1. Financial Analysis – Part 2
Professor Eric Carstensen
MiraCosta College

2. Methods of Financial Analysis
Trend Analysis
Horizontal Analysis
Vertical Analysis
Common Size Statements
Comparison to Budget
Comparison to Industry Data
Ratio Analysis
Liquidity Measures
Profitability Measures
Asset Utilization Measures
Solvency Measures
Market Prospects Measures

3. Financials for Ratio Analyses
EJ Company's Year 2 Income Statement:
Comparative Balance Sheets for Two (2) Years:
Sales
$ ,000
Assets
Year 1
Year 2
COGS
570,000
Cash
$ ,000
$ ,000
Gross Margin
320,000
A/R
110,000
130,000
Op. Expenses
210,000
Inventory
190,000
170,000
Op. Income
Prepaids
20,000
10,000
Loss on Disposal
Total Current Assets
340,000
350,000
Income Before Taxes
90,000
Taxes
30,000
Long Term Investments
Net Income
$ ,000
Property, Plant & Equipment
420,000
550,000
EJ Company's Year 2 RE Statement:
Accum. Depreciation
(110,000)
(120,000)
Net Property, Plant & Equipment
310,000
430,000
Year 1 Retained Earnings
$ ,000
add: Net Income
60,000
Total Assets
$ ,000
$ ,000
less: Dividends
equals: Year 2 Retained Earnings
$ ,000
Liabilities
A/P
$ ,000
$ ,000
Unearned Revenue
Other Information:
Total Current Liabilities
160,000
150,000 a.
Equipment that had cost $90,000 and on which
Long Term Note Payable
there was $40,000 of accumulated deprec-
iation was sold in Year 2 for $30,000 cash.
Total Liabilities
300,000 b.
Replacement equipment was purchased for
$220,000 in cash.
Equity c.
Year 2 depreciation expense was $50,000.
Common Stock
250,000 d.
Cash dividends of $10,000 were paid in
Retained Earnings
the current year.
Total Owners' Equity
360,000
510,000
Total Liabilities & Equity

4. Ratio Analysis - Liquidity
Year 1
Year 2
Total Current Assets
340,000
350,000 -
Total Current Liabilities
160,000
150,000 =
Working Capital
180,000
200,000
Current Ratio
2.1
2.3
(cash + A/R + s.t. invest)
130,000
170,000
Quick Ratio
0.8
1.1

5. Ratio Analysis - Profitability
Year 1
Year 2
Sales
$ 836,000
$ 890,000
COGS
585,000
570,000
Gross Margin
251,000
320,000
Op. Expenses
190,000
210,000
Op. Income
61,000
110,000
Loss on Disposal -
20,000
Income Before Taxes
90,000
Taxes
19,000
30,000
Net Income
$ 42,000
$ 60,000
GM% =
30.0%
36.0%
836,000
890,000
Op. Inc. % =
7.3%
12.4%
Profit Margin =
42,000
5.0%
60,000
6.7%

6. Ratio Analysis – Profitability Cont’d
Year 2
Return on Investment (ROI)
Net Income =
60,000
8.1%
Average Assets **
(680, ,000)/2
Return on Equity (ROE)
13.8%
Average Equity ***
(360, ,000)/2
Earnings Per Share (EPS)
0.20
Weighted Average
(250, ,000)/2
Shares Outstanding ****
** Average Assets =
(beginning assets + ending assets) / 2
*** Average Owners' Equity =
(beginning equity + ending equity) / 2
**** Assume Common Stock is $1 par and there is no additional paid in capital

7. Ratio Analysis – Asset Utilization
Year 2
A/R Turnover
Net Credit Sales =
890,000
7.4
Average A/R **
(110, ,000)/2
# Days Uncollected
Ending A/R * 365
130,000 * 365 53
Inventory Turnover
COGS
570,000
3.2
Average Inventory ***
(190, ,000)/2
# Days Sales in End. Inv.
Ending Inv. * 365
(170,000 * 365)
109
** Average A/R =
(beginning A/R + ending A/R) / 2
*** Average Inventory =
(beginning inventory + ending inventory) / 2

8. Ratio Analysis - Solvency
Debt Ratio
Year 1
Year 2
Total Liabilities
320,000
47.1%
300,000
37.0%
Total Assets
680,000
810,000
Equity Ratio
Total Owners' Equity
360,000
52.9%
510,000
63.0%
Equity
88.9%
58.8%

9. Ratio Analysis – Market Prospects
Year 2
Price-Earnings Ratio
Market Price per Share =
10.00
5.8
Earnings per Share*
1.71
Dividend Yield
Dividends per Share*
.29
2.9%
Market Price per Share**
* assumes 35,000 shares of common stock
** assumes $10 market price per share

10. Financial Analysis Part 2 - Concluded
We looked at several Ratio Analysis measures as part of this presentation.
Accounting, Managerial Accounting and Finance textbooks contain additional ratios that can be applied, depending on the type of business.
Some companies tailor these standard ratios for use in their own unique business.