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Financial Statement Analysis

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Presentation on theme: "Financial Statement Analysis"— Presentation transcript:

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

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