1. Financial Statement Analysis
Chapter 19
Financial Statement Analysis

2. Overview
Purpose
Tools Used
Statements
Ratio Analysis
Limitations

3. Financial Statements Balance Sheet Income Statement
Common Sized
Trend or Indexed
Income Statement
Statement of Cash Flows

4. Ratio Analysis Purpose of Ratio Analysis Uses Use by External Analysts
Trend analysis
Comparative analysis
Combination
Use by External Analysts
Important information for investment community
Important for credit markets

5. Type of Financial Ratios
Liquidity Ratios
Activity or Mgmt Efficiency Ratios
Leverage Ratios
Profitability Ratios
Market Price Ratios

6. Liquidity Ratios Current Ratio Current Assets Current Liabilities
Quick Ratio
Current Assets - Inventory

7. Activity or Management Efficiency Ratios
Inventory Turnover
Sales or Cost of Goods Sold
Inventory
Total Asset Turnover
Sales
Total Assets

8. Activity or Management Efficiency Ratios
Average Collection Period
Accounts Receivable
Sales Per Day
Days to Sell Inventory
Inventory

9. Leverage Ratios Times Interest Earned Earnings Before Int. & Taxes
Interest Expense
Fixed Charge Coverage Ratios
Lease Payments
Principal Repayments
Preferred Dividends

10. Leverage Ratios Debt to Assets Long Term Debt Assets Debt to Equity
Shareholders Equity

11. Profitability Ratios Net Profit Margin % Net Income Sales
Return on Assets
Total Assets

12. Profitability Ratios Return on Equity Net Income Common Equity
Operating Margin After Depr.
Operating Profit
Sales

13. Market Price Ratios Price to Earnings Market Price of Stock Earnings
Market-to-Book-Value
Book Value Per Share

14. Decomposition of ROE (1) x (2) x (3) x (4) x (5) ROE = Net Profit
Pretax Profit x
EBIT
Sales
Assets
Equity
(1) x (2) x (3) x (4) x (5)
x Margin x Turnover x Leverage
Tax
Burden
Interest

15. Comparability Problems
Accounting Differences
Inventory Valuation
Depreciation
Inflation
International Accounting Conventions