Fourth Edition1

Financial Statement Analysis

Fourth Edition2

Outline

1. Financial statements1. Income statement and margin analysis

2. Ratio analysis

3. DuPont Analysis

4. Applications

Fourth Edition3

Income Statement– Measure of profitability over a period of time

• StructureSimplified Income Statement:

Sales(Total revenue)

-Cost of Goods Sold(Cost of revenue)

Gross Profit

-Expense

Earning Before Interest and Tax(EBIT,Operating income)

-Interest

Earning Before Tax (EBT)

-Tax

Net Income (NI)

Fourth Edition4

Income Statement– Margin /Common Size Analysis

• Gross Margin• Operating Margin

– Research and Development– Sales and Administrative

• Tax rate• Profit Margin

– Trend analysis• Margin comparison• Growth rate

– Compare with peers– Forecasting

Fourth Edition5

Financial Statements

• Balance Sheet– Snap shot of financial conditions– Common Sized– Trend and peers

• Statement of Cash Flows

Fourth Edition6

Type of Financial Ratios

• Liquidity Ratios

• Activity or Mgmt Efficiency Ratios (turn over ratios)

• Leverage Ratios (debt ratios)

• Profitability Ratios

• Market Price Ratios

Fourth Edition7

Liquidity Ratios

Current Ratio

Current Assets

Current Liabilities

Quick Ratio

Current Assets - Inventory

Current Liabilities

Fourth Edition8

Activity or Management Efficiency Ratios

Inventory Turnover

Sales or Cost of Goods Sold

Inventory

Total Asset Turnover

Sales

Total Assets

Fourth Edition9

Activity or Management Efficiency Ratios

Average Collection Period

Accounts Receivable

Sales Per Day

Days to Sell Inventory

Inventory

Sales Per Day

Fourth Edition10

Leverage Ratios

Times Interest Earned

Earnings Before Int. & Taxes

Interest Expense

Fixed Charge Coverage RatiosLease Payments

Principal Repayments

Preferred Dividends

Fourth Edition11

Leverage Ratios

Debt to Assets

Long Term Debt

Assets

Debt to Equity

Long Term Debt

Shareholders Equity

Fourth Edition12

Profitability Ratios

Net Profit Margin %

Net Income

Sales

Return on Assets

Net Income

Total Assets

Fourth Edition13

Profitability Ratios

Return on Equity

Net Income

Common Equity

Operating Margin After Depreciation

Operating Profit

Sales

Fourth Edition14

Market Price Ratios

Price to Earnings

Market Price of Stock

Earnings

Market-to-Book-Value

Market Price of Stock

Book Value Per Share

Fourth Edition15

DuPont Analysis

• ROE=PM*TATO*EM

• Prefer company that improves in all three components

• PM=Tax burden*Interest burden*OpertingMargin

• NI/S=(NI/EBT)*(EBT/EBIT)*(EBIT/S)

• NI/S=(NI/EBIT)*(EBIT/Gross Profit)*(Gross Profit/Sales)