Financial Statement Analysis

Common Financial Statements  Balance Sheet  Income Statement  Statement of Retained Earnings  Statement of Cash Flows –Events?

Ratio Analysis  What is the main benefit of conducting ratio analysis?  What are the major limitations of ratio analysis? See page 83.

Liquidity Ratios  Current Ratio  Quick (Acid Test) Ratio

Asset Management Ratios  Inventory Turnover Ratio  Days Sales Outstanding  Fixed Asset Turnover  Total Assets Turnover

Debt Management Ratios  Why is it important to have a good understanding of a firm’s leverage position?  Debt to Assets  Times Interest Earned  Fixed Charge Coverage

Profitability Ratios  Profit Margin on Sales  Basic Earning Power (BEP)  Return on Total Assets  Return on Common Equity

Market Value Ratios  Price to Earnings  Market to Book  Look at summary for MicroDrive on p. 75.

Trend Analysis  What can be learned from trend analysis?  What makes trend analysis so difficult in the short run?

Du Pont Equation  Look at Du Pont chart on page 77.  Du Pont analysis allows us to see what is driving ROE.  Why is that important?

Comparative Ratios and Benchmarking  What is benchmarking and why is it of value?

Looking Behind the Numbers!!  Are the company’s revenues tied to one key customer?  To what extent are the company’s revenues tied to one key product?  To what extent does the company rely on a single supplier?  What percentage of the company’s business is generated overseas?

 What is the competition like?  What are the future prospects of the firm?  What is the legal and regulatory environment like?