17 - 1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D.,
Building Blocks of Analysis C 1 Liquidity and efficiency Solvency Market prospects Profitability
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
17 - 1
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Financial statement analysis helps users make better decisions.
Internal UsersManagersOfficers
Internal Auditors
External UsersShareholders
LendersCustomers
C 1
17 - 3
Building Blocks of AnalysisC 1
Liquidity and efficiency Solvency
Market prospectsProfitability
17 - 4
Information for AnalysisC 1
1. Income Statement2. Balance Sheet 3. Statement of
Stockholders’ Equity4. Statement of Cash Flows5. Notes to the Financial
Statements
17 - 5
IntracompanyIntracompany
CompetitorsCompetitors
IndustryIndustry
GuidelinesGuidelines
Standards for ComparisonC 1
When we interpret our analysis, it is essential to compare the results we obtained to other
standards or benchmarks.
17 - 6
Horizontal AnalysisComparing a company’s financial condition and
performance across time.
Tools of Analysis
Vertical AnalysisComparing a company’s financial condition and
performance to a base amount.
Ratio AnalysisMeasurement of key relations between financial
statement items.
C 2
17 - 7
Horizontal AnalysisP 1
17 - 8
Comparative Statements
Calculate Change in Dollar Amount
DollarChange
Analysis Period Amount
Base PeriodAmount= –
When measuring the amount of the change in dollar amounts, compare the
analysis period balance to the base period balance. The analysis period is usually the current year while the base
period is usually the prior year.
P 1
17 - 9
Comparative Statements
Calculate Change as a Percent
PercentChange
Dollar Change Base Period Amount 100= ×
P 1
When calculating the change as a percentage, divide the amount of the
dollar change by the base period amount, and then multiply by 100 to
convert to a percentage.
17 - 10
$325,336 – $393,927 = $(68,591)
($(68,591) ÷ $393,927) × 100 = (17.4)%
Horizontal AnalysisP 1
17 - 11
Horizontal Analysis
($665,810 ÷ $1,991,139) × 100 = 33.4%
$2,656,949 – $1,991,139 = $665,810
P 1
17 - 12
Trend Analysis
Trend analysis is used to reveal patterns in data covering successive periods.
TrendPercent
Analysis Period Amount Base Period Amount 100= ×
P 1
17 - 13
Polaris Industries Inc.Income Statement Information
Using 2007 as the base year we will get the following trend information:
Examples of 2007-2011 Calculations for Revenues:2007 is base year. Set to 100%2008: $1,948,254 ÷ $1,780,009 × 100 = 109.5%2009: $1,565,887 ÷ $1,780,009 × 100 = 88.0%
P 1
Trend Analysis
17 - 14
Trend Analysis
We can use the trend percentages to construct a graph so we can see the trend over time.
P 1
17 - 15
Vertical Analysis
Common-Size Statements
Common-size Percent
Analysis AmountBase Amount 100= ×
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
P 2
17 - 16
($325,336 ÷ $1,228,024) × 100 = 26.5%
($393,927 ÷ $1,061,647) × 100 = 37.1%
Common-Size Balance SheetP 2
•Percents are rounded to tenths and thus may not exactly sum to totals and subtotals.
17 - 17
Common-Size Income StatementP 2
($1,916,366 ÷ $2,656,949) × 100 = 72.1%
($1,460,926 ÷ $1,991,139) × 100 = 73.4%
•Percents are rounded to tenths and thus may not exactly sum to totals and subtotals.
17 - 18
Common-Size GraphicsP 2
Common-Size Graphic ofAsset Components
Common-Size Graphic ofIncome Statement
17 - 19
Ratio AnalysisP 3
Liquidity and efficiency Solvency
Market prospectsProfitability
17 - 20
Current Ratio
Acid-test Ratio
Accounts Receivable
Turnover
Inventory Turnover
Days’ Sales Uncollected
Days’ Sales in Inventory
Total Asset Turnover
Liquidity and EfficiencyP 3
17 - 21
Working Capital
Working capital represents current assets financed from long-term capital sources that
do not require near-term repayment.
Current assets– Current liabilities= Working capital
More working capital suggests a strong liquidity More working capital suggests a strong liquidity
position and an ability to meet current obligations.position and an ability to meet current obligations.
P 3
17 - 22
This ratio measures the short-term debt-paying ability of the company. A higher current ratio suggests a strong liquidity
position.
Current Ratio
Current Ratio = Current AssetsCurrent Liabilities
P 3
17 - 23
This ratio is like the current ratio but excludes current assets such as inventories and prepaid expenses that may be
difficult to quickly convert into cash.
Acid-Test Ratio
Acid-test ratio = Cash + Short-term investments + Current
receivablesCurrent Liabilities
Referred to as Quick Assets
P 3
17 - 24
This ratio measures how many times a company converts its receivables
The debt ratio expresses total liabilities as a percent of total assets. The equity ratio provides complementary
information by expressing total equity as a percent of total assets.
P 3
17 - 31
Debt-to-Equity Ratio
Debt-to-equity ratio = Total liabilities Total equity
This ratio measures what portion of a company’s assets are contributed by creditors. A larger debt-to-
equity ratio implies less opportunity to expand through use of debt financing.
P 3
17 - 32
Times Interest Earned
Times interest earned =
Income before interest and taxes
Interest expense
This is the most common measure of the ability of a company’s operations to provide
protection to long-term creditors.
Net income+ Interest expense+ Income taxes= Income before interest and taxes
P 3
17 - 33
Profit Margin
Return on Total Assets
Return on Common Stockholders’ Equity
ProfitabilityP 3
17 - 34
Profit Margin
Profit margin = Net income Net sales
This ratio describes a company’s ability to earn net income from each sales dollar.
P 3
17 - 35
Return on total asset =
Net income Average total
assets
Return on Total Assets
Return on total assets measures how well assets have been employed by the
company’s management.
P 3
17 - 36
Return on Common Stockholders’ Equity
Return on common stockholders' equity =
Net income - Preferred dividends Average common stockholders'
equity
This measure indicates how well the company employed the stockholders’ equity to earn net
income.
P 3
17 - 37
Price-Earnings Ratio
Dividend Yield
Market ProspectsP 3
17 - 38
Price-Earnings Ratio
Price-earnings ratio = Market price per common share Earnings per share
This measure is often used by investors as a general guideline in gauging stock values.
Generally, the higher the price-earnings ratio, the more opportunity a company has for growth.
P 3
17 - 39
Dividend Yield
Dividend yield = Annual cash dividends per share Market price per share
This ratio identifies the return, in terms of cash dividends, on the current market price per share
of the company’s common stock.
P 3
17 - 40
Summary of Ratios
17 - 41
Global View
Horizontal and Vertical AnalysisHorizontal and vertical analyses help eliminate many differences between U.S. GAAP
and IFRS when analyzing and interpreting financial statements. However, when fundamental differences in reporting regimes impact financial statements, the user
must exercise caution when drawing conclusions.
Ratio AnalysisRatio analysis of financial statements also helps eliminate differences between U.S.
GAAP and IFRS. Importantly, the use of ratio analysis is fine, with some possible changes in interpretation depending on what is and what is not included in certain
accounting measures across U.S. GAAP and IFRS. Care must be taken in drawing inferences from a comparison of ratios across reporting regimes.