1. Financial Statements Ratio Analysis
Chapter II Tutorial
Financial
Statements
Ratio Analysis

2. Financial Statements
The Income Statement (financial summary of the firm‘s operating result during a specified period)
The Balance Sheet (summary statement of the firm‘s financial position at a given point in time)
The Statement of Cash Flows (summary of the cash flows over a specified period)
The Statement of Retained Earnings (reconciles the net income during a year, and any dividends paid, with the change in retained earnings between the start and the endof that year)

3. The Income Statement
Provides a financial summary of the firm‘s operating result during a specified period.
Most common are income statements covering a 1-year period ending December 31. Monthly statements are prepared for use by management. Quaterly statements must be made available to the stockholders of publicly owned corporations.

4. The Income Statement General form: Revenue -Cost of goods sold
= Gross profit
-Operating expenses
= Operating profit (EBIT)
-Financial cost
= Earning Before Taxes (EBT)
-Taxes
= Earning After Taxes (EAT)

5. The Balance Sheet
Balances the firm‘s assets against its financing (debt or equity)
Short-term x Long-term assets and liabilities
Shotr-term (current assets and liabilities) – they are expected to be converted into cash or paid within 1 year or less.
Long-term (fixed assets, equity, long term debt) – they are expected to remain on the firm‘s books far more than 1 year.

6. Liabilities and Equity Long term debt / liabilities
The Balance Sheet
As is customary, the assets are listed from the
most liquid (cash) down to the least liquid.
Assets
Current assets
Fixed assets
Liabilities and Equity
Current liabilities
Long term debt / liabilities
Equity

7. The Statement of Cash Flows
Analyses the firm’s ability to generate cash and cash equivalents
Statement of CF shows:
– Where did the cash come from?
– What was it used for?
– What was the change in the cash balance?
Operating, Investing and Financing activities
Sources vs. Usage of funds

8. Financial Analysis Evaluation of firm’s performance
Users: investors, stockholders, management, creditors, business partners
Types of Ratio Comparisons
Cross-Sectional Analysis (benchmarking)
Time-Series Analysis
Combined Analysis

9. Categories of Financial Ratios:
Liquidity ratios
Activity ratios
Debt ratios
Profitability ratios
Market ratios

10. Liquidity Ratios Current Ratio = Current Assets / Current Liabilities
Measure the ability of a firm to satisfy its short-term obligations.
Current Ratio = Current Assets / Current Liabilities
(acceptable = 2, depends on industry)
Quick Ratio = (Current Assets – Inventory) /
Current Liabilities
(acceptable = 1, depends on industry)

11. Activity Ratios Inventory Turnover = Cost of Goods Sold / Inventory
Measure the speed with which various accounts are converted into sales or cash.
Inventory Turnover = Cost of Goods Sold / Inventory
Average Collection Period = Accounts receivable / (Annual sales/365)
Average Payment Period = Accounts payable / (Annual purchases/365)
Total Assets Turnover = Sales / Total Assets

12. Debt Ratios Debt Ratio = Total Liabilities / Total Assets
measure how much of the firm is financed with other people’s money and the firm’s ability to meet fixed charges.
Debt Ratio = Total Liabilities / Total Assets
Interest Coverage Ratio or Times Interest Earned = EBIT / Interest

13. Profitability Ratios
measure a firm’s return with respect to sales, assets, or equity.
Common-size Income Statement – each item is expressed as % of sales.
Gross Profit Margin = Gross Profit / Sales
Operating Profit Margin = EBIT / Sales
EPS = Earnings available for comm. Stockh. / number of shares
ROA = Earnings available for comm. Stockh. / Total Assets
ROE = Earnings available for comm. Stockh. / Common stock Equity

14. Market Ratios PE = Market price per share / EPS
insight into how well investors in the marketplace feel the firm is doing in terms of return and risk.
PE = Market price per share / EPS
Market/Book Ratio = Market price per share / Book value per share
Book value per share = Equity / Number of shares

15. Questions? Thank You for Your attention.