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
Financial figures in absolute amounts do not provide the complete picture. Financial statements give a detailed understanding of the various financial entries and overall profits and expenses. This presentation explains the various methods to understand Financial Statements.
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A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies.[1] If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.
Values used in calculating financial ratios are taken from the balance sheet, income statement, statement of cash flows or (sometimes) the statement of retained earnings. These comprise the firm's "accounting statements" or financial statements. The statements' data is based on the accounting method and accounting standards used by the organization.
Ratios
Profitability ratios
Liquidity ratios
Activity ratios (Efficiency Ratios)
Debt ratios (leveraging ratios)
Market ratios
Capital budgeting ratios
Financial ratios quantify many aspects of a business and are an integral part of the financial statement analysis. Financial ratios are categorized according to the financial aspect of the business which the ratio measures. Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash assets.[3] Debt ratios measure the firm's ability to repay long-term debt.[4] Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.[5] Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.[6] These are concerned with the return on investment for shareholders, and with the relationship between return and the value of an investment in company’s shares.
Financial ratios allow for comparisons
between companies
between industries
between different time periods for one company
between a single company and its industry average
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
what is the best method to sell pi coins in 2024DOT TECH
The best way to sell your pi coins safely is trading with an exchange..but since pi is not launched in any exchange, and second option is through a VERIFIED pi merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and pioneers and resell them to Investors looking forward to hold massive amounts before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade pi coins with.
@Pi_vendor_247
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
2. Study Objectives
1. Discuss the need for comparative analysis.
2. Identify the tools of financial statement analysis.
3. Explain and apply horizontal analysis.
4. Describe and apply vertical analysis.
5. Identify and compute ratios used in analyzing a firm’s
liquidity, profitability, and solvency.
6. Understand the concept of earning power, and how
discontinued operations are presented.
7. Understand the concept of quality of earnings.
Slide
14-2
3. Financial Statement Analysis
Basics of
Financial
Statement
Analysis
Horizontal and
Vertical
Analysis
Need for
comparative
analysis
Statement of
financial
position
Tools of
analysis
Income
statement
Retained
earnings
statement
Slide
14-3
Ratio Analysis
Liquidity
Profitability
Solvency
Summary
Earning
Power and
Irregular Items
Discontinued
operations
Changes in
accounting
principle
Comprehensive
income
Quality of
Earnings
Alternative
accounting
methods
Pro forma
income
Improper
recognition
4. Basics of Financial Statement Analysis
Analyzing financial statements involves:
Comparison
Bases
Characteristics
Tools of
Analysis
Liquidity
Intracompany
Horizontal
Profitability
Industry
averages
Vertical
Solvency
Ratio
Intercompany
Slide
14-4
SO 1
SO 2
Discuss the need for comparative analysis.
Identify the tools of financial statement analysis.
5. Horizontal Analysis
Horizontal analysis, also called trend analysis
Technique for evaluating a series of financial statement
data over a period of time.
Purpose is to determine the increase or decrease that
has taken place.
Commonly applied to the statement of financial position,
income statement, and statement of retained earnings.
Slide
14-5
SO 3 Explain and apply horizontal analysis.
6. Horizontal Analysis
Statement of
Financial
Position
These changes
suggest that the
company expanded
its asset base during
2011 and financed
this expansion
primarily by
retaining income
rather than assuming
additional long-term
debt.
Illustration 14-5
Slide
14-6
SO 3 Explain and apply horizontal analysis.
7. Horizontal Analysis
Income
Statement
Overall, gross profit
and net income were
up substantially.
Gross profit
increased
17.1%, and net
income, 26.5%.
Quality’s profit trend
appears favorable.
Illustration 14-6
Slide
14-7
SO 3 Explain and apply horizontal analysis.
8. Horizontal Analysis
Retained
Earnings
Statement
Illustration 14-7
We saw in the horizontal analysis of the statement of financial position that
ending retained earnings increased 38.6%. As indicated earlier, the company
retained a significant portion of net income to finance additional plant facilities.
Slide
14-8
SO 3 Explain and apply horizontal analysis.
9. Horizontal Analysis
Illustration: Summary financial information for
Rosepatch Company is as follows.
Compute the amount and percentage changes in 2011 using
horizontal analysis, assuming 2010 is the base year.
Solution
Slide
14-9
SO 4 Describe and apply horizontal analysis.
10. Vertical Analysis
Vertical analysis, also called common-size analysis
Expresses each financial statement item as a percent of
a base amount.
For example, selling expenses could be expressed as
16% of net sales.
Commonly applied to the statement of financial position
and the income statement.
Slide
14-10
SO 4 Describe and apply vertical analysis.
11. Vertical Analysis
Statement of
Financial
Position
These results
reinforce the earlier
observations that
Quality is
choosing to
finance its growth
through retention
of earnings rather
than through
issuing additional
debt.
Illustration 14-8
Slide
14-11
SO 4 Describe and apply vertical analysis.
13. Vertical Analysis
Enables a comparison of companies of different sizes.
Illustration 14-10
Intercompany income
statement comparison
Park Street earned net income more than 4,208 times larger than Quality’s, Park
Street’s net income as a percent of each sales euro (5.6%) is only 44% of
Quality’s (12.6%).
Slide
14-13
SO 4 Describe and apply vertical analysis.
14. Ratio Analysis
Ratio analysis expresses the relationship among
selected items of financial statement data.
Financial Ratio Classifications
Liquidity
Solvency
Measures shortterm ability of the
company to pay its
maturing
obligations and to
meet unexpected
needs for cash.
Slide
14-14
Profitability
Measures the
income or
operating success
of a company for a
given period of
time.
Measures the
ability of the
company to
survive over a long
period of time.
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
15. Ratio Analysis
A single ratio by itself is not very meaningful.
The discussion of ratios will
include the following types of
comparisons.
Slide
14-15
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
16. Ratio Analysis
Liquidity Ratios
Measures short-term ability of the company to pay its
maturing obligations and to meet needs for cash.
Short-term creditors such as bankers and suppliers are
particularly interested in assessing liquidity.
Ratios include the current ratio, the acid-test ratio,
receivables turnover, and inventory turnover.
Slide
14-16
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
17. Ratio Analysis
Liquidity Ratios
The 2011 ratio of 2.96:1 means that for every euro of current
liabilities, Quality has €2.96 of current assets.
Slide
14-17
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
19. Ratio Analysis
Liquidity Ratios
Compute the Acid-Test Ratio for 2011.
Illustration 14-13
Slide
14-19
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
20. Ratio Analysis
Liquidity Ratios
The acid-test ratio measures immediate liquidity.
Slide
14-20
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
21. Ratio Analysis
Liquidity Ratios
It measures the number of times, on average, the company
collects receivables during the period.
Slide
14-21
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
22. Ratio Analysis
Liquidity Ratios
A variant of the receivables turnover ratio is to convert it to
an average collection period in terms of days.
365 days / 10.2 times = every 35.78 days
This means that receivables are collected on average every
36 days.
Slide
14-22
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
23. Ratio Analysis
Liquidity Ratios
Inventory turnover measures the number of times, on average,
the inventory is sold during the period.
Slide
14-23
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
24. Ratio Analysis
Liquidity Ratios
A variant of inventory turnover is the days in inventory.
365 days / 2.3 times = every 159 days
Inventory turnover ratios vary considerably among industries.
Slide
14-24
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
25. Ratio Analysis
Liquidity Ratios
Illustration 14-27
Summary of liquidity ratios
Slide
14-25
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
26. Ratio Analysis
Profitability Ratios
Measure the income or operating success of a company
for a given period of time.
Income, or the lack of it, affects the company’s ability to
obtain debt and equity financing, liquidity position, and
the ability to grow.
Ratios include the profit margin, asset turnover,
return on assets, return on ordinary shareholders’
equity, earnings per share, price-earnings, and
payout ratio.
Slide
14-26
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
27. Ratio Analysis
Profitability Ratios
Measures the percentage of each dollar of sales that results
in net income.
Slide
14-27
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
28. Ratio Analysis
Profitability Ratios
Measures how efficiently a company uses its assets to
generate sales.
Slide
14-28
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
29. Ratio Analysis
Profitability Ratios
An overall measure of profitability.
Slide
14-29
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
30. Ratio Analysis
Profitability Ratios
Shows how many euros of net income the company earned
for each dollar invested by the owners.
Slide
14-30
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
31. Ratio Analysis
Profitability Ratios
A measure of the amount of net income applicable to each
ordinary share.
Slide
14-31
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
32. Ratio Analysis
Profitability Ratios
The price-earnings (PE) ratio reflects investors’ assessments
of a company’s future earnings.
Slide
14-32
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
33. Ratio Analysis
Profitability Ratios
Measures the percentage of earnings distributed in the form of
cash dividends.
Slide
14-33
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
34. Ratio Analysis
Profitability Ratios
Illustration 14-27
Summary of profitability ratios
Slide
14-34
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
35. Ratio Analysis
Solvency Ratios
Solvency ratios measure the ability of a company to
survive over a long period of time.
Debt to total assets and times interest earned are two
ratios that provide information about debt-paying ability.
Slide
14-35
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
36. Ratio Analysis
Solvency Ratios
Measures the percentage of the total assets that creditors
provide.
Slide
14-36
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
37. Ratio Analysis
Solvency Ratios
Provides an indication of the company’s ability to meet
interest payments as they come due.
Slide
14-37
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
38. Ratio Analysis
Solvency Ratios
Illustration 14-27
Summary of solvency ratios
Slide
14-38
SO 5 Identify and compute ratios used in analyzing a
firm’s liquidity, profitability, and solvency.
40. Earning Power and Irregular Items
Earning power means the normal level of income to be
obtained in the future.
“Irregular” items are separately identified on the income
statement as Discontinued Operations.
These “irregular” items are reported net of income taxes.
Slide
14-40
SO 6 Understand the concept of earning power, and how
discontinued operations are presented.
41. Earning Power and Irregular Items
Discontinued Operations
(a) Refers to the disposal of a significant component
of a business.
(b) Report the income (loss) from discontinued
operations in two parts:
1. income (loss) from operations (net of tax) and
2. gain (loss) on disposal (net of tax).
Slide
14-41
SO 6 Understand the concept of earning power, and how
discontinued operations are presented.
42. Earning Power and Irregular Items
Illustration: During 2011 Acro Energy Inc. has income before
taxes of $800,000. During 2011 Acro discontinued and sold its
unprofitable chemical division. The loss in 2011 from chemical
operations (net of $60,000 taxes) was $140,000. The loss on
disposal of the chemical division (net of $30,000 taxes) was
$70,000. Assuming a 30% tax rate.
Slide
14-42
SO 6 Understand the concept of earning power, and how
discontinued operations are presented.
43. Earning Power and Irregular Items
Income Statement (in thousands)
Discontinued Operations
are reported after
“Income from continuing
operations.”
Previously labeled as
“Net Income”.
Sales
Cost of goods sold
$ 285,000
149,000
Other revenue (expense):
Interest revenue
Interest expense
Total other
Income before taxes
Income tax expense
Income from continuing operations
17,000
(21,000)
(4,000)
79,000
24,000
55,000
Discontinued operations:
Loss from operations, net of tax
Loss on disposal, net of tax
Moved to
Slide
14-43
315
189
Total loss on discontinued operations
Net income
504
$
54,496
SO 6
45. Earning Power and Irregular Items
Change in Accounting Principle
Occurs when the principle used in the current year is
different from the one used in the preceding year.
Accounting rules permit a change if justified.
Changes are reported retroactively.
Example would include a change in inventory
costing method such as FIFO to average cost.
Slide
14-45
SO 6 Understand the concept of earning power, and how
discontinued operations are presented.
46. Earning Power and Irregular Items
Comprehensive Income
All changes in equity except
those resulting from
investments by shareholders
and distributions to
shareholders.
Income Statement (in thousands)
Sales
Cost of goods sold
Gross profit
Operating expenses:
Advertising expense
Depreciation expense
Total operating expense
Income from operations
Other revenue:
Interest revenue
Total other
Income before taxes
Income tax expense
Net income
Slide
14-46
$ 285,000
149,000
136,000
10,000
43,000
53,000
83,000
Reported in Stockholders’
Equity
17,000
17,000
100,000
24,000
$ 76,000
Unrealized gains and
losses on available-forsale securities.
Plus other items
+
SO 6 Understand the concept of earning power, and how
discontinued operations are presented.
47. Earning Power and Irregular Items
Comprehensive Income
Why are gains and losses on available-for-sale
securities excluded from net income?
Because disclosing them separately
1. reduces the volatility of net income due to fluctuations in
fair value,
2. yet informs the financial statement user of the gain or
loss that would be incurred if the securities were sold at
fair value.
Slide
14-47
SO 6 Understand the concept of earning power, and how
discontinued operations are presented.
48. Quality of Earnings
A company that has a high quality of earnings
provides full and transparent information that will not
confuse or mislead users of the financial statements.
Companies have incentives to manage income to
meet or beat Wall Street expectations, so that
the market price of the shares increase and
the value of share options increase.
Slide
14-48
SO 7 Understand the concept of quality of earnings.
49. Quality of Earnings
Alternative Accounting Methods
Variations among companies in the application of IFRS
may hamper comparability and reduce quality of earnings.
Pro Forma Income
Pro forma income usually excludes items that the
company thinks are unusual or nonrecurring.
Some companies have abused the flexibility that pro
forma numbers allow.
Slide
14-49
SO 7 Understand the concept of quality of earnings.
50. Quality of Earnings
Improper Recognition
Some managers have felt pressure to continually increase
earnings and have manipulated the earnings numbers to meet
these expectations.
Abuses include:
Improper recognition of revenue (channel stuffing).
Improper capitalization of operating expenses (WorldCom).
Failure to report all liabilities (Enron).
Slide
14-50
SO 7 Understand the concept of quality of earnings.
51. Understanding U.S. GAAP
Key Differences
Financial Statement
Analysis
Under GAAP, items that are considered to be both unusual in
nature and infrequent in occurrence are reported as
“extraordinary items” in a separate line item at the bottom of
the income statement, net of tax. Under IFRS, there is no
classification for extraordinary items. In other words,
extraordinary item treatment is prohibited under IFRS. In recent
years, the types of items that can receive extraordinary item
treatment under GAAP has been reduced to the point where the
classification is rarely used.
The accounting for changes in accounting principles and
changes in accounting estimates are the same for both GAAP
Slide
14-51
and IFRS.
52. Understanding U.S. GAAP
Key Differences
Financial Statement
Analysis
Under IFRS, comprehensive income is either presented in a
single statement, combined with net income, or as a separate
statement, immediately after the income statement. GAAP also
permits the one-statement or two-statement approach as well.
In addition, GAAP permits a third alternative, which is to show
the computation of comprehensive income in the statement of
shareholders’ equity.
The issues related to quality of earnings are the same under
both GAAP and IFRS. It is hoped that by adopting a more
principles-based approach as found in IFRS that many of the
earnings quality issues will be reduced.
Slide
14-52
53. Understanding U.S. GAAP
Looking to the Future
Financial Statement
Analysis
FASB and the IASB are working on a project that would rework the
structure of financial statements. Recently, the IASB decided to
require a statement of comprehensive income similar to what was
required under GAAP. In addition, another part of this project
addresses the issue of how to classify various items in the income
statement. A main goal of this new approach is to provide
information that better represents how businesses are run. In
addition, the approach draws attention away from one number—net
income. Instead, this approach provides more information about the
components of net income and comprehensive income.
Slide
14-53