ph.D. & David S. Kidwell, Ph.D.
2. 2
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
CHAPTER 4
Analyzing Financial Statements
3. 3
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Ratio Analysis
Quick Links
Financial Statement Analysis
The DuPont System, ROA, ROE
Benchmarks
Limitations of Ratio Analysis
4. 4
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Perspectives on Financial
Statement Analysis
A firm’s financial statements can be analyzed from
the perspective of different stakeholders.
Important perspectives:
Creditor
Manager
Stockholder
5. 5
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Stockholders’ perspective
Centers on value of stock held.
Allows determination of firm’s profitability,
return for that period, and likely dividends.
Interest in the financial statement is to gauge
cash flows firm will generate from operations.
Perspectives on Financial
Statement Analysis
6. 6
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Manager’s perspective
Interest in firm’s financial statement is similar
to stockholders’.
Manager’s job security depends on firm’s
performance.
Management gets feedback on investing,
financing, and working capital decisions by
identifying trends in various accounts
reported in financial statements.
Perspectives on Financial
Statement Analysis
7. 7
Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Creditors’ perspective
A firm’s creditors closely monitor
Amount of debt firm has.
Ability to meet short-term obligations.
Ability to generate sufficient cash flows to
meet all legal obligations, debt repayment,
and interest payments.
Focus on getting loans repaid and receiving
interest payments on time.
Perspectives on Financial
Statement Analysis
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Main Concern
Guidelines for Financial Statement
Analysis
From whose perspective firm analysis is done.
Management, shareholder or creditor.
Use only audited financial statements if
possible.
Perform analysis over 3-5 year period–time-
trend analysis.
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Main Concern (cont.)
Compare firm’s performance to direct
competitors’ performance.
Perform a benchmark analysis comparing it to
most relevant competitors – American Airlines
with Delta or United Airlines.
Guidelines for Financial Statement
Analysis
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Common-Size Balance Sheets
Common-Size Financial
Statements
Each asset and liability item on balance sheet
is standardized by dividing by total assets.
Accounts are then represented as
percentages of total assets.
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Exhibit 4.1: Common-Size
Balance Sheets
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Common-Size Income Statement
Each income statement item standardized by
dividing it by dollar amount of net sales.
Each income statement item now indicated as
percent of sales.
Common-Size Financial
Statements
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Exhibit 4.2: Common-Size
Income Statements
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A financial ratio is computed by dividing one balance
sheet or income statement item by another.
Ratio Analysis
Variety of ratios can be computed to focus on
specialized aspects of firm’s performance.
Choice of scale determines story garnered from
ratio.
Why Ratios Are Better Measures
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Different ratios calculated based on type of firm
being analyzed or kind of analysis being performed.
Ratios may be computed to measure liquidity,
efficiency, leverage, profitability, or market value
performance.
Why Ratios Are Better Measures
Ratio Analysis
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Exhibit 4.3: Ratios for Time-
Trend Analysis
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Measures ability of firm to meet short-term obligations
with short-term assets, without endangering the firm.
Liquidity Ratios
Current ratio
Quick ratio
Two commonly used ratios to measure liquidity
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Current ratio is calculated by dividing current assets by
current liabilities.
2.75
$377.8
$1,039.8
(4.1)
liabilites
Current
assets
Current
ratio
Current
Amount of current assets firm has per dollar
of current liabilities.
Higher number = more liquidity
Liquidity Ratios
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Quick (acid-test) ratio calculated by dividing most
liquid current assets by current liabilities.
Amount of liquid assets firm has per dollar
of current liabilities.
Higher number = more liquidity
Liquidity Ratios
Inventory subtracted from total current assets
determines most liquid assets.
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Quick ratios typically smaller than current ratios for
firms carrying significant inventory (e.g. mfg).
1.63
$377.8
$423.8
-
$1,039.8
(4.2)
s
liabilitie
Current
Inventory
-
assets
Current
ratio
Quick
Liquidity Ratios
Firms carrying little inventory (e.g. service) will see
no significant difference between the two.
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Measure how efficiently firm’s management uses
assets to generate sales.
Efficiency Ratios
Sometimes called asset turnover ratios.
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Used by management to identify areas of inefficiency.
Efficiency ratios focus on inventory, receivables and
use of fixed and total assets.
Used by creditors to determine speed of converting
inventory to receivables.
Receivables convert to cash to help firm meet
debt obligations.
Efficiency Ratios
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Inventory turnover ratio–measures how many times
inventory turned over into saleable products.
2.55
$423.8
$1,081.1
(4.3)
Inventory
sold
goods
of
Cost
ratio
turnover
Inventory
In general, more often a firm can turn over
inventory, the better. Too high or too low a
turnover could be warning sign.
Efficiency Ratios
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Days’ sales in inventory ratio also builds on inventory
turnover ratio.
days
143.14
2.55
days
365
(4.4)
turnover
Inventory
days
365
inventory
in
sales
Days’
Measures number of days firm takes to turn
over inventory.
The smaller the number, the faster the firm
turns over inventory, more efficient it is.
Efficiency Ratios
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Accounts receivable turnover ratio measures how
quickly firm collects on its credit sales.
5.11
$306.2
$1,563.7
(4.5)
receivable
Accounts
sales
Net
turnover
receivable
Accounts
The higher the frequency of turnover, the
faster it converts credit sales into cash flows
Efficiency Ratios
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Days Sales Outstanding (DSO) measures number of
days firm takes to convert receivables into cash.
days
71.43
5.11
days
365
(4.6)
turnover
receivable
Accounts
days
365
DSO
The fewer the days, the more efficient the
firm.
Note: an overzealous credit department
may offend firm’s customers.
Efficiency Ratios
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Total asset turnover ratio measures level of
sales firm generates per dollar of total assets.
0.83
$1,889.2
$1,563.7
(4.7)
assets
Total
sales
Net
turnover
asset
Total
Asset Turnover Ratios
The higher the turnover, the more efficiently
management is using total assets.
More relevant for service industry firms.
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Fixed asset turnover ratio measures level of sales
firm generates per dollar of fixed assets.
Higher the fixed asset turnover, the more efficiently
management uses plant and equipment.
More relevant for equipment intensive firms (e.g.
mfg).
Asset Turnover Ratios
Net sales
Fixed asset turnover = (4.8)
Net fixed assets
$1,563.7
=
$399.4
= 3.92
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Leverage ratios reflect ability of firm and owners to
use equity to generate borrowed funds.
Leverage Ratios
Financial leverage refers to use of debt in firm’s
capital structure.
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Use of debt increases shareholders’ returns; tax
benefits from interest payments on debt.
Two sets of ratios can analyze leverage:
Debt ratios quantify use of debt in capital
structure;
Coverage ratios measure firm’s ability to meet
debt obligations.
Leverage Ratios
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The higher the amount of debt, the higher the firm’s
leverage, and the more risky it is.
Leverage Ratios
Total debt
Total debt ratio = (4.9)
Total assets
$951.8
=
$1,889.2
= 0.50
Total debt ratio is calculated using short-term and
long-term debt.
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Debt to equity ratio is a second leverage ratio,
measuring amount of debt per dollar of equity.
Leverage Ratios
Total debt
Total equity
Debt-to-equity ratio = (4.10)
$951.8
=
$937.4
= 1.01
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Equity multiplier or leverage multiplier reveals amount
of assets firm has for every dollar of equity.
Leverage Ratios
Total assets
Equity multiplier = (4.11)
Total equity
$1,889.2
=
$937.4
= 2.02
Best measure of firm’s ability to leverage shareholders’
equity with borrowed funds.
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Debt ratio
Debt to equity ratio
1 Debt to equity ratio
Equity multiplier = 1 + Debt to equity ratio
Other Leverage Relationships
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Times interest earned measures number of dollars in
operating earnings firm generates per dollar of
interest expense.
Coverage Ratios
EBIT
Times interest earned = (4.12)
Interest expense
$168.4
=
$5.6
=30.07
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Cash coverage ratio measures amount of cash firm
has to meet its interest payments.
Coverage Ratios
EBITDA
Cash coverage = (4.13)
Interest expense
$251.5
=
$5.6
= 44.91
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Gross profit margin measures amount of gross profit
generated per dollar of net sales.
Profitability Ratios
Net sales - Cost of Goods Sold
Net sales
Gross profit margin = (4.14)
$1,563.7 - $1,081.1
=
$1,563.7
= 30.86%
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Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Operating profit margin measures the amount of
operating profit generated by firm for each dollar of
net sales.
Profitability Ratios
EBIT
Operating profit margin = (4.15)
Net sales
$168.4
=
$1,563.7
= 10.77%
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Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Net profit margin measures amount of net income
after taxes generated by firm for each dollar of net
sales.
Profitability Ratios
Net Income
Net profit margin = (4.16)
Net sales
$118.5
=
$1,563.7
= 7.58%
In each case, the higher the ratio, the more profitable
the firm.
Management and creditors likely to focus on these
profitability measures; shareholders likely to
concentrate on two others.
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Return on assets (ROA) ratio measures amount of net
income per dollar of total assets. There are two
approaches to calculate the return on assets.
Profitability Ratios
EBIT
EROA = (4.17)
Total assets
$168.4
=
$1,889.2
= 8.91%
This ratio reveals how efficiently management
utilized assets under their command.
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Some analysts calculate return on assets as:
Profitability Ratios
Net income
ROA = (4.18)
Total assets
$118.5
=
$1,889.2
= 6.27%
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Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Return on equity (ROE) ratio measures dollar
amount of net income per dollar of shareholders’
equity.
For firm with no debt, ROA = ROE
For firm with debt, ROE >ROA
Profitability Ratios
Net income
Return on equity = (4.19)
Total equity
$118.5
=
$937.4
= 12.64%
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Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
The following ratios reveal how market views
company’s liquidity, efficiency, leverage, profitability.
Market Value Ratios
Net income
Earnings per share = (4.20)
Shares outstanding
$118,500,000
=
$54,566,054
= 2.17 per share
Earnings per share (EPS) ratio measures income
after taxes generated by firm for each share
outstanding.
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Price-earnings (P/E) ratio ties firm’s earnings per
share to price per share.
P/E ratio reflects investors’ expectations of
firm’s future earnings growth.
Market Value Ratios
Price per share
Price-earnings ratio = (4.21)
Earnings per share
$48.61
=
$2.17
= 22.4
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Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Set of related ratios that links balance sheet
and income statement.
The DuPont System
Diagnostic tool for evaluating firm’s financial
health.
Used by management and shareholders to
understand factors that drove firm’s ROE.
Based on two equations that relate firm’s
ROA and ROE.
Diagnostic Tool
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Return on assets (net income/total assets) can be
broken down into two components:
Profit margin and total assets turnover ratio
(4.22)
turnover
assets
Total
margin
Profit
assets
Total
sales
Net
sales
Net
income
Net
ROA
The ROA Equation
Net profit margin measures management’s ability to
generate sales & manage operating expenses.
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Exhibit 4.4: Two Basic
Strategies to Earn a Higher
ROA
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Chapter 4 – Analyzing Financial Statements Copyright 2008 John Wiley & Sons
Total asset turnover reveals how efficiently
management uses assets under its command; how
much output can be generated with a given asset
base. Thus, asset turnover measures asset use
efficiency.
The ROA equation says if management wants to
increase firm’s ROA, it can increase profit margin,
asset turnover, or both.
Management can examine a poor ROA and determine
whether the problem is operating efficiency or asset
use efficiency.
The ROA Equation
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This equation is simply a restatement of equation 4.19.
(4.23)
multiplier
Equity
ROA
equity
Total
assets
Total
assets
Total
income
Net
equity
Total
income
Net
ROE
The ROA Equation
ROE is determined by firm’s ROA and its use of
leverage.
Firm with small ROA can increase ROE by using
higher leverage.
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Shows that a firm’s ROE is determined by three factors:
The DuPont Equation
Net profit margin, which measures firm’s
operating efficiency.
Total asset turnover, which measures firm’s
asset use efficiency.
The equity multiplier, which measures
firm’s financial leverage.
ROE = Net profit margin Total asset turnover
Equity multiplier (4.24)
Net income Net sales Total assets
ROE =
Net sales Total assets Total e
(4.25)
quity
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Exhibit 4.5: Relations in the
DuPont System of Analysis
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Analyzing firm’s financial performance will reveal
inefficiencies and strengths.
Weak operational efficiency calls for closer look at
firm’s income statement items.
Asset turnover or leverage problems shift focus to
balance sheet.
The DuPont Equation
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Those who do not agree that maximizing ROE is
equivalent to shareholder wealth maximization
identify three key weaknesses of ROE.
ROE as a Goal
ROE is based on after-tax earnings, not
cash flows.
ROE does not consider risk.
ROE ignores size of initial investment as
well as future cash flows.
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Those who believe that they are consistent propose.
ROE allows management to break down
performance, identify areas of strengths and
weaknesses.
ROE is highly correlated with shareholder
wealth maximization.
ROE as a Goal
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A ratio analysis becomes relevant only when
compared against a benchmark.
Financial managers can create a benchmark for
comparison in three ways:
Selecting a Benchmark
1. Time-trend
2. Industry average
3. Peer group
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Time-trend analysis
Based on firm’s historical performance.
Allows management to examine each ratio
over time, determine whether trend is good or
bad for firm.
Selecting a Benchmark
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Industry average analysis
Another way of developing benchmark.
Firms in same industry grouped by size,
sales, and product lines, to establish
benchmark ratios.
Can identify industry groups with Standard
Industrial Classification (SIC) system.
Selecting a Benchmark
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Peer group analysis
Instead of selecting an entire industry,
management may select firms similar in size
or sales, or who compete in same market.
Average ratios of this peer group would then
be used as benchmark.
Peer groups can be only 3 or 4 firms,
depending on industry.
Selecting a Benchmark
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Exhibit 4.6: Peer Group Ratios
for Diaz Manufacturing
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Exhibit 4.7: Peer Group Analysis
for Diaz Manufacturing
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Ratio analysis depends on accounting data based
on historical costs.
Limitations of Ratio Analysis
No theoretical backing in making judgments based
on financial statement and ratio analysis.
When doing industry or peer group analysis, one
often encounters large, diversified firms that do not
fit into any one SIC code.
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Time trend analysis could be distorted by financial
statements affected by inflation.
Multinational firms deal with many accounting
standards.
Difficult to compare financial reports.
Even among domestic firms, differences in
accounting practices make comparisons difficult.
FIFO versus LIFO
Limitations of Ratio Analysis