Topic 7

KAL1013 Chapter Seven 1

Chapter Seven

FINANCIAL

STATEMENT

ANALYSIS


Outline

Users of financial statement The importance of financial statement analysis Types of analysis:

Percentage Analysis: Vertical Horizontal

Ratio Analysis Liquidity Profitability Efficiency Solvency


Users of financial statement

Managers Investors / Shareholders Potential Investors Creditors Regulatory Agencies Inland Revenue Consumers


The importance of financial statement analysis Helps interested users in making economic

decisions: Provide the trend of the business for a certain

period of time. Provide comparability among companies in

the same industry. Helps in forecasting the business’s future

performance


Comparison basis Benchmarking for performance evaluation


Financial Analysis: Comparison Basis

1 intracompany basis

2 industry averages

Year 1 Year 2

Company XYZ

Co. A

Co. B

Co. D Co. E

Co. C

Co. ABC Co. XYZ

3 intercompany basis


Types of analysis

FinancialStatementAnalysis

Percentage Ratio

Horizontal Analysis

Vertical Analysis

Liquidity Ratio

Profitability Ratio

Efficiency Ratio

Solvency Ratio


Horizontal analysis Also known as trend analysis.

Evaluates a series of financial statement data

over a period of time.

Purpose: to determine the increase or decrease that has taken place This change may be expressed as either an amount or a percentage.


Horizontal analysis

Evaluates:Income Statement

Balance Sheet

Formula: Current Year Amount – Base Year AmountBase Year Amount


Selamat CompanyComparative Balance Sheet As At Dec. 31, 2001 and 2002

Fixed Asset:Office Equipment (net) 55,000 63,000Current Asset:Cash 7,000 9,700Accounts Receivable 10,000 18,000

Current LiabilitiesCurrent Liabilities:Accounts Payable 9,000 7,000

2001 2002 Inc. (Dec) Amount %

63,000 83,700

Owner’s Equity 63,000 83,700

63,000 83,700

8,000 14.5

2,700 38.68,000 80.0

(2,000) (22.2)

20,700 32.9

20,700 32.9

20,700 32.9


Selamat CompanyComparative Income Statement For the Years

Ended Dec. 31, 2001 and 2002

2001 2002 Inc. (Dec) Amount %

Net Sales 99,000 115,000

Cost of Goods Sold 44,500 57,700

Gross Profit 54,500 57,300

Selling Expenses 16,800 15,000

Admin Expenses 12,000 20,900

Net Income 25,700 21,400

16,000 16.2

13,200 29.7

2,800 5.1

(1,800) (10.7)

8,900 74.2

(4,300) (16.7)


Vertical Analysis

Evaluates financial statement data expressing

each item in a financial statement as a percent

of a base amount.

Vertical analysis enables you to compare companies of different sizes.


Selamat CompanyComparative Balance Sheet As At Dec. 31, 2001 and 2002

Fixed Asset:Office Equipment (net) 55,000 63,000Current Asset:Cash 7,000 9,700Accounts Receivable 10,000 18,000

Current LiabilitiesCurrent Liabilities:Accounts Payable 9,000 7,000

63,000 83,700

Owner’s Equity 33,000 38,700

63,000 83,700

2001 2002

Amt % Amt %

Long Term Liabilities 30,000 45,000

100

87.3

11.115.9

14.3

100

100

100

47.652.4

75.3

11.621.5

8.4

53.846.2


Selamat CompanyComparative Income Statement For the Years

Ended Dec. 31, 2001 and 2002

2001 2002

Amt % Amt %Net Sales 99,000 115,000

Cost of Goods Sold 44,500 57,700


Selling Expenses 16,800 15,000

Admin Expenses 12,000 20,900

Net Income 25,700 21,400

100 100

45.0

55.0

17.0

12.0

26.0

50.2

49.8

13.0

18.2

18.6


Ratio Analysis

Expresses the relationship among selected items

of financial statement data.

Classifications:

Liquidity Ratios

Profitability Ratios

Efficiency Ratios

Solvency Ratios


Liquidity Ratios

Measures of short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

The ratios are:

Current Ratio / Working capital ratio

Acid test ratio / quick ratio


Liquidity Ratio – Current ratio / Working capital ratio

measure for evaluating a company’s liquidity and short-term debt-paying ability.

Current ratio = Current Assets

Current Liabilities


Eg:

Current Assets 20,500 26,700

Current Liabilities 17,200 29,600

2001 2002

Current ratio = 20,500

17,200

26,700

29,600

= 1.19 : 1 = 0.90 : 1


Liquidity Ratio – Acid Test Ratio / Quick Ratio

is a measure of a company’s short-term liquidity.

Acid test ratio = Quick Assets

Current Liabilities

Quick asset includes cash, marketable securities and accounts receivable.


Eg:

Current Assets

Current Liabilities 17,200 29,600

2001 2002

Acid test ratio = 17,700

17,200

20,700

29,600

= 1.03 : 1 = 0.70 : 1

Cash 7,900 8,700

Accounts Receivable 9,800 12,000

Inventories 2,800 6,000

20,500 26,700


Profitability Ratios

Measures of the income or operating success of a company for a given period of time.

The ratios are:

Profit margin

Gross profit margin

Return on Assets

Return on Equity

Return on Common Equity

Earnings Per Share

Price - Earnings ratio


Profitability Ratio – Profit Margin

is a measure of the percentage of each dollar of sales that results in net income.

Profit margin = Net income

Net sales


Eg:

Net Sales 45,000 52,700

Less: Cost of Goods Sold 20,200 23,600

2001 2002

Profit margin = 10,600

45,000

14,500

52,700

= 23.56% = 27.51%

24,800 29,100

Less: Operating Expenses 14,200 14,600

Net income 10,600 14,500


Profitability Ratio – Gross Profit Margin

is a measure of the percentage of each dollar of sales that results in gross profit.

Gross profit margin = Gross Profit

Net Sales


Eg:

Net Sales 45,000 52,700

Less: Cost of Goods Sold 20,200 23,600

2001 2002

Gross profit margin = 24,800

45,000

29,100

52,700

= 55.11% = 55.22%


Less: Operating Expenses 14,200 14,600

Net income 10,600 14,500


Profitability Ratio – Return on Assets

To assess the ability of the company in using its assets to earn net income without consideration in the financing of such assets.

Return on assets = Net income + Interest expense

Average total assets

Average total assets = Total assets year 1 + total assets year 2

2


Eg: 2001 2002

Return on Assets =

= 15.89%

Net income 10,600 14,500

Interest Expense 910 760

Total Assets (2000 = 69,900) 75,000 82,000

10,600 + 910

(69,900 + 75,000 ) / 2

14,500 + 760

(75,000 + 82,000 ) / 2

= 19.44%


Profitability Ratio – Return on Equity

To assess the ability of the company in managing the investments by shareholders to earn income.

Return on equity = Net income

Average total stockholders’ equity

Average total stockholders’ equity

= Total equity year 1 + total equity year 2

2


Eg: 2001 2002

Return on Equity ( year 2002 ) =

Net income 10,600 14,500

Total Equities:

14,500

(100,000 + 106,000 ) / 2

= 14.08%

Common Shares 80,000 86,000

Preference Shares 20,000 20,000

100,000 106,000


Profitability Ratio – Return on Common Equity

To assess the ability of the company in managing the investments by common shareholders to earn its net income.

Return on commonequity

=Net income

Average common stockholders’ equity

Average common stockholders’ equity =

Common equity year 1 + common equity year 2

2


Eg: 2001 2002

Return on Common Equity ( year 2002 )

Net income 10,600 14,500

Total Equities:

14,500

(80,000 + 86,000 ) / 2

= 17.47%

Common Shares 80,000 86,000

Preference Shares 20,000 20,000

100,000 106,000

=


Profitability Ratio – Earnings Per Share

a measure of net income earned on each share of common stock.

Earnings Per Share/ EPS

Net income

average common shares outstanding (unit)=


Eg: 2001 2002

Earnings per share ( year 2002 )

Net income 10,600 14,500

Total Equities:

14,500

(80,000 + 86,000 ) / 2

= RM0.17 per share

Common Shares(RM1.00 per share) 80,000 86,000

=


Profitability Ratio – Price Earnings Ratio

Measures the ratio of the market price of each share of common stock to the earnings per share.

Price Earnings Ratio/ PE Ratio =

Market price of common stock

Earnings Per Share


Eg:2001 2002

Average market price forcommon stock

RM3.25 RM4.62

Earnings Per Share RM0.11 RM0.17

Price Earnings Ratio/ PE Ratio

=RM3.25 RM4.62

RM0.11 RM0.17

= 30 times = 27 times


Efficiency Ratios

Measures of the efficiency and the ability of the company in managing its resources.

The ratios are:

Inventory Turnover

Asset Turnover

Debtors Turnover / Receivable Turnover


Efficiency Ratio – Inventory Turnover

measures the number of times, on average, the inventory is sold during the period .

Purpose: to measure the liquidity of the inventory.

InventoryTurnover

=Cost of goods sold

Average inventory

Average inventory =Opening inventory + closing inventory

2


Eg:2001 2002

=

Cost of goods sold 20,200 23,600

Inventories 2,800 6,000

Inventory turnover (2002)23,600

( 2,800 + 6,000 ) / 2

= 5.4 times


Efficiency Ratio – Assets Turnover

measures how efficiently a company uses its assets to generate sales.

Assets turnover =Net sales

Average total assets

Average assets =Total assets year 1 + total assets year 2

2


Eg:2001 2002

=Assets turnover (2002)52,700

( 75,000 + 82,000 ) / 2

= 0.67 times

Net Sales 45,000 52,700

Total Assets 75,000 82,000


Efficiency Ratio – Receivables Turnover

Used to assess the liquidity of the receivables.

It measures the number of times, on average, receivables are collected during the period.

Receivables turnover =Net credit sales

Average net receivables

Average net receivables

=A. R year 1 + A. R year 2

2


Eg:2001 2002

=Receivables turnover (2002)

45,700

( 9,800 + 12,000 ) / 2

= 4.2 times

Net Credit Sales 35,000 45,700

Accounts Receivable 9,800 12,000


Solvency Ratios

Measures of the ability of the company to survive over a long period of time.

The ratios are:

Debt ratio

Equity ratio

Times Interest Earned


Solvency Ratio – Debt Ratio

measures the percentage of total assets provided by creditors.

Debt ratio =Total liabilities

Total assets


Eg:2001 2002

Total assets 75,000 82,000

Total liabilities 39,000 52,000

Debt ratio =39,000

75,000

= 52 %

52,000

82,000

= 63 %


Solvency Ratio – Equity Ratio

measures the percentage of total assets provided by shareholders.

Equity ratio =

Total owner’s equity

Total assets


Eg:2001 2002

Total assets 75,000 82,000

Equity ratio =69,000

75,000

= 92 %

69,000

82,000

= 84 %

Total equities 69,000 69,000


Solvency Ratio – Times Interest Earned

provides an indication of the company’s ability to meet interest payments as they come due.

Times interest earned = Income before tax and interest expense

Interest expense


Eg:2001 2002

Income before tax and interest 10,600 14,500

= 11.65 times

Interest Expense 910 760

Times interest earned =10,600

910

14,500

760

= 19.1 times


Topic 7

Documents