If you don't know the financials, you don't know the business. Financial statements are often an overlooked tool to better understand a business. Financial statements are essentially the scorecard of the business. If you can’t read the scorecard your business may be in jeopardy and you not even know it. Many business owners don’t understand the story they tell. This deck helps you understand the basic financial statements, the importance, steps of an analysis, ratios, and a quick valuation.
This presentation will help professionals as well as students to understand ratios. I have used very easy language and have tried to be more descriptive.
The document discusses various financial ratios used to evaluate the financial health and performance of a business. It defines ratios that measure leverage, liquidity, profitability, and efficiency. These include the debt-to-asset ratio, quick ratio, current ratio, net profit margin, return on investment, and return on equity. Calculating and analyzing these ratios helps owners and managers assess the business's solvency, working capital management, profit generation, and use of assets and equity.
The document discusses various financial ratios used to analyze a company's profitability, liquidity, efficiency, gearing, and evaluate investments. It provides examples and definitions of key ratios including gross profit margin, net profit margin, current ratio, acid test (quick) ratio, return on capital employed, stock turnover, gearing ratio, and average rate of return.
Wm 3 Fundamental Analysis stock market analysis 1yogesh ingle
Fundamental analysis evaluates a security's underlying value by examining related economic, financial and other qualitative and quantitative factors. It includes examining a company's financial statements and health, its management and competitive advantages, and its competitors and markets. Technical analysis, on the other hand, studies past stock price movements and patterns to predict future price changes. Fundamental analysis uses financial ratios to evaluate a company's profitability, operational efficiency, liquidity, leverage and market performance. Common financial ratios include return on equity, current ratio, debt-to-equity, and earnings per share.
Where Did All My Profits Go? Mastering the Concept of Working Capital (Series...Financial Poise
Stated simply, Working Capital = Current Assets - Current Liabilities. This equation helps a company (and its financing sources) understand whether it has enough short term cash inflows to cover its short term cash outflows, also referred to as liquidity. But it’s not as simple as that. And, because it is the elemental center of cash flow, which in turn is the lifeblood of any business, it deserves much attention. Understanding the various parts of working capital will allow you to develop a plan for taming your working capital and, instead, have it work for you. In this webinar you will learn what parts of the balance sheet make up working capital and what actions cause the most problems with cash flow. It also covers best practices for managing working capital that will allow you to avoid working capital issues that can negatively impact cash flow, tax acceleration and make financing difficult to find.
To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/mastering-the-concept-of-working-capital-2020/
This document discusses key financial ratios used to analyze different aspects of a business's performance. It covers ratios related to liquidity, investment/shareholders, gearing, profitability, and financial metrics. Specifically, it defines ratios like the current ratio, acid test ratio, return on capital employed, gross profit margin, and stock turnover, explaining what each measures and ideal levels.
This document discusses various accounting ratios used to evaluate business performance. It describes profitability ratios like gross profit percentage and net profit percentage, which are calculated using the profit and loss statement. It also discusses balance sheet ratios like return on capital invested and current (working capital) ratio, which analyze capital efficiency and liquidity. Specific formulas are provided to calculate each ratio along with guidelines for interpreting the results.
This presentation will help professionals as well as students to understand ratios. I have used very easy language and have tried to be more descriptive.
The document discusses various financial ratios used to evaluate the financial health and performance of a business. It defines ratios that measure leverage, liquidity, profitability, and efficiency. These include the debt-to-asset ratio, quick ratio, current ratio, net profit margin, return on investment, and return on equity. Calculating and analyzing these ratios helps owners and managers assess the business's solvency, working capital management, profit generation, and use of assets and equity.
The document discusses various financial ratios used to analyze a company's profitability, liquidity, efficiency, gearing, and evaluate investments. It provides examples and definitions of key ratios including gross profit margin, net profit margin, current ratio, acid test (quick) ratio, return on capital employed, stock turnover, gearing ratio, and average rate of return.
Wm 3 Fundamental Analysis stock market analysis 1yogesh ingle
Fundamental analysis evaluates a security's underlying value by examining related economic, financial and other qualitative and quantitative factors. It includes examining a company's financial statements and health, its management and competitive advantages, and its competitors and markets. Technical analysis, on the other hand, studies past stock price movements and patterns to predict future price changes. Fundamental analysis uses financial ratios to evaluate a company's profitability, operational efficiency, liquidity, leverage and market performance. Common financial ratios include return on equity, current ratio, debt-to-equity, and earnings per share.
Where Did All My Profits Go? Mastering the Concept of Working Capital (Series...Financial Poise
Stated simply, Working Capital = Current Assets - Current Liabilities. This equation helps a company (and its financing sources) understand whether it has enough short term cash inflows to cover its short term cash outflows, also referred to as liquidity. But it’s not as simple as that. And, because it is the elemental center of cash flow, which in turn is the lifeblood of any business, it deserves much attention. Understanding the various parts of working capital will allow you to develop a plan for taming your working capital and, instead, have it work for you. In this webinar you will learn what parts of the balance sheet make up working capital and what actions cause the most problems with cash flow. It also covers best practices for managing working capital that will allow you to avoid working capital issues that can negatively impact cash flow, tax acceleration and make financing difficult to find.
To listen to this webinar on-demand, go to: https://www.financialpoise.com/financial-poise-webinars/mastering-the-concept-of-working-capital-2020/
This document discusses key financial ratios used to analyze different aspects of a business's performance. It covers ratios related to liquidity, investment/shareholders, gearing, profitability, and financial metrics. Specifically, it defines ratios like the current ratio, acid test ratio, return on capital employed, gross profit margin, and stock turnover, explaining what each measures and ideal levels.
This document discusses various accounting ratios used to evaluate business performance. It describes profitability ratios like gross profit percentage and net profit percentage, which are calculated using the profit and loss statement. It also discusses balance sheet ratios like return on capital invested and current (working capital) ratio, which analyze capital efficiency and liquidity. Specific formulas are provided to calculate each ratio along with guidelines for interpreting the results.
Profitability Ratio
A profitability ratio is a measure of financial ratio defining the profit percent and return percent from the business using data from financial statements at a specific point of time
It assess business’s ability to generate gross profit, operating profit and net profit from the sales using data from profit& loss statement
It even takes into consideration various return generating ability of business in terms of return on assets, return on capital employed, return on equity, return on investment using data from balance sheet
Types of profitability ratio
Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Assets, Return on Equity, Return on Investment, Return on Capital Employed
Gross Profit Ratio
Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between gross profit and the revenue from net sales
GPR = (퐆퐫퐨퐬퐬 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Net Profit Ratio
The net profit ratio is equal to how much net profit is generated as a ratio of revenue earned through sales
Net Profit Ratio = (퐍퐞퐭 푷풓풐풇풊풕)/(퐍퐞퐭 푺풂풍풆풔)
Operating Profit Margin is a profitability ratio used to calculate the percentage of operating profit a company produces from its operations, prior to deduction of taxes and interest charges
Operating Profit Ratio
Operating Profit Ratio = (퐎퐩퐞퐫퐚퐭퐢퐧퐠 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Return on assets (ROA) is a kind of profitability measure used to determine returns on assets relevant when compared across the companies or previous performance of the company
Return On Asset = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐀퐬퐬퐞퐭퐬)
Return on equity (ROE) is a measure of financial performance calculated by dividing net profit by average shareholders' equity
ROE = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐄퐪퐮퐢퐭퐲)
Return on capital employed is a profitability ratio used in valuation of company’s financial position depicting the return out of capital employed
ROCE = 퐄퐁퐈퐓/(퐂퐚퐩퐢퐭퐚퐥 퐄퐦퐩퐥퐨퐲퐞퐝)
Return on investment is a profitability measure used by businesses to identify the efficiency of business in generating return out of an investment
ROI = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐂퐨퐬퐭 퐨퐟 퐈퐧퐯퐞퐬퐭퐦퐞퐧퐭)
Ratio analysis refers to the analysis and interpretation of the data collected from the financial statements (i.e., Profit and Loss Statement, Balance Sheet and Fund/Cash Flow statement etc.)
Thank You for Watching
DevTech Finance
The document provides an overview of how to read and understand key financial reports and ratios that are used to analyze the financial performance and health of public companies. It discusses the different types of financial statements including the income statement, balance sheet, and cash flow statement. It also outlines various financial ratios that can be used to evaluate a company's short-term stability, long-term stability, management performance, and profitability.
Our accounting professor permitted us to use one 8x11 sheet of paper during our comprehensive final exam. Within a short amount of time I laid out all the major concepts we covered along with my own notes/examples. I also recruited Pac Man to help out with making room for our final chapter topics.
Edit: Full res version here --> http://www.joejan6.com/scratch/GuideSheet13.pdf
This document provides an overview of how to read and understand key financial reports and metrics that are used to analyze the financial performance and condition of public companies. It discusses things like the balance sheet, income statement, cash flow statement, financial ratios, and investment strategies. The key elements covered include the components and purpose of the main financial reports, important accounting concepts and terms, and various ratios used to evaluate areas like liquidity, management performance, profitability, and stock valuation.
The document discusses ratio analysis, which involves using ratios to analyze a company's financial statements and determine its financial soundness. It defines various types of ratios including liquidity, profitability, and solvency ratios. It also covers the classification, calculation, and interpretation of different financial ratios like the current ratio, quick ratio, and absolute liquid ratio.
10 Common Errors in Valuations and How to Effectively Cross-Examine These IssuesSkoda Minotti
You just received an opposing expert’s valuation report. Looking for weaknesses in the concluded value? In this presentation, you will learn: how to identify 10 common errors in valuations; how to correctly approach the 10 common errors in valuations; how attorneys will cross-examin experts on the 10 common errors in valuations
This document provides an overview of financial statement analysis and ratio analysis. It defines key financial statements like the income statement, balance sheet, and statement of cash flows. It also explains the purpose of ratio analysis is to evaluate a firm's performance, liquidity, profitability, and financial stability by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios covered include liquidity, leverage, activity, and profitability ratios. Ratio analysis is a useful tool but requires comparing ratios to standards and accounting for company and industry differences.
This document provides guidelines on using ratio analysis as a management tool to improve understanding of financial results and trends over time. It outlines various categories of ratios including profitability, operational efficiency, liquidity, and leverage ratios. For each ratio, it defines what the ratio measures and what insights it can provide about the organization's financial performance and sustainability. The ratios can help pinpoint strengths and weaknesses, measure performance against goals and industry benchmarks, and identify areas for strategic improvement.
The document discusses various analytical techniques used to analyze financial reports and ratios, including ratio analysis, vertical analysis, horizontal analysis, and trend analysis. It then provides examples of key financial ratios used to evaluate the profitability, financial stability, and effectiveness of management for a business. These include ratios like gross profit ratio, net profit ratio, current ratio, quick ratio, equity ratio, and debt ratio. Recommendations are provided for improving areas of weakness identified by the ratios.
The document discusses ratio analysis and provides definitions and formulas for various types of ratios used to analyze company financial statements. It covers 18 different ratios organized into categories of liquidity/short term solvency ratios, capital structure/long term solvency ratios, asset management ratios, and profitability ratios. The ratios are used to evaluate a company's financial health, performance, and efficiency in areas such as liquidity, leverage, asset utilization, and profit generation.
Ratio analysis is a method of expressing the relationships between financial statement elements. It is used to evaluate a firm's performance, strengths, weaknesses, and ability to meet obligations. Ratios can be classified into liquidity, capital structure, turnover/activity, and profitability. Liquidity ratios measure short-term debt paying ability, capital structure ratios measure financial risk, turnover ratios measure asset use efficiency, and profitability ratios measure profit generation. Ratio analysis allows stakeholders to assess the firm's performance, financial condition, and risk.
This document provides an overview of various ratio analysis techniques used to evaluate the financial health and performance of a business. It discusses liquidity ratios, profitability ratios, financial leverage ratios, operating performance ratios, and investment valuation ratios. For each type of ratio, it provides examples of specific ratios calculated along with their formulas and what they measure. The ratios are used to analyze a company's ability to meet short-term obligations, manage costs and expenses, utilize assets, leverage debt, generate revenue, and determine stock valuation.
1. Ratio analysis involves calculating and analyzing relationships between financial data to assess a company's performance and financial position.
2. Key financial ratios include current ratio, quick ratio, debt-to-equity ratio, gross profit ratio, return on capital employed, and dividend payout ratio.
3. Ratio analysis is used by various stakeholders like investors, managers, and creditors to evaluate aspects like profitability, liquidity, operational efficiency, and financial leverage.
This document discusses various types of financial ratios used in financial statement analysis, including:
1. Liquidity ratios like the current ratio and acid-test ratio, which measure a company's ability to pay short-term debts with its current assets.
2. Turnover ratios like inventory, debtors, and creditors turnover, which measure how efficiently a company utilizes its current assets.
3. Leverage ratios like the debt-to-equity ratio and interest coverage ratio, which indicate the degree of a company's financial leverage.
4. Profitability ratios like gross profit margin, which measure a company's ability to generate profits from sales.
5. Activity ratios, which measure how efficiently
Meaning of Ratios
Objective of ratio analysis
Advantage or uses of Accounting Ratios
Limitations of Accounting Ratios
Classification of ratios :
i). Liquidity Ratio
ii). Solvency Ratio
iii). Activity/Turnover Ratio
iv). Profitability/Income Ratio
Financial ratio analysis can serve as an early warning system by measuring a company's performance across key financial metrics. Ratio analysis assumes accurate accounting information and compares a company's ratios to industry standards. Conducting regular ratio analysis can improve a company's profitability and chances of survival by identifying areas for improvement. Key ratios to examine include current assets to current liabilities, accounts receivable to working capital, inventory turnover, net profit to net worth, and net sales to working capital. Comparing ratios to competitors helps pinpoint where a company can enhance efficiency.
Equity-Investment Analyst who have been working in the financial markets for over 35 years. A University of Pennsylvania Wharton School of Business Graduate, an Investment and Financial leader on Capital Hill in Washington, DC and 20 years of financial modeling and analysis consulting experience. I am a teacher, a mentor and accomplished businessman eager to share my experience, and helpful advice
This document discusses ratio analysis, which involves calculating relationships between financial statement items to analyze a company's performance and financial position. Ratio analysis can be used to evaluate profitability, solvency, operating efficiency, short-term financial position, and more. Some common ratios mentioned include the current ratio, quick ratio, debt-to-equity ratio, and gross profit ratio. The document outlines how ratios are calculated and expressed, and provides examples of liquidity, activity, profitability, and long-term financial position ratios. Caution is advised when interpreting ratios, as different accounting treatments, time periods, or single ratios can provide misleading results.
This document discusses how management accounting can increase business profits. It explains key management accounting concepts like cost analysis, cash flow projections, budgets, and financial ratio analysis. These tools help businesses understand costs, cash flows, and financial performance over time. Ratio analysis in particular can serve as an early warning system by identifying potential problems. Understanding a business's finances through management accounting allows owners to better manage costs, anticipate issues, and improve overall profits.
This document provides definitions and explanations of various ratios used in ratio analysis. It discusses ratios that measure activity, liquidity, solvency, profitability, and leverage. For inventory turnover, it notes that a high ratio could indicate effective inventory management but could also mean inadequate inventory levels. It explains that receivables and payables turnover ratios high compared to peers could mean stringent credit terms that reduce sales. Profitability ratios like ROE are discussed as measuring management effectiveness.
Profitability Ratio
A profitability ratio is a measure of financial ratio defining the profit percent and return percent from the business using data from financial statements at a specific point of time
It assess business’s ability to generate gross profit, operating profit and net profit from the sales using data from profit& loss statement
It even takes into consideration various return generating ability of business in terms of return on assets, return on capital employed, return on equity, return on investment using data from balance sheet
Types of profitability ratio
Gross Profit Ratio, Net Profit Ratio, Operating Profit Ratio, Return on Assets, Return on Equity, Return on Investment, Return on Capital Employed
Gross Profit Ratio
Gross Profit Ratio(GPR) is a profitability ratio that shows the relationship between gross profit and the revenue from net sales
GPR = (퐆퐫퐨퐬퐬 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Net Profit Ratio
The net profit ratio is equal to how much net profit is generated as a ratio of revenue earned through sales
Net Profit Ratio = (퐍퐞퐭 푷풓풐풇풊풕)/(퐍퐞퐭 푺풂풍풆풔)
Operating Profit Margin is a profitability ratio used to calculate the percentage of operating profit a company produces from its operations, prior to deduction of taxes and interest charges
Operating Profit Ratio
Operating Profit Ratio = (퐎퐩퐞퐫퐚퐭퐢퐧퐠 퐏퐫퐨퐟퐢퐭)/(퐍퐞퐭 퐒퐚퐥퐞퐬)
Return on assets (ROA) is a kind of profitability measure used to determine returns on assets relevant when compared across the companies or previous performance of the company
Return On Asset = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐀퐬퐬퐞퐭퐬)
Return on equity (ROE) is a measure of financial performance calculated by dividing net profit by average shareholders' equity
ROE = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐀퐯퐠.퐓퐨퐭퐚퐥 퐄퐪퐮퐢퐭퐲)
Return on capital employed is a profitability ratio used in valuation of company’s financial position depicting the return out of capital employed
ROCE = 퐄퐁퐈퐓/(퐂퐚퐩퐢퐭퐚퐥 퐄퐦퐩퐥퐨퐲퐞퐝)
Return on investment is a profitability measure used by businesses to identify the efficiency of business in generating return out of an investment
ROI = (퐍퐞퐭 퐏퐫퐨퐟퐢퐭)/(퐂퐨퐬퐭 퐨퐟 퐈퐧퐯퐞퐬퐭퐦퐞퐧퐭)
Ratio analysis refers to the analysis and interpretation of the data collected from the financial statements (i.e., Profit and Loss Statement, Balance Sheet and Fund/Cash Flow statement etc.)
Thank You for Watching
DevTech Finance
The document provides an overview of how to read and understand key financial reports and ratios that are used to analyze the financial performance and health of public companies. It discusses the different types of financial statements including the income statement, balance sheet, and cash flow statement. It also outlines various financial ratios that can be used to evaluate a company's short-term stability, long-term stability, management performance, and profitability.
Our accounting professor permitted us to use one 8x11 sheet of paper during our comprehensive final exam. Within a short amount of time I laid out all the major concepts we covered along with my own notes/examples. I also recruited Pac Man to help out with making room for our final chapter topics.
Edit: Full res version here --> http://www.joejan6.com/scratch/GuideSheet13.pdf
This document provides an overview of how to read and understand key financial reports and metrics that are used to analyze the financial performance and condition of public companies. It discusses things like the balance sheet, income statement, cash flow statement, financial ratios, and investment strategies. The key elements covered include the components and purpose of the main financial reports, important accounting concepts and terms, and various ratios used to evaluate areas like liquidity, management performance, profitability, and stock valuation.
The document discusses ratio analysis, which involves using ratios to analyze a company's financial statements and determine its financial soundness. It defines various types of ratios including liquidity, profitability, and solvency ratios. It also covers the classification, calculation, and interpretation of different financial ratios like the current ratio, quick ratio, and absolute liquid ratio.
10 Common Errors in Valuations and How to Effectively Cross-Examine These IssuesSkoda Minotti
You just received an opposing expert’s valuation report. Looking for weaknesses in the concluded value? In this presentation, you will learn: how to identify 10 common errors in valuations; how to correctly approach the 10 common errors in valuations; how attorneys will cross-examin experts on the 10 common errors in valuations
This document provides an overview of financial statement analysis and ratio analysis. It defines key financial statements like the income statement, balance sheet, and statement of cash flows. It also explains the purpose of ratio analysis is to evaluate a firm's performance, liquidity, profitability, and financial stability by calculating and comparing various financial ratios over time and against industry benchmarks. Common ratios covered include liquidity, leverage, activity, and profitability ratios. Ratio analysis is a useful tool but requires comparing ratios to standards and accounting for company and industry differences.
This document provides guidelines on using ratio analysis as a management tool to improve understanding of financial results and trends over time. It outlines various categories of ratios including profitability, operational efficiency, liquidity, and leverage ratios. For each ratio, it defines what the ratio measures and what insights it can provide about the organization's financial performance and sustainability. The ratios can help pinpoint strengths and weaknesses, measure performance against goals and industry benchmarks, and identify areas for strategic improvement.
The document discusses various analytical techniques used to analyze financial reports and ratios, including ratio analysis, vertical analysis, horizontal analysis, and trend analysis. It then provides examples of key financial ratios used to evaluate the profitability, financial stability, and effectiveness of management for a business. These include ratios like gross profit ratio, net profit ratio, current ratio, quick ratio, equity ratio, and debt ratio. Recommendations are provided for improving areas of weakness identified by the ratios.
The document discusses ratio analysis and provides definitions and formulas for various types of ratios used to analyze company financial statements. It covers 18 different ratios organized into categories of liquidity/short term solvency ratios, capital structure/long term solvency ratios, asset management ratios, and profitability ratios. The ratios are used to evaluate a company's financial health, performance, and efficiency in areas such as liquidity, leverage, asset utilization, and profit generation.
Ratio analysis is a method of expressing the relationships between financial statement elements. It is used to evaluate a firm's performance, strengths, weaknesses, and ability to meet obligations. Ratios can be classified into liquidity, capital structure, turnover/activity, and profitability. Liquidity ratios measure short-term debt paying ability, capital structure ratios measure financial risk, turnover ratios measure asset use efficiency, and profitability ratios measure profit generation. Ratio analysis allows stakeholders to assess the firm's performance, financial condition, and risk.
This document provides an overview of various ratio analysis techniques used to evaluate the financial health and performance of a business. It discusses liquidity ratios, profitability ratios, financial leverage ratios, operating performance ratios, and investment valuation ratios. For each type of ratio, it provides examples of specific ratios calculated along with their formulas and what they measure. The ratios are used to analyze a company's ability to meet short-term obligations, manage costs and expenses, utilize assets, leverage debt, generate revenue, and determine stock valuation.
1. Ratio analysis involves calculating and analyzing relationships between financial data to assess a company's performance and financial position.
2. Key financial ratios include current ratio, quick ratio, debt-to-equity ratio, gross profit ratio, return on capital employed, and dividend payout ratio.
3. Ratio analysis is used by various stakeholders like investors, managers, and creditors to evaluate aspects like profitability, liquidity, operational efficiency, and financial leverage.
This document discusses various types of financial ratios used in financial statement analysis, including:
1. Liquidity ratios like the current ratio and acid-test ratio, which measure a company's ability to pay short-term debts with its current assets.
2. Turnover ratios like inventory, debtors, and creditors turnover, which measure how efficiently a company utilizes its current assets.
3. Leverage ratios like the debt-to-equity ratio and interest coverage ratio, which indicate the degree of a company's financial leverage.
4. Profitability ratios like gross profit margin, which measure a company's ability to generate profits from sales.
5. Activity ratios, which measure how efficiently
Meaning of Ratios
Objective of ratio analysis
Advantage or uses of Accounting Ratios
Limitations of Accounting Ratios
Classification of ratios :
i). Liquidity Ratio
ii). Solvency Ratio
iii). Activity/Turnover Ratio
iv). Profitability/Income Ratio
Financial ratio analysis can serve as an early warning system by measuring a company's performance across key financial metrics. Ratio analysis assumes accurate accounting information and compares a company's ratios to industry standards. Conducting regular ratio analysis can improve a company's profitability and chances of survival by identifying areas for improvement. Key ratios to examine include current assets to current liabilities, accounts receivable to working capital, inventory turnover, net profit to net worth, and net sales to working capital. Comparing ratios to competitors helps pinpoint where a company can enhance efficiency.
Equity-Investment Analyst who have been working in the financial markets for over 35 years. A University of Pennsylvania Wharton School of Business Graduate, an Investment and Financial leader on Capital Hill in Washington, DC and 20 years of financial modeling and analysis consulting experience. I am a teacher, a mentor and accomplished businessman eager to share my experience, and helpful advice
This document discusses ratio analysis, which involves calculating relationships between financial statement items to analyze a company's performance and financial position. Ratio analysis can be used to evaluate profitability, solvency, operating efficiency, short-term financial position, and more. Some common ratios mentioned include the current ratio, quick ratio, debt-to-equity ratio, and gross profit ratio. The document outlines how ratios are calculated and expressed, and provides examples of liquidity, activity, profitability, and long-term financial position ratios. Caution is advised when interpreting ratios, as different accounting treatments, time periods, or single ratios can provide misleading results.
This document discusses how management accounting can increase business profits. It explains key management accounting concepts like cost analysis, cash flow projections, budgets, and financial ratio analysis. These tools help businesses understand costs, cash flows, and financial performance over time. Ratio analysis in particular can serve as an early warning system by identifying potential problems. Understanding a business's finances through management accounting allows owners to better manage costs, anticipate issues, and improve overall profits.
This document provides definitions and explanations of various ratios used in ratio analysis. It discusses ratios that measure activity, liquidity, solvency, profitability, and leverage. For inventory turnover, it notes that a high ratio could indicate effective inventory management but could also mean inadequate inventory levels. It explains that receivables and payables turnover ratios high compared to peers could mean stringent credit terms that reduce sales. Profitability ratios like ROE are discussed as measuring management effectiveness.
Ratio analysis measures relationships between financial variables to show how a firm's situation compares to its past, other firms, and the industry. Ratios are used to identify performance, standardize information, provide early warnings, and enable trend spotting. Key types of ratios include liquidity, activity, debt, and profitability. Liquidity ratios measure a firm's ability to pay obligations and include current, quick, and cash ratios. Activity ratios evaluate efficiency through measures like inventory turnover, accounts receivable period, and asset turnover.
Ratio analysis is used to assess the strengths and weaknesses of a business by interpreting its financial data. Ratios can compare performance over time, between companies, and evaluate how well stakeholders' interests are being met. Key ratios examine profitability, liquidity, asset use, and debt. Limitations include the inability to directly compare companies and the exclusion of non-financial factors from the analysis.
Analytical techniques like ratio analysis, vertical analysis, horizontal analysis, and trend analysis allow businesses to study financial reports and make informed decisions. Key financial ratios analyze profitability, financial stability, and management effectiveness. Profitability ratios like gross profit ratio and net profit ratio indicate ability to earn income. Current ratio and quick ratio measure short-term liquidity. Equity ratio and debt ratio show sources of financing. Accounts receivable and inventory turnover ratios evaluate management policies. Comparing ratios to benchmarks helps assess performance.
Here are the answers to the quiz questions:
1. Balance Sheet
2. Income Statement
3. The accounting equation - Assets = Liabilities + Owner's Equity
4. Revenue and Expense accounts
5. Balance Sheet and Statement of Cash Flows
6. Revenue, Expenses, Net Income
7. Balance Sheet
8. Stockholder's Equity or Shareholder's Equity
This document discusses evaluating the financial performance of ventures using financial ratios. It describes how ratios related to liquidity, cash burn rates, and profitability are important at different stages of a venture's lifecycle. Specific liquidity ratios like the current ratio and quick ratio are defined and calculated for a sample company. The company's cash burn rates and liquidity ratios increased significantly from 2004 to 2005, indicating declining financial stability.
This document outlines key aspects of financial statement analysis including the meaning and types of financial statements, methods of analysis such as ratio analysis, and the significance of financial statements. It discusses the main financial statements including the income statement, balance sheet, statement of cash flows, and statement of retained earnings. It also explains various types of ratios used in analysis like liquidity, asset management, debt, and profitability ratios and how they are calculated and used. The purpose of financial statement analysis is to evaluate a company's financial strength and performance.
CriteriaNo Submission0 pointsEmerging (Fthrough D RaCruzIbarra161
Criteria
No Submission
0 points
Emerging (F
through D Range)
(12-14)
14 points
Satisfactory (C
Range) (14-16)
16 points
Proficient (B Range)
(16-18)
18 points
Exemplary (A
Range) (18-20)
20 points
Criteri
Score
Analyzed
your
company’s
operations
and the
market in
which it
operates.
/ 20Did not identify
your company’s
operations and the
market in which it
operates.
Unsupported with
research.
Identified your
company’s
operations and the
market in which it
operates.
Lacked credible
research support.
Described your
company’s
operations and the
market in which it
operates.
Weakly supported
with research.
Analyzed your
company’s
operations and the
market in which it
operates.
Sufficiently
supported with
research.
Analysis of your
company’s
operations and the
market in which it
operates was
compelling and
showed well-
developed logical
progression.
Well supported by
research.
Criteria
No Submission
0 points
Emerging (F
through D Range)
(6-7)
7 points
Satisfactory (C
Range) (7-8)
8 points
Proficient (B Range)
(8-9)
9 points
Exemplary (A
Range) (9-10)
10 points
Criterio
Score
Evaluated
the EVA,
and free
cash flow
using the
firm’s
annual
report.
/ 10Did not identify the
EVA, and free cash
flow using the firm’s
annual report.
Unsupported with
research.
Identified the EVA,
and free cash flow
using the firm’s
annual report.
Lacked credible
research support.
Described the EVA,
and free cash flow
using the firm’s
annual report.
Weakly supported
with research.
Evaluated the EVA,
and free cash flow
using the firm’s
annual report.
Sufficiently
supported with
research.
Evaluation of the
EVA, and free cash
flow using the firm’s
annual report was
compelling and
showed well-
developed logical
progression.
Well supported by
research.
Criteria
No Submission
0 points
Emerging (F
through D Range)
(6-7)
7 points
Satisfactory (C
Range) (7-8)
8 points
Proficient (B Range)
(8-9)
9 points
Exemplary (A
Range) (9-10)
10 points
Criterion
Score
Analyzed
the
firm’s
ROA and
ROE.
/ 10Did not identify the
firm’s ROA and
ROE.
Unsupported with
research.
Identified the firm’s
ROA and ROE.
Lacked credible
research support.
Described the firm’s
ROA and ROE.
Weakly supported
with research.
Analyzed the firm’s
ROA and ROE.
Sufficiently
supported with
research.
Analysis of the
firm’s ROA and ROE
was compelling and
actionable.
Well supported by
research.
Criteria
No Submission
0 points
Emerging (F
through D Range)
(6-7)
7 points
Satisfactory (C
Range) (7-8)
8 points
Proficient (B Range)
(8-9)
9 points
Exemplary (A
Range) (9-10)
10 points
Cr
Sc
Wrote in a
clear, concise,
and organized
manner;
demonstrated
ethical
scholarship in
Submission contains
no discernible
overall intent in
author’s selection of
ideas.
Errors in basic
writing conventions
are sufficiently
Submission contains
random
presentation of
ideas, which
preve ...
This document provides an overview of various financial ratios that can be used to analyze the financial performance and health of a social enterprise. It discusses ratios in four categories: profitability and sustainability, operational efficiency, liquidity, and leverage. Specific ratios are defined that measure aspects such as sales growth, reliance on revenue sources, operating self-sufficiency, profit margins, asset and inventory turnover, current ratios, debt-to-equity, and interest coverage. The document emphasizes that ratios should be calculated consistently over time and in comparison to benchmarks to help identify organizational strengths and weaknesses.
The document provides an overview of financial statement and ratio analysis. It discusses the objectives of ratio analysis which include standardizing financial information, evaluating current operations, and comparing performance. It then examines various types of ratios that can be analyzed including liquidity, investment/shareholders, gearing, profitability, and financial ratios. Specific ratios are defined under each category such as current ratio, quick ratio, debt-to-equity ratio, gross profit margin, return on capital employed, asset turnover, and stock turnover. The document emphasizes that multiple ratios should be analyzed over several years for accurate assessment of a firm's financial condition.
The document provides financial information for XXX Constructions Pvt. Ltd for the fiscal years 2013 through 2016. It includes key metrics such as net sales, operating profit, PAT, cash profit, margins, tangible net worth, total liabilities, and ratios such as TOL/TNW. XXX Constructions is an Indian mining and construction company that diversified into Africa in 2012 by establishing a subsidiary in Zambia. The financial position of the company appears stable with consistent sales growth and profits over the period analyzed.
My Business is Growing, Now What? Financial Management Skills for the Entrepr...McKonly & Asbury, LLP
The document discusses building successful employee relationships as a cornerstone to fraud prevention and risk management. It covers introducing David Blain and Michael Hoffner, partners at McKonly & Asbury, who will discuss financial management skills for entrepreneurs. They will focus on balance sheet management, cash flow management, why ratios are important, and developing long term value. Questions are welcomed at the end.
Financial analysis for juhayna & domty co . graduation project zagzig uni...Eslam Fathi
Financial Analysis is the process of selecting, evaluating, and identifying the financial
strength and weaknesses of the firm by properly establishing relationship between
items of financial statements. Firms, bank, loan officers and business owners all use
Financial analysis to learn more about a company’s current financial health as well as its
potential.
This document discusses ratio analysis for financial statement evaluation. It begins by defining financial analysis and its primary tools of financial statements and ratios. It then outlines various ratio categories including liquidity, investment/shareholders, gearing, profitability, and financial. Specific ratios are defined within each category, such as current ratio, acid test, earnings per share, and asset turnover. Notes are provided on ratio calculation and limitations of ratio analysis for financial evaluation.
“Interpreting Financial Statements” by Philip DrakeMegan Calcote
This document provides an overview and introduction to understanding financial statements. It begins with an agenda that outlines topics to be covered including the accounting equation, financial statement relations, ratio analysis, and cash flow analysis. It then discusses key concepts like the accounting equation that balances assets with liabilities and equity. The three main financial statements are introduced as the balance sheet, income statement, and statement of cash flows. Common components of each statement are defined. The rest of the document discusses how financial statements link business decisions and valuation, and provides examples of analyzing elements like return on equity, working capital management, and cash-to-cash cycles.
The document provides an overview of analyzing financial statements by examining key financial ratios that act as "vital signs" of an organization. It discusses analyzing short-term liquidity ratios like current ratio and receivables turnover. It also covers profitability ratios, asset turnover, long-term leverage ratios, and Dupont analysis - which breaks down return on equity into its components to guide business strategy. Benchmarks are needed to compare ratios to competitors and industry standards.
Stepping into a role which requires business finance knowledge? Here is a short guide offering advice, tools, and expertise that you will need to equip yourself with to be successful. Check out our Diploma in Business Finance for more.
The document discusses liquidity and the procedures used to analyze a firm's liquidity. Liquidity refers to a firm's ability to pay off short-term debts and is analyzed by examining current assets like cash, accounts receivable, and inventory. Key parties interested in a firm's liquidity include owners, managers, bankers, investors, and creditors. Common ratios used to measure liquidity are the current ratio, quick ratio, cash ratio, and analysis of working capital. These ratios compare current assets to current liabilities to evaluate a firm's short-term financial health and ability to meet obligations.
Similar to Financial Statements are telling you a story (20)
Discover timeless style with the 2022 Vintage Roman Numerals Men's Ring. Crafted from premium stainless steel, this 6mm wide ring embodies elegance and durability. Perfect as a gift, it seamlessly blends classic Roman numeral detailing with modern sophistication, making it an ideal accessory for any occasion.
https://rb.gy/usj1a2
How MJ Global Leads the Packaging Industry.pdfMJ Global
MJ Global's success in staying ahead of the curve in the packaging industry is a testament to its dedication to innovation, sustainability, and customer-centricity. By embracing technological advancements, leading in eco-friendly solutions, collaborating with industry leaders, and adapting to evolving consumer preferences, MJ Global continues to set new standards in the packaging sector.
B2B payments are rapidly changing. Find out the 5 key questions you need to be asking yourself to be sure you are mastering B2B payments today. Learn more at www.BlueSnap.com.
Zodiac Signs and Food Preferences_ What Your Sign Says About Your Tastemy Pandit
Know what your zodiac sign says about your taste in food! Explore how the 12 zodiac signs influence your culinary preferences with insights from MyPandit. Dive into astrology and flavors!
Top mailing list providers in the USA.pptxJeremyPeirce1
Discover the top mailing list providers in the USA, offering targeted lists, segmentation, and analytics to optimize your marketing campaigns and drive engagement.
Understanding User Needs and Satisfying ThemAggregage
https://www.productmanagementtoday.com/frs/26903918/understanding-user-needs-and-satisfying-them
We know we want to create products which our customers find to be valuable. Whether we label it as customer-centric or product-led depends on how long we've been doing product management. There are three challenges we face when doing this. The obvious challenge is figuring out what our users need; the non-obvious challenges are in creating a shared understanding of those needs and in sensing if what we're doing is meeting those needs.
In this webinar, we won't focus on the research methods for discovering user-needs. We will focus on synthesis of the needs we discover, communication and alignment tools, and how we operationalize addressing those needs.
Industry expert Scott Sehlhorst will:
• Introduce a taxonomy for user goals with real world examples
• Present the Onion Diagram, a tool for contextualizing task-level goals
• Illustrate how customer journey maps capture activity-level and task-level goals
• Demonstrate the best approach to selection and prioritization of user-goals to address
• Highlight the crucial benchmarks, observable changes, in ensuring fulfillment of customer needs
LA HUG - Video Testimonials with Chynna Morgan - June 2024Lital Barkan
Have you ever heard that user-generated content or video testimonials can take your brand to the next level? We will explore how you can effectively use video testimonials to leverage and boost your sales, content strategy, and increase your CRM data.🤯
We will dig deeper into:
1. How to capture video testimonials that convert from your audience 🎥
2. How to leverage your testimonials to boost your sales 💲
3. How you can capture more CRM data to understand your audience better through video testimonials. 📊
Tata Group Dials Taiwan for Its Chipmaking Ambition in Gujarat’s DholeraAvirahi City Dholera
The Tata Group, a titan of Indian industry, is making waves with its advanced talks with Taiwanese chipmakers Powerchip Semiconductor Manufacturing Corporation (PSMC) and UMC Group. The goal? Establishing a cutting-edge semiconductor fabrication unit (fab) in Dholera, Gujarat. This isn’t just any project; it’s a potential game changer for India’s chipmaking aspirations and a boon for investors seeking promising residential projects in dholera sir.
Visit : https://www.avirahi.com/blog/tata-group-dials-taiwan-for-its-chipmaking-ambition-in-gujarats-dholera/
Implicitly or explicitly all competing businesses employ a strategy to select a mix
of marketing resources. Formulating such competitive strategies fundamentally
involves recognizing relationships between elements of the marketing mix (e.g.,
price and product quality), as well as assessing competitive and market conditions
(i.e., industry structure in the language of economics).
IMPACT Silver is a pure silver zinc producer with over $260 million in revenue since 2008 and a large 100% owned 210km Mexico land package - 2024 catalysts includes new 14% grade zinc Plomosas mine and 20,000m of fully funded exploration drilling.
Company Valuation webinar series - Tuesday, 4 June 2024FelixPerez547899
This session provided an update as to the latest valuation data in the UK and then delved into a discussion on the upcoming election and the impacts on valuation. We finished, as always with a Q&A
Part 2 Deep Dive: Navigating the 2024 Slowdownjeffkluth1
Introduction
The global retail industry has weathered numerous storms, with the financial crisis of 2008 serving as a poignant reminder of the sector's resilience and adaptability. However, as we navigate the complex landscape of 2024, retailers face a unique set of challenges that demand innovative strategies and a fundamental shift in mindset. This white paper contrasts the impact of the 2008 recession on the retail sector with the current headwinds retailers are grappling with, while offering a comprehensive roadmap for success in this new paradigm.
1. The Story from your
Financial Statements
L. Brent McClure, CPA
@LBMCPA
2. Agenda for Today • Recognize the need to
understand financial
statements in everyday
business
• Understand the basic financial
statements
• Identify appropriate steps to
conduct an analysis
• Identify the factors that
determine how much external
financing is needed
4. • Financial statements are often an
overlooked tool to better understand
a business
• Financial statements are essentially
the score card of the business
• If you can’t read the score card your
business may be in jeopardy and you
not even know it
• Many business owners don’t
understand the story they tell
Why
should
we care
7. balance
sheet The totals on both sides must equal.
The Assets are listed first or on the left,
Next the liabilities are listed or they are on
the right hand side. Followed by the equity
section.
Assets = liabilities + equity
A snapshot of the business at
a point in time
8. Income
statement Sometimes called a profit & loss
statement or P&L. The P&L or
income statement tracks the
profit or loss of the business
Revenues – expenses = profit
Measures revenues &
expenses over a period of time
9. Statement
of Cash
Flows
Measures the amount of cash
flowing in and out of the
business over period of time
Begins with Net Income/Loss
Starts with Net income or loss
from the income statement and
ends with current cash balance.
Must equal cash on the balance
sheet
11. Balance
sheet
Assets are things that you own. Including things that may even
have debt attached to it
Liabilities are things that you owe
Equity is what is left over, beginning with the amount of contributed
capital
A simple approach
22. Value of a firm’s equity =
3
2
2
21
R1
FCF
R1
FCF
R1
FCF
…
Mathematically this expression can be reduced to
Value =
GR
FCF1
FCF = Funds that can be withdrawn from the business – called free cash flow
R = Risk adjusted rate of return
G = Expected growth rate
Dividend Capitalization
Model
23. Cause versus Effect
Effect ratios measure the results of company actions
not their cause. Things like Liquidity, Leverage, &
Profitability
Causal ratios measure the actions (or lack of actions)
that cause the effects.
24. Liquidity
Measures-
Show Ability of
Firm to Meet
Short-term
Obligations as
They Come Due
• Current ratio
• Quick ratio
• Defensive interval
• Cash conversion cycle
• Inventory/working capital
• Receivables/working
capital
• Net sales/working capital
• Operating cash flow to
current liabilities
25. LiquidityRatios
Liquidity Category Ratios
Quantity of
liquidity
Current ratio
Quick ratio
Timing of liquidity Defensive interval
Cash conversion cycle
Quality of liquidity Inventory/working capital
Receivable/working capital
Early warning Net sales/net worth
Operating cash flow to
current liabilities
26. Current Ratio • Computed as current assets ÷
current liabilities
• Measures the quantity of
liquidity
• Its size is largely determined
by inventory
27. Quick Ratio • Quick assets include cash,
marketable securities, and
receivables
• Ratio measures the quantity of
liquidity
• Differences in quick ratio and
current ratio are largely driven
by inventory
28. Defensive
Interval • Numerator is quick assets
• Denominator is daily cash
operating expenses
• Measures the number of days
the firm’s liquidity will last if no
new sales occur
29. Inventory to
Working Capital
Measures quality of liquidity
Company
A B
Cash $ 2,000 $ 10,000
Accounts receivable 16,000 40,000
Inventory 10,000 60,000
Total 28,000 110,000
Current liabilities 10,000 80,000
Working capital $18,000 $ 30,000
Inventory to working capital 56% 200%
Industry average 60% 60%
30. Trade
Receivables to
Working Capital
Measures quality of liquidity
Company
H J
Cash $ 1,000 $ 5,000
Trade receivables 6,000 50,000
Inventory 7,000 30,000
Total current assets 14,000 85,000
Total current liabilities 4,000 55,000
Working capital $10,000 $ 30,000
Trade receivables to working capital 60.0% 166.7%
Industry average 75.0% 75.0%
31. Net Sales to
Working Capital
Measures the ability of W/C to support
sales and in turn support growth
Company
V W
Current assets $ 25,000 $ 25,000
Current liabilities 24,000 11,000
Working capital 1,000 14,000
Sales $150,000 $150,000
Sales to working capital 150 times 10.7 times
Industry average 10 times 10.0 times
32. • Debt to net worth
• Debt to assets
• Short-term debt to net
worth
• Times interest earned
• Cash times interest
earned
• Fixed charge coverage
Leverage
Measures -
Shows Ability
of Firm to Meet
Obligations as
They Come Due
33. • Return on Equity =
• Net income/Net worth
Profitability
Measures -
Shows Ability
of Firm to Earn
a Return
34. Net Profit to
Net Worth
Company
A B
Net sales $2,000,000 $2,000,000
Net profit 20,000 100,000
Net worth 80,000 1,000,000
Net profit to net sales 1% 5%
Industry average 3.3% 3.3%
Net profit to net worth (ROE) 25% 10%
Industry average 8.8% 8.8%
35. Illustrative
Problem
Suppose that a company’s current ratio was 2.5 last year
and decreased to 2.0 this year. Last year, its quick ratio was
1.0 and stayed constant. What does this trend suggest?
Last Year This Year
Current Ratio 2.5 2.0
Quick Ratio 1.0 1.0
The difference between the current and quick ratios is largely
inventory. We can see that the ratio of inventory to current
liabilities has decreased from 1.5 to 1.0. We can conclude
that there has likely been an inventory decrease this year.
36. If a company has a
debt ratio of 40%;
What is its debt to
equity ratio?
Illustrative
Problem
37. Solution If a company has a debt to asset ratio of 40 percent, what is
its debt to equity ratio?
From the balance sheet equation, we know that assets equal
liabilities plus stockholder’s equity. So if debt to assets is 40
percent, equity to assets is 60 percent.
What this tells us is that the two ratios measure the exact
same thing; they just use a different scale of measurement.
/ 40%
66.7%
/ 60%
debt debt assets
equity equity assets
38. Effect Ratio Summary
Current
ratio
If small, indicates
inadequate liquidity
Quick ratio If small, indicates
inadequate liquidity
Defensive
interval
If small, implies the
company could not survive
very long in a financial
crisis
39. Effect Ratio Summary
Inventory to
working capital
If large, indicates
poor quality of
liquidity
Receivables to
working capital
If large, indicates
poor quality of
liquidity
Net sales to
working capital
If large, indicates
inadequate liquidity to
support sales
40. Effect Ratio Summary
Debt to net
worth
If large, indicates increased
financial risk
Debt to assets If large, indicates increased
financial risk
Tangible debt
ratio
Measures debt usage
proportionate to tangible
assets
Short-term debt
to net worth
If large, implies extremely
high risk situation
41. Times interest
earned
If small, indicates insufficient
financial solvency—high
financial
Fixed charge
coverage
Measures how many times
earnings cover all financial
obligations
Return on
equity
Key profitability ratio is a
measure of the return on
owner’s investment in the
firm
Effect Ratio Summary
42. Earnings
Quality
strong
Earnings quality is strong if we perceive that the
company can continue to earn at the same rate.
Earnings quality is strong if earnings and cash
flow follow similar patterns.
weak
Earnings quality is weak if we perceive that
the company is unlikely to continue earning
at its same rate and/or earnings and cash
flow does not follow the same pattern.
43. Earnings Quality-
Perceived Ability to
Continue in Business
• Strength of the balance sheet
• Presence of one-time transactions
• Age of the assets
• Adequacy of R&D
• Age and incentive of key managers
44. Causal Ratio
Ratio What it measures
Fixed assets to net worth Over-investment in fixed
assets
Collection period Rise in accounts
receivable
Net sales to inventory Rise in inventory
Net sales to net worth Unrestrained growth
Net profit to net sales Profitability
Miscellaneous assets to
net worth
Rise in “other” assets
45. Fixed Assets to
Net Worth
• Measures the extent to which capital
is tied up in nonliquid, permanent,
or depreciable property
• Measures the amount of capital
remaining for investment in more
liquid assets
46. Fixed Assets to
Net Worth
If too much net worth is tied up in fixed
assets
• Too little working capital
• Over-utilize debt
• Profitability suffers
47. How Fixed Assets
Affects Profits
• Interest expense
• Increased depreciation
• Increased property taxes &
insurance costs
• Reduced working capital
• Late charges
• Inventory stockouts
• Reduced bank balances
48. Collection Period
• Measures of credit and collection efficiency
of the firm, the probability of bad debt write-
off, and the company’s receivable position
over time and as compared to the industry
• If this ratio is too high, it can indicate
inefficiency or a decision to allow loose
credit terms.
49. Collection Period
Why is this ratio an important Casual
Ratio
• Sales attainment
• Profitability
• Borrowing
50. Casual Ratio Summary
Problems
Reduced Liquidity
Increased Leverage
Reduced Profits
Casual Ratios
Large Fixed Assets/Net Worth
Large Collection Period
Low Inventory Turnover
Large Net Sales/Net Worth
Low or Negative Profit Margin
Large Misc. Assets/Net Worth
…caused by
52. Types of Analysis
• Industry analysis with industry averages
or comparison to competitors
• Time series analysis with comparison of
current year to past years
53. Conducting an
Analysis
• Determine what problems exist.
• Compare causal ratios to previous
years and to industry averages.
• Determine which of the causal ratios
are at fault.
• Take corrective action.
54. Guidelines to use in
Ratio Analysis
• Ignore isolated figures.
• Compare likes.
• Study any substantial deviation.
• Avoid concentration on high
percentages or variances.
55. Guidelines to use in
Ratio Analysis
• Remember that a ratio measures both
components.
• Recognize the seasonal factor.
• Watch for trends.
• Be alert to compensating advantages.
• Lenders are more Balance Sheet
focused
• Owners/Managers are more Income
Statement driven
59. The Basic Forecasting
Model
MISCRE-S
S
SL
-FAS
S
SA
EFN
EFN = Amount of external funding to maintain its present condition
SA = Ought to increase proportionately as sales increase
∆S = Increase in sales that causes the need for external funding
∆FA = Required to meet increased demand
SL = Increase proportionately as sales increase
S = Existing sales level
∆RE = (S + ∆S)(PM)(1 − PO) or (S + ∆S)(PM) − $Div
MISC = Any other changes to the company’s cash flow in the
other expressions
61. Making Assumptions
• In forecasting we make assumptions about financial
relationships in the future
• Our model assumes that future sales levels are a very
important determinant of the company’s future financial
condition
• One basic assumption of our model is that financial
relationships of many balance sheet items and sales will
remain the same
• We can change assumptions as necessary and useful in the
model
• Testing the importance of assumptions or testing changes in
assumptions is called sensitivity analysis.
62. Methods of EFN
External Sources
Debt
Bank loans
Bonds
Loans from owners or officers
Insurance company
Equity
From existing stockholders
From new stockholders
Internal Sources
Decreased payout
Increased profit margin
Working capital
Fixed assets
Marketable securities
64. What have we
covered?
• Recognize the need to
understand financial
statements in everyday
business
• Understand the basic financial
statements
• Identify appropriate steps to
conduct an analysis
• Identify the factors that
determine how much external
financing is needed
65. 46
don’t hesitate to contact us
contact
address:
202 Gov. St.
Mobile, AL
36608
contact:
brent@brentmcclure.com
www.brentmcclure.com
@LBMCPA
phone:
205 613 9708
Editor's Notes
What is a BS. It is essentially a snapshot of the business at a specific point in time, like as of December 31, 2018 or as of June 30, 2019. It also represents the businesses Assets, Liabilities and equity. Generally speaking the assets are listed first or on the left followed by the liabilities and then equity or retained earnings. Assets must equal the liabilities + equity and that’s why it is called a Balance Sheet
The Income Stmt or Profit & Loss or P&L is the best tool for knowing if your business is profitable or if you have sustained losses. A P&L statement measures revenue (also called sales or income) and expenses over a period of time – whether that is a month, quarter or year. With it you know if you have made a profit (and how much) or if you have incurred a loss.
The Stmt of Cash flows is my favorite stmt. It essentially measures the amount of cash flowing in and out of the business over a period of time. Normally the stmt of CF and the P&L or Income Stmt are covering the same period. Like it will say for the 12 months ended December 31, 2018 or for the 6 months ended June 30, 2019 or whatever. This statement generally begins with net Income from the P&L and ends with the current cash balance from the Balance Sheet.
So far I have provided you sort of an overview of the basic financial statements but now I want to take a deeper dive into each and also provide some real life examples…..
First, let’s start with the BS. As I mentioned before it has Assets with are things that you own – like cash, accounts receivable, inventory – those would be considered current assets b/c you can convert them to cash within a year. Property, Plant & equipment or PPE would also be an asset but a long term asset, like notes receivable b/c they aren’t typically converted into cash within 1 year. Then on the liability side we also have current and non-current. These are things we owe, like accounts payable and short term notes payable or a line of credit are all examples of current liab. b/c/ again they are due within 1 year from the BS date. Non-current or long term liab. Could be notes payable and other long term debt or financing arrangements. Next let’s focus on the equity section and it is primarily made up of equity contributed to the business plus the balance of retained earnings.
Amazon…
Now let’s turn our attention to the Income stmt or P&L. Simply put we will have revenues or sales, followed by COGS then operating expenses and then any misc. items such as interest expense and finally or hopefully profits.
Amazon..
Starting on this page is Operating Income from the previous page followed by…..
Now we get to the good part of Cash Flows. We will start with net income followed by cash flows in and out of the business from operating activities like changes in accts receivable, then we have investing activities like purchasing or selling PPE, followed by financing activities as you probably guessed is debt, bonds, movement in stock.
This is Amazon’s stmt of cash flows, which again is a recon of net income to cash. …..
So now we know what financial stmts are important and how to look at them, let’s take a dive into several ways of analyzing a financial stmt.
How much is my business worth? …….. This approach approximates a future dividend stream based on the firm's dividend history and an assumed growth rate, and computes the market capitalization rate that equates it with the current market price. In the case of closely-held firms (such as sole proprietorships and partnerships) which don’t usually distribute profits as dividends, the firms dividend paying capacity is estimated from its average free cash flow and compared with the dividends actually paid by a similar size firm. Also called dividend growth model. Essentially taking FCF and dividing it by the R less the G. so for example….. If your FCF is $2M and your Risk adj. ROR is 10% and your growth rate in perpetuity is 2%, then you are dividing $2m by 8% and getting a business value of $25M
Let’s talk about ratios….. 2 major classes of ratios.. Cause and effect ratios.. Read slide.. A ratio by itself is almost meaningless, but if we have another company or maybe industry averages to compare our business ratios to then it starts to paint a picture….
Read slide..
A look at liquidity ratios again and what category they are measuring…. For example… slide
The current ratio is my favorite. And specifically it is current assets over current liab. And read slide….
Another look at the current ratio without inventory is the Quick ratio, this is another one of my favs.