Financial Statements & Ratios
- 1. Financial Statements & Ratios VernitaR. Gilbert And then God answered: “Write this. Write what you see. Write it out in big block letters so that it can be read on the run. This vision- message is a witness pointing to what’s coming. It aches for the coming—it can hardly wait! And it doesn’t lie. If it seems slow in coming, wait. It’s on its way. It will come right on time. Habakkuk 2:2-3 (MSG)
- 2. Agenda • The Importanceof Counting the Cost • The Formation the Financial Statements • The 4 Financial Statements and Their Purpose • Users of the Financial Statements • Financial Indicators • Company Analysis
- 3. Count the Cost...It’sScriptural For which of you, intending to build a tower, sitteth not down first, and counteth the cost, whether he have sufficient to finish it? Lest haply, after he hath laid the foundation, and is not able to finish it, all that behold it begin to mock him, Saying, This man began to build, and was not able to finish. Luke 14:28-30 (KJV)
- 4. The Business Plan& The Financials Financial Statements Marketing Plan Target Market Pricing Operating Model Product/ Service Competitive Analysis Balance Sheet Income Statement Statement of Owner’s Equity Statement of Cash Flow
- 5. Balance Sheet • a• Summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. • The balance sheet gives investors an idea as to what the company owns, owes and the amount invested by the shareholders. • Uses & sources of funds • Called the Balance Sheet because it should be in balance • ASSETS = LIABILITIES + EQUITY
- 6. Income Statement • Measuresa company's financial performance over a specific accounting period. • Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. • It also shows the net profit/loss incurred over a specific accounting period, typically over a fiscal quarter or year.
- 7. Statement of Owner’sEquity • Represents the equity stake currently held on the books by a firm's equity investors.
- 8. Statement of CashFlows • Provides a summary of all cash inflow and outflow of the company from • Operating activities • Investment activities • Financing activities
- 9. Users of FinancialStatements • Financial institutions - assess the financial health of a business to make lending decisions • Prospective Investors/Shareholders - assess the risk and potential return of their investment in a company • Managers – assess the companies financial performance and position in order to make business decisions • Customers - assess the health of a supplier to ensure the supplier can provide a steady supply of goods/services in the future.
- 10. Users of FinancialStatements (cont.) • Competitors - compare their performance against industry leaders to learn and develop strategies and improve their competitiveness. • Governments - to determine the correctness of tax declared in the tax returns and to measure economic progress • Employees use Financial Statements for assessing the company's profitability and its consequence on their future wages and job security. • General Public may be interested in the effects of a company on the economy, environment and the local community.
- 11. Financial Metrics Usedby Investors • Profitability Metrics measures a companies ability to generate a profit • Investors prefer these ratios to be high
- 12. Financial Metrics Usedby Investors Curent Assets Current Liabilities Curent Assets - Inventory Current Liabilities Cash and Cash Equivalents Current Liabilities Current Ratio = Quick Ratio = Cash Ratio = LIQUIDITY RATIOS • Liquidity Metrics measures a companies ability to pay its bills • A ratio • >1 means more assets than liabilities • <1 means more liabilities than assets • The signal the ratio give is situational, in most cases investors prefer this number be low as a signal of a growth business
- 13. Financial Metrics Usedby Investors Total Debt Total Assets Total Debt Total Equity FINANCIAL LEVERAGE Debt-to-Equity Ratio = =Debt Ratio • Financial Leverage Metrics measures a companies indebt-ness • A ratio • >1 means more highly levered • <1 means more equity than debt • Again, the signal the ratio give is situational, in most cases investors view companies with high debt as less financially stable and more risky
- 14. Break Even Analysis •Breakeven point = fixed costs/ (unit selling price – variable costs) • Breakeven analysis is used to determine when your business will be able to cover all its expenses and begin to make a profit. It is important to identify your startup costs, which will help you determine your sales revenue needed to pay ongoing business expenses.
- 15. Target’s Liquidity &Leverage Ratios • a Total Debt 31,605 Total Assets 48,168 Total Debt 31,605 Total Equity 16,558 0.66 = 1.91 FINANCIAL LEVERAGE = Debt-to-Equity Ratio = Debt Ratio = Curent Assets 16,388 Current Liabilities 14,031 Curent Assets - Inventory 8,485 Current Liabilities 14,031 Cash and Cash Equivalents 784 Current Liabilities 14,031 LIQUIDITY RATIOS Quick Ratio = Cash Ratio = 0.6 0.1 = = Current Ratio = 1.2=
- 16. Profitability Metric Net Sales- COGS 22,733 Net Sales 73,301 Net Income 2,999 Total Assets 48,168 Net Income 2,999 Shareholder Equity 16,558 PROFITABILITY RATIOS 31% = 6% = 18% Return on Assets = Return on Equity = Gross Margin = =
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- 19. How the FinancialStatements Feed Each Other