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ATENEO J.G.

SCHOOL OF MANAGEMENT
Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

FINANCIAL STATEMENTS & RATIO ANALYSIS

Balance Sheet
Income Statement
Statement of Retained Earnings
Statement of Cash Flows
Accounting Income vs. Cash Flow
Financial Ratio Analysis
Du Pont System
Market Value Added (MVA) and Economic Value Added (EVA)
Effects of Improving Ratios
Limitations of Ratio Analysis

The Annual Report


The Annual Report is issued annually by a firm to its shareholders, which contains the managements
analysis of the firms past operations and future prospects as well as the following basic financial
statements:

Balance Sheet provides a snapshot of a firms financial position at one point in time.

Income Statement summarizes a firms revenues and expenses over a given period of time;
also known as Profit and Loss (P&L) Statement

Statement of Retained Earnings shows how much of the firms earnings were retained, rather
than paid out as dividends

Statement of Cash Flows reports the impact of a firms activities on cash flows over a given
period of time.

F/S: Balance Sheet

Shows a firms assets, liabilities, and


shareholders equity, using the actual cost
of acquiring them, at a given point in time

Accounting Book Value value of an


asset as shown in the balance sheet; it
represents the historical cost of the asset
rather than current market value or
replacement cost

Balance Sheet Equation :


Total Assets = Total Liabilities
+ Total Shareholders Equity
Total Resources of the Firm = How it was financed by Debt or Capital
o Shows what assets the firm owns and who has claims on those assets as of a given date

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Overview of Balance Sheet: TOTAL ASSETS


I.

II.

CURRENT ASSETS
1. Cash
2. Accounts Receivables (A/R)
3. Inventories
4. Other Current Assets

Current Assets - called Gross Working Capital because these assets turn over (used &
replaced within a year)

Cash - refers to Cash on hand, demand deposits, short-term marketable securities that
can be quickly converted into cash

A/R - money owed by customers who purchased goods & services on credit

Inventories - raw materials, work in progress, and finished goods held for eventual sale

Other Current Assets - items such as prepaid expenses

LONG-TERM (FIXED) ASSETS


1. Net Property, Plant, and Equipment
2. Other Long-Term Assets
A. Land
B. Long-Term Investments
C. Intangible Assets like Patents, Copyrights, Trademarks, Goodwill

Depreciation Expense a non-cash expense (found in Income Statement) to allocate the


cost of depreciable assets, such as machinery and equipment, over the assets expected
useful life

Accumulated Depreciation sum of all depreciation taken over the entire life of a
depreciable asset (found in Balance Sheet)

Gross Fixed Assets reflect the original cost of fixed assets

Net Fixed Assets = Gross Fixed Assets minus Accumulated Depreciation taken over life
of the assets

Overview of Balance Sheet: TOTAL LIABILITIES


I.

CURRENT LIABILITIES
1. Accounts Payables (A/P)
2. Accrued Expenses
3. Short-Term Debt (Notes Payable)
4. Other Current Liabilities

Current Liabilities (Short-Term Debt) - borrowed money that must be repaid within 12
months

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

II.

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

A/P or Trade Credit - the credit suppliers have extended when materials or inventories
were purchased and will be paid within 30, 60, and 90 days

Accrued Expenses - unpaid short-term liabilities incurred during the firms operations

Short-Term Notes - borrowings from banks or other FIs that are due and payable within
12 months

LONG-TERM LIABILITIES
1. Long-Term Loans
2. Corporate Bonds
3. Mortgages

Long-Term Liabilities (L/T Debt) -borrowed money from banks or other financial
institutions that must be repaid longer than 12 months

Corporate Bonds - borrowings of the firm through issuance of its own securities with
medium to long-term maturities

Mortgages loan to finance real estate where the lender has first claim on the property in
the event the borrower is unable to repay the loan

Overview of Balance Sheet: SHAREHOLDERS EQUITY


I.

SHAREHOLDERS EQUITY
1. Par Value of Common Stocks
2. Paid-In Capital
3. Retained Earnings

Shareholders Equity includes both preferred and common shareholders investment in


the firm

Preferred Stockholders stockholders that have claims on the firms income and assets
after creditors, but before common stockholders; Receives dividends that are fixed in
amount

Common Stockholders investors who own the firms common stocks; also known as
residual owners of the firm

Common Stocks the amount the firm receives after selling the stocks, which represent
ownership in a corporation

Par Value the arbitrary value a firm puts on each share of stock prior to its being offered
for sale

(Additional) Paid-In Capital the amount the firm receives from selling stock to investors
above par value

Treasury Stock - firms stock that has been issued and the repurchased by the firm

Retained Earnings cumulative profits retained in business up to the date of the balance
sheet

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

F/S: Income Statement

Shows the firms sales and costs over a given time period

Income Statement Equation :


Sales Expenses = Profits

Known also as Profit & Loss (P&L) Statement; indicates the amount of profits generated by a
firm, which is calculated on an accrual basis

Accrual Basis Accounting method of accounting whereby revenue is recorded when it is


earned, whether or not the revenue has been received in cash. Likewise, expenses are
recorded when they are incurred, even if the money has not actually been paid out

Overview of Income Statement: GROSS PROFITS


SALES OR REVENUES
Paid in Cash
Paid thru Credit
Sold on Installment
Deferred Sales
Less:
COST OF GOODS SOLD (CGS)
Equals:
GROSS PROFITS

Revenues - Total Sales Pesos equals Selling Price X Units Sold, whether sold in cash, thru
credit, on installment or deferred

Cost of Goods Sold the cost of producing or acquiring a product or service to be sold in the
ordinary course of business

Gross Profits - Sales or Revenues minus Cost of Goods Sold

Overview of Income Statement: OPERATING INCOME


GROSS PROFITS
Less:
OPERATING EXPENSES
Marketing & Selling Expenses
General & Administrative Expenses
Equals:
EARNINGS BEFORE INTEREST, TAXES DEPRECIATION & AMORTIZATION (EBITDA)
Less:
Depreciation Expenses
Amortization Expenses
Equals: OPERATING INCOME or OPERATING PROFITS (EBIT)
Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Marketing & Selling Expenses the (variable) cost of promoting and distributing the firms
products or services to customers

General & Administrative Expenses the firms overhead (fixed) expenses, such as salaries
and rent

Depreciation Expense a noncash expense to allocate the cost of depreciable assets, such
as plant & equipment, over the life of the asset

Amortization Expense a noncash expense to allocate the cost of the intangible assets, such
as copyrights, over the life of the asset

Overview of Income Statement: TAXABLE INCOME


OPERATING INCOME or OPERATING PROFITS (EBIT)
Less:
FINANCING COST
Interest Expenses
Preferred Dividends
Equals:
TAXABLE INCOME (EBT)

Operating Income or Operating Profits also called earnings before interest & taxes (EBIT);
the result of managements decisions relating only to the operations of the business

Financing Cost interest expenses resulting from the use of debt to finance operations and,
if the firm issued preferred stocks, includes also preferred dividends

Taxable Income = Operating Income minus Financing Cost; also called earnings before taxes
(EBT)

Overview of Income Statement: NET INCOME


TAXABLE INCOME (EBT)
Less:
INCOME TAX
Equals:
NET INCOME

Taxable Income = Operating Income minus Financing Cost; also called earnings before taxes
(EBT)

Income Tax computed based on earnings before taxes (EBT) and the applicable tax rate for
the amount of income reported

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Net Income earnings available to common stockholders, which represents income that may
be reinvested in the firm or distributed to its owners, provided that there is available cash to
do so

Overview of Statement of Shareholders Equity (SE):


SE BALANCE, Previous Year
Add:
NET INCOME, Current Year
Less:
CASH / STOCK DIVIDENDS*
Add:
RETAINED EARNINGS
Equals:
SE BALANCE, Current Year

SE = Par Value of Common Stocks + Paid-In Capital + Retained Earnings; shows how
much a firms equity changed during the year and why this change occurred

Retained Earnings - cumulative profits retained in the firm up to the date of the balance
sheet; represents a claim against assets, which does not represent cash and are not
available for dividends or anything else; it may also be negative to show unrealized losses
like forex losses

*Stock Dividend distribution of shares of up to 25% of the number of shares outstanding,


issued on a pro rata basis to the current shareholders

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Other Financial Ratios: PER SHARE BASIS


NO. OF OUTSTANDING SHARES
Common Shares
Preferred Shares
EARNINGS PER SHARE
=
Net Income____________
No. of Outstanding Common Shares
DIVIDENDS PER SHARE
=
Total Dividends Declared___
No. of Outstanding Shares
BOOK VALUE PER SHARE
=
Common Equity
______
No. of Outstanding Common Shares

Earnings per Share (EPS) income on a per share basis

Dividends per Share (DPS) amount of dividends a firm pays for each share outstanding

Book Value per Share (BVPS) accounting value per share based on firms balance sheet

Stock Price per Share market value per share observed in the market place

Other Financial Ratios: MORE LIQUIDITY RATIOS


AVE. COLLECTION PERIOD
=
Accounts Receivable____
(Credit Sales / 365)
ACCOUNTS RECEIVABLES (A/R) TURNOVER RATIO
=
Annual Credit Sales____
Accounts Receivables
INVENTORY TURNOVER
=
Cost of Goods Sold___
Inventory
DAY SALES OUTSTANDING
= Receivables____
Annual Sales / 365

Ave. Collection Period - how long the firm collects on its credit accounts & converts to cash

A/R Turnover Ratio expresses how often accounts receivable are rolled over during a
year

Inventory Turnover measures the number of times a firms inventories are sold and
replaced during the year (relative liquidity of the inventories)
Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Day Sales Outstanding indicates the average length of time the firm must wait after making
a sale before it receives cash

Other Financial Ratios: OPERATING EFFICIENCY


BASIC EARNING POWER (BEP) RATIO or OPERATING RETURN ON ASSETS (OROA)
=
EBIT_____
Total Assets
TOTAL ASSET TURNOVER
=
Sales_____
Total Assets
FIXED ASSET TURNOVER
=
Sales______
Net Fixed Assets

Basic Earning Power (BEP) Ratio or OROA indicates the ability of the firms assets to
generate operating income

Total Asset Turnover relates how well the firm is managing its assets to generate sales
(called asset efficiency)

Fixed Asset Turnover indicates how efficiently the firm is using its fixed assets

Other Financial Ratios: FINANCING DECISION


TIMES INTEREST EARNED
= Operating Profits__
Interest Expense
DEBT / EQUITY RATIO
=
Total Debt___
Total Equity

Times Interest Earned measures a firms ability to meet its interest payments from its
annual operating earnings

Debt / Equity Ratio (D/E Ratio) determines how much leverage the shareholders had in
magnifying expected earnings

Other Financial Ratios: RETURN ON CAPITAL


RETURN ON EQUITY
= Net Income___
Common Equity
RETURN ON TOTAL ASSETS (ROA)
=
Net Income____
Total Assets
Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Return on Equity (ROE) refers to accounting rate of return earned on the common
stockholders investment

Return on Total Assets (ROA) indicates the rate of return being earned on the firms assets

Effects of Debt on ROA and ROE

ROA is lowered by debt:


Interest lowers Net Income, which also lowers ROA = NI/Assets

Use of debt also lowers equity:


Hence, debt could raise ROE = NI/Equity

Problems with ROE

ROE and shareholder wealth are correlated, but problems can arise when ROE is the sole
measure of performance:
ROE does not consider risk
ROE does not consider the amount of capital invested
Might encourage managers to make investment decisions that do not benefit shareholders
ROE focuses only on return. A better measure is one that considers both risk and return.

The DuPont Equation

A formula that shows the relationship among asset management, debt management, and
profitability ratios:
ROE = Net Income X
Sales
X
Total Assets_____
Sales
Total Assets
Total Common Equity

Profit Margin - Expense


Control; tells the firm how
much it earns on sales,
which
determines
its
command on premium price
and holding down of costs

Total Assets Turnover Asset Utilization; tells the


firm how many times the
profit margin is earned each
year for each pesos of sales
and how many times its
assets turned over each
year

Equity Multiplier Debt


Utilization; the adjustment
factor

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Statement of Cash Flows

Profits and cash flows are not the same thing!

Two Ways to Measure a Firms Cash Flows:


Free Cash Flows the amount of cash available from operations after the firm pays for
the investments it has made in operating working capital and fixed assets. This cash is
available for distribution to firms creditors and owners.

Statement of Cash Flows focuses on identifying the sources and uses of cash that
explain the change in the firms cash balance reported in the balance sheet

Potential Uses of Freed Up Cash

Expand business
Reduce debt
Repurchase stock
All these actions would likely improve the stock price

Statement of Cash Flows

Three Key Activities that Explain Cash Inflows & Cash Outflows of the Firm:
1. Generating Cash Flows from Day-to-Day Operations - how much cash is coming from the
normal course of operating a business, starting with :
- purchasing inventories on credit
- selling on credit
- paying for the inventories
- collection on sales made on credit

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

2. Investing in Fixed Assets & Other Long-Term Investments - when a firm purchases or
sells fixed assets, like equipment or building, there can be a significant cash inflows and
outflows

3. Financing the Business - cash inflows & outflows occur from:


- borrowing and repaying S/T and L/T Debt
- paying dividends to the shareholders
- issuing new equity stocks or repurchasing stocks from shareholders

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Overall Statement of Cash Flows:

Converting a Firms Income Statement from an Accrual Basis to Cash Basis in Two (2) Steps:
1.

Add Back depreciation to net income since depreciation is not a cash expense

2.

And Subtract the following:


- any uncollected sales (or total sales minus increases in accounts receivables)
- cash payments for inventories (or increases in inventories minus increases in
accounts payables)

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Instructor : Alice Parlan

Economic Value Added (EVA)

A financial performance that measures a firms economic profit, which assigns:


cost to the equity capital (the opportunity cost of funds provided by the shareholders)
interest cost on the firms debt

Economic Value Added Equation:


EVA = Operating Return
on Assets

Cost of
All Capital

x Total
Assets

Php Amount (if positive, then there is added economic value)

Value created by management is determined by the amount the firm earns on its invested capital
relative to the cost of both equity and debt funds, and the amount of capital invested in the firm
(which are the total assets)

Computing for Economic Profit:

Market Value Added (MVA)


MVA = Market value __ Equity capital
of equity
supplied

Market Value Ratios:


PRICE / EARNINGS RATIO
= Market Price per Share__
Earnings per Share
PRICE / BOOK RATIO
= Market Price per Share___
Equity Book Value per Share

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

Price/Earnings Ratio (P/E Ratio) the price the market places on Php 1 of the firms reported
earnings

Price / Book Ratio (P/BV Ratio) If > I, then investors believe that the firm is more valuable
than the amount shareholders have invested in it

Analyzing Market Value Ratios

Price-Earnings Ratio (P/E) : How much investors are willing to pay for $1 of earnings?

Price-Cash Flow Ratio (P/CF): How much investors are willing to pay for $1 of cash flow?

Price-Book Value Ratio (M/B): How much investors are willing to pay for $1 of book value
equity?

For each ratio, the higher the number, the better.

P/E and M/B are high if ROE is high and risk is low.

Trend Analysis and Benchmarking

Used to estimate the likelihood of improvement or


deterioration in financial condition

Trend Analysis - analyzes a firms financial ratios over


time

Benchmarking - comparing with the industrys average


can help determine how the firm is faring with other
companies

Potential Problems and Limitations of Financial Ratio Analysis

Comparison with industry averages is difficult for a conglomerate firm that operates in many
different divisions

Average performance is not necessarily good, perhaps the firm should aim higher

Seasonal factors can distort ratios

Window dressing techniques can make statements and ratios look better

Different operating and accounting practices can distort comparisons.

Sometimes it is hard to tell if a ratio is good or bad.

Difficult to tell whether a company is, on balance, in strong or weak position.

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

17

ATENEO J.G. SCHOOL OF MANAGEMENT


Finance & Accounting Department
Instructor : Alice Parlan

FINANCE 103: PRINCIPLES OF FINANCE


III & IV Financial Statements and Ratio Analysis
SY 2016 2017 Intersession

SUMMARY: Five Major Categories of Financial Ratios


(What questions do they answer?)

Liquidity: Can the firm meet the required payments as they fall due?
These ratios give an idea of the firms ability to pay off debts that are maturing within a year.

Asset Management: Does the firm manage its assets efficiently to generate enough sales?
These ratios give an idea of how efficiently the firm is using its assets.

Debt Management: Does the firm finance its assets with the right mix of debt and equity?
These ratios give an idea of how the firm has financed its assets as well as the firms ability to
repay its long-term debt.

Profitability: Are the Firm's managers providing good returns on shareholders' capital? Do sales
prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?
These ratios give an idea of how profitably the firm is operating and utilizing its assets.

Market Value: Are the Firm's managers creating shareholders' value? Do investors like what
they see as reflected in P/E and M/B ratios? These ratios give an idea of what investors think
about the firm and its future prospects based on its stock price.

Sources: Brigham and Houston: Essentials of Financial Management, 13th Ed., Cengage Learning Asia 2013;
Keown, Martin, Petty: Foundations of Finance, 7th Ed., Pearson Education, Inc. / Prentice Hall 2011

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