FINANCIAL

STATEMENTS
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
FINANCIAL
ANALYSIS
FINANCIAL ANALYSIS

• assessment of how viable, stable, solvent, and profitable a

business or project is
• when people carry out a financial analysis of a company,
they examine the income statement and balance sheet; they
also focus on the cash flow statement
• also called financial statement analysis, analysis of finance,
or accounting analysis

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For exclusive use of ETRP 55, 2nd sem, SY 2020-2021. Not for sharing or distribution.
Who Uses Financial Statement Analysis?

Management. The company controller prepares an

ongoing analysis of the company's financial results,
particularly in relation to a number of operational
metrics that are not seen by outside entities (such as
the cost per delivery, cost per distribution channel,
profit by product, and so forth ).

Investors. Both current and prospective

investors examine financial statements to learn
about a company's ability to continue issuing
dividends, or to generate cash flow, or to continue
growing at its historical rate (depending upon their
investment philosophies ).

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Who Uses Financial Statement Analysis?

Creditors. Anyone who has lent funds to a

company is interested in its ability to pay back
the debt, and so will focus on various cash flow
measures.

Regulatory authorities. If a company is

publicly held, its financial statements are
examined by the Securities and Exchange
Commission to see if its statements conform to
the various accounting standards and the rules
of the SEC.

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TYPES OF FINANCIAL
STATEMENTS

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TYPES OF FINANCIAL ANALYSIS

1. Vertical Analysis
2. Horizontal Analysis
3. Ratio Analysis

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1. VERTICAL ANALYSIS

• a method of financial statement analysis in

which each line item is listed as a percentage
of a base figure within the statement

• for instance, line items on an income statement can be

stated as a percentage of gross sales or of revenue, while
line items on a balance sheet can be stated as a
percentage of total assets or liabilities, and vertical
analysis of a cash flow statement shows each cash inflow
or outflow as a percentage of the total cash inflows

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1. VERTICAL ANALYSIS

Financial statements that include vertical analysis in a

separate column line showing percentages are called common
size financial statements. These are used by many companies
to provide greater detail on a company’s financial position.

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Vertical Analysis

5,000,000/ 5,000,000 x 100 = 100%

1,000,000/ 5,000,000 x 100 = 20%

4,000,000/ 5,000,000 x 100 = 80%

2,000,000/ 5,000,000 x 100 = 40%

2,000,000/ 5,000,000 x 100 = 40%

500,000/ 5,000,000 x 100 = 10%

1,500,000/ 5,000,000 x 100 = 30%

This shows that from your sales/ revenue…

• 20% goes to “payment” of cost of goods sold
• 80% of this is your gross profit
• 10% goes to taxes
• 30% of it is your net income etc.

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 550,000/ 1,139,500 x 100 = 48.3%

444,500/ 1,139,500 x 100 = 39.0%

Total Assets as base figure

210,000/ 1,139,500 x 100 = 18.4 %

310,000/ 1,139,500 x 100 = 27.2 %

500,000/ 1,139,500 x 100 = 43.9%

Total liabilities &

stockholder’s equity as base
figure
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2. HORIZONTAL ANALYSIS

• involves taking several years of financial data and

comparing them to each other to determine a growth
rate. This will help an analyst determine if a company
is growing or declining, and identify important trends

• used to compare historical data, such as ratios, or line

items, over a number of accounting periods

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3. RATIO ANALYSIS

• a quantitative method of gaining insight into a

company's liquidity, solvency, operational efficiency,
and profitability by studying its financial statements
such as the balance sheet and income statement

• uses important ratio metrics to calculate statistical

relationships

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RATIO CATEGORIES

A. Liquidity Ratio – ability to pay short-term debts

B. Solvency/ Leverage – ability to pay long-term debts

C. Profitability – ability to earn profits

D. Efficiency/ Operating – ability to use assets to

generate revenue and cash flow

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RATIO ANALYSIS

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 Current Asset
• Cash
• Marketable Securities – assets that can be liquidated to cash quickly
- stocks, corporate bonds, T-bills, preferred shares
• Accounts Receivable - any money your customers owe you for goods
or services they purchased from you in the past.

• Inventory assets are goods or items of value that a company plans to

sell for profit.
-raw production materials, merchandise, and products that are either
finished or unfinished.

• Prepaid expense is a type of asset on the balance sheet that results

from a business making advanced payments for goods or services to be
received in the future.

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A. LIQUIDITY RATIO

• measures the ability of the firm to meet its current or

short-term obligations
• measure a company's ability to convert their assets to
cash

i. Current Ratio
ii. Quick Ratio
iii. Cash Ratio
iv. Networking Capital

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A. LIQUIDITY RATIO

i. Current Ratio - measures a company's ability to pay off its current

liabilities (payable within one year) with its total current assets such
as cash, accounts receivable, and inventories. The higher the ratio,
the better the company's liquidity position.

Current Ratio = Current Assets

Current Liabilities

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A. LIQUIDITY RATIO

ii. Quick Ratio - measures a company's ability to meet its short-term

obligations with its most liquid assets and therefore excludes
inventories from its current assets. It is also known as acid-test ratio.

Quick Ratio = Cash + Marketable Securities + Accounts Receivable

Current Liabilities

Another way to express this is:

Quick Ratio = (Current Assets - Inventory – Prepaid expenses)
Current Liabilities

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A. LIQUIDITY RATIO

iii. Cash Ratio - Since the cash is the most liquid asset, a financial
analyst may examine the ratio of cash and is equivalent to current
liabilities. Marketable securities are equivalent cash.

Cash Ratio = Cash + Marketable Securities

Current Liabilities

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A. LIQUIDITY RATIO

iv. Networking Capital (NWC)- The difference between a

company’s current assets and current liabilities on its balance sheet.
The ideal position is to have more current assets than current
liabilities, and thus have a positive net working capital balance.

Networking Capital (NWC) = Current Asset - Current Liabilities

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 Current Ratio = Current Assets
Current Liabilities

Quick Ratio = Cash + Marketable Securities + Accounts Receivable

Current Liabilities

Cash Ratio = Cash + Marketable Securities

Current Liabilities

Networking Capital (NWC) = Current Asset - Current Liabilities

Networking Capital (NWC) = $ 315 - $ 80 = $235

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B. SOLVENCY RATIO

• a key metric used to measure an enterprise’s ability to

meet its long-term debt obligations and is used often by
prospective business lender
• it indicates whether a company’s cash flow is sufficient to
meet its long-term liabilities and thus is a measure of its
financial health
• an unfavorable ratio can indicate some likelihood that a
company will default on its debt

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B. SOLVENCY RATIO

i. Interest Coverage Ratio (Time Interest Earned Ratio)

ii. Debt-to-Asset Ratio (Debt Ratio)
iii. Equity Ratio
iv. Debt-to-Equity Ratio

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B. SOLVENCY RATIO

i. Interest Coverage Ratio (Time Interest Earned Ratio)

measures the ability of a company to meet the interest payments on
its debt with its earnings. Specifically, it measures how many times
over a company can meet its interest payment with its current
earnings, as such, it includes a margin of safety.

Interest Coverage Ratio = Earnings Before Interest & Tax (EBIT)

Interest Expense
*earnings or income

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B. SOLVENCY RATIO

ii. Debt-to-Asset Ratio (Debt Ratio) measures a company's total

debt to its total assets. It measures a company's leverage and
indicates how much of the company is funded by debt versus assets,
and therefore, its ability to pay off its debt with its available assets.

Debt-to-Asset Ratio (Debt Ratio) = Total Liabilities/ Debt

Total Asset

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B. SOLVENCY RATIO

iii. Equity Ratio (Shareholder’s Equity Ratio). Also called as

shareholder’s equity or equity-to-assets. It shows how much of a
company is funded by equity as opposed to debt. The higher the
number, the healthier a company is. The lower the number, the more
debt a company has on its books relative to equity.

Shareholder Equity Ratio = Total Shareholder Equity

Total Assets

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B. SOLVENCY RATIO

iv. Debt-to-Equity Ratio. Similar to the debt-to-assets ratio, in that it

indicates how a company is funded, in this case, by debt. The higher
the ratio, the more debt a company has on its books, meaning the
likelihood of default is higher. The ratio looks at how much of the
debt can be covered by equity if the company needed to liquidate.

Debt to Equity Ratio = ___Total Liabilities/ Debt____

Total Shareholder’s Equity

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a. Compute for Interest Coverage Ratio

Interest Coverage Ratio = Earnings Before Interest & Tax

Interest Expense
= 36,300/ 3500
= 10.37
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b. Debt to Asset Ratio
Debt-to-Asset Ratio = Total Debt
Total Asset
= 306,900/ 596,150
= 0.5148 or 51.48%
c. Equity Ratio
Shareholder Equity Ratio = Total Shareholder Equity
Total Assets
= 289,250/ 596,150
= 0.485 or 48.5%

d. Debt to Equity Ratio

Debt to Equity Ratio = Debt Outstanding
Equity
= 306,900/ 289,250
= 1.06

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TO BE CONTINUED…

Prepared by Micah Roque for exclusive use of BMGT 11 1st sem, SY 2020-2021. Not for sharing or distribution.