Big Picture in Focus: ULOb.

Analyze the content of the financial

statements

Metalanguage
For you to demonstrate ULOb, you will need to have an operational understanding of
the following terms below.
Financial Statement Analysis. It is the process of extracting information form financial
statements to better understand a company’s current and future performance and
financial condition.
Financial Ratio. It is a comparison in fraction, proportion, decimal or percentage of two
significant figures taken from financial statements.

Essential Knowledge

Horizontal Analysis
Vertical Analysis
Financial Analysis
Trend Analysis

Ratio Analysis
In our discussion, we will focus on the ratio analysis.

Profitability Ratios
Ratio Analysis Growth Ratios
Liquidity Ratios
Leverage Ratios
Ratio Analysis
a. Profitability Ratios:
Gross Profit Rate
Profit Margin
Return on Sales
Return on Investment(ROI)
*same with Return on Asset (ROA)
Return on Equity (ROE)
Earnings Per Share (EPS)
Shares Outstanding
Basic Earnings Power
Operating Leverage
and taxes
Du Pont Model:
EPS = (Profit/ Sales) X (Net Sales/ Assets) X (Assets/SHE) X (SHE/Ave. Outstanding OS)
= Gross Profit / Net Sales
= Profit / Net Sales
= Profit / Net Sales
= Operating Profit after tax (OPAT) / Average
Operating Asset
OPAT = (Profit+interest expense, net of tax)
OPAT = Operating Profit (1-Tax Rate)
= Profit / Average Shareholders’ Equity
= (Profit – Preferred Dividends) / Ave. Ordinary
= Operating Profit / Ave. Total Assets
= Contribution Margin / Profit before interest

Profit Margin X Asset Turnover X Equity Multiplier X Book Value Per Share
ReturnOn Assets

Return on Equity

Earnings Per Share

*Equity Multiplier = 1 / Equity Ratio or 1/(1-Debt Ratio)
*Equity Ratio = Equity / Total Assets or 1 - Debt Ratio
*Debt Ratio = Total Debt / Total Assets or 1 – Equity Ratio

b. Growth Ratios:
Price-Earnings Ratio (P/E) = MPPS / EPS
Dividend Yield Ratio = DPS / MPPS
Dividend Payout Ratio = DPS / EPS
Book Value per
Preference Share = PSE / APSO
Book Value per Ordinary Share = OSE / AOSO

AOSO = Ave. Ordinary Share Outstanding

APSO = Ave. Preference Share Outstanding

BVPS = Book Value per Share

DPS = Dividend per Share

EPS = Earnings per Share

MPPS = Market Price Per Share

OSE = Ordinary Shareholders’ Equity

PSE = Preference Shareholders’ Equity

c. Liquidity Ratios:
Inventory Turnover = Cost of Goods Sold / Ave. Inventory
Inventory days or period = 365 / Inventory turnover or
Ave. Inventory / (Annual Cost of goods Sold/365)
*Note that in the absence to the contrary 365 days must be used, unless stated otherwise.

Receivable Turnover = Nets Sales / Ave. Accounts Receivable

Collection Period = 365/ Receivable Turnover or
Ave. Accts. Receivable / (Annual Sales/365)
*Note that in the absence to the contrary 365 days must be used, unless stated otherwise.

Payable Turnover = Net Credit Purchases / Ave. Accts. Payable

Payable Period or Payment days = 365 / Payable Turnover or
Ave. Acct. Payable/ (Net Credit Purchases/ 365)
Net Working Capital = Current Assets – Current Liabilities
Working Capital Turnover = Net Sales / Ave. Working Capital
Asset Turnover = Net Sales / Ave. Total Assets
Current Ratio = Current Assets / Current Liabilities
Quick Assets Ratio = Quick Assets / Current Liabilities
*Quick Assets includes cash, accounts receivables, marketable securities which are highly
liquid assets and I excludes inventory and prepayments.

d. Leverage Ratios:
Debt-to-equity ratio = Total debts/ Total Equity
Debt-to-total assets ratio
Or Debt Ratio = Total Debts / Total Assets or 1 – Equity Ratio
Equity Ratio = Total Equity / Total Assets or 1 – Debts Ratio
Equity Multiplier = Total Assets / Total Equity or
1 / Equity Ratio or 1 / (1-Debt Ratio)
Times Interest Earned = EBIT / Interest Expense
*EBIT – Earnings Before Interest and Taxes

Financial Leverage = EBIT / (EBIT – Interest – Before Tax Preferred

Dividends)
Fixed Charge Ratio = Cash flows before fixed charges / Total Fixed
Charges
Total Debt Coverage = Total Liabilities / Total Cash from operation

Example 14 (Comprehensive):
The Statement of Financial Position as of Dec 31, 2011 and 2010, Income Statement
and Statement of Cash Flows of EBC Enterprise, Inc. for years 2011, 2010, 2009 are
given below:
EBC Enterprise Inc.
Statement Of Financial Position at December 31, 2011 and 2010
(In Thousands)
2011 2010
Assets
Current Assets
Cash 2,030.5 1,191.0
 Marketable Securities 2,636.0 4,002.0
Accounts Receivable 4,704.0 4,383.5
Allowance for Doubtful Accounts (224.0) (208.5)
Inventories 23,520.5 18,384.5
Prepaid Expenses 256.0 379.5
Total 32,923.0 28,132.0
Non-Current Assets
Land 405.5 405.5
Building and Leasehold Improvements 9,136.5 5,964.0
Equipment 10,761.5 6,884.0
20,303.5 13,253.5
Less: Accumulated Depreciation and Amortization (5,764.0) (3,765.0)
Property plant and equipment, net 14,539.5 9,448.5
Other Assets 186.5 334.0
Total Assets 47,649.0 37,954.5

Liabilities and Equity

Current Liabilities
Accounts Payable 7,147.0 3,795.5
Notes Payable – banks 2.807.0 3,006.0
Current Maturities of long term debt 942.0 758.0
Accrued Liabilities 2,834.5 2,656.5
Total 47,649.0 37,954.5
Deferred Income Taxes 421.5 317.5
Long term Debt 10,529.5 8,487.5
Total Liabilities 24,681.5 19,021.0

Equity
 Ordinary shares, par value P1, authorized
10,000 shares; issued 2,297,000 shares
in 2011 and 2,401,500 shares in 2011 2,401.5 2,297.0
Additional paid-in capital 478.5 455.0
Retained Earnings 20,087.5 16,181.5
Total Equity 22,967.5 18,933.5
Total Liabilities and Equity 47,649.0 37,954.5

EBC Enterprise Inc.

Income Statement and Retained Earnings

For the year ended December 31, 2011, 2010 and 2009

(In Thousands)

2011 2010 2009

Net Sales 107,800.0 76,500.0 70,350.0

Cost of Goods Sold 64,682.0 45,939.5 40,803.0

Gross Profit 43,118.0 30,560.5 29,547.0

Selling and Administrative Expenses 16,332.0 13,191.0 12,749.0

Advertising 7,129.0 5,396.0 4,770.5

Depreciation and Amortization 1,999.0 1,492.0 1,250.5

Repairs and Maintenance 1,507.5 1,023.0 1,515.5

Total 33,496.5 24,657.5 23,919.0

Operating Profit 9,621.5 5,903.0 5,628.0

Other Income (Expenses):

Interest Income 211.0 419.0 369.0

Interest Expense (1,292.5) (1,138.5) (637.0)

Earnings Before Income Taxes 8,540.0 5,183.0 5,360.0

Income Taxes 3,843.0 2,228.5 2,412.0

Net Income 4,697.0 2,955.0 2,948.0

Earnings Per Share P2.00 P1.29 P1.33

Statement of Retained Earnings

Retained Earnings, Beginning 16,181.5 14,157.5 12,130.0

Net Income 4,697.0 2,955.0 2,948.0

Cash Dividends (2011-P0.33 per share; 2010-

P0.41 per share) (791.0) (931.0) (920.5)

Retained Earnings at the end of the year P20,087.5 P16,181.5 P14,157.5

EBC Enterprise Inc.

Statement of Cash flows for the years ended December 31, 2011 and 2010

(In Thousands)

2011 2010

Cash Flow From Operating Activities – Direct Method

Cash Received from Customers 107,495.0 74, 830.5

Interest Received 211.0 419.0

Cash paid to supplier for inventory (66,466.5) (49,968.0)

Cash paid to employees (S&A Expenses) (16,332.0) (13,191.0)

Cash paid for other operating expenses (14,864.0) (10,675.0)

Interest Paid (1,292.5) (1,138.5)

Taxes Paid (3,739.0) (2,160.5)

Net Cash Provided (used) by Operating activities 5,012.0 (1,883.5)

Cash Flow From Investing

Addition to Property, Plant and Equipment (7,050.0) (2,386.5)

Other Investing Activities 147.5 0

Net Cash Provided (used) by investing activities ( 6,902.5) (2,386.5)

Cash Flow from Financing Activities

Sales of Ordinary Shares 128.0 91.5

Increase (decrease) in short-term borrowings (15.0) 927.0

(includes current maturities of long term debt)

Addition to long term borrowings 2,800.0 3,941.0

Reductions of long term borrowings (758.0) (796.5)

Dividends paid (791.0) (931.0)

 Net cash provided (used) by financing activities 1,364.0 3,232.0

Increase (decrease) in cash & marketable securities (562.5) (1,038.0)

Required:
Use the financial Ratios, evaluate the company’s financial position and operating results
for the years 2011 and 2010.
1. Current Ratio 2011: 32,923 / 13,703.5 = 2.4 times
2010: 28,132 / 10,216 = 2.75 times
Current Ratio is a measure of short-term debt paying ability.
2. Quick or acid test ratio 2011: 9,146.5 / 13, 703.5 = 0.67 times
2010: 9,368 / 10,216 = 0.92 times
Quick Ratio is much more rigorous test of company’s ability to meet its short term
debt. Again, quick assets doesn’t include inventories and prepayments.
3. Accounts Receivable Turnover
2011: 107,800*/ [(4,480+4,175)/2]= 24.9 times
2010: 76,500 / 4,175** = 18.32 times
Accounts Receivable Turnover measures how many times a company’s accounts
receivable have been turned into cash during the year.
*When net credit sales are not available, use the net sales.
**Assumed Average for 2010 since there’s no 2009 accounts receivable given
so the given in 2010 is assumed to be the average.
4. Ave. Collection Period 2011: 365 / 24.9 = 14.6 or 15 days
2010: 365 / 18.32 = 19.9 or 20 days
Collection Period helps evaluate the liquidity of accounts receivable and the
firm’s credit policy.
5. Inventory Turnover 2011: 64,682 / [(23,520.5+18,384.5)/2]
= 3.09 times
2010: 45,939.5 / 18,384.5* = 2.5 times
*Assumed Average for 2010.
Inventory turnover measures the efficiency of the firm in managing and selling
inventory.
6. Inventory days or period
2011: 365 / 3.09 = 118 days
2010: 365 / 2.5 = 146 days
Inventory period is the number of days to sell the entire inventory one time.
7. Total Asset Turnover 2011: 107,800 / [(47,649+37,954.5)/2]
= 2.52 times
2010: 76,500 / 37,954.5* = 2.02 times
*Assumed Average for 2010.
Asset turnover measures the efficiency of management to generate sales and
thus earn more profit for the firm.
8. Debt Ratio 2011: 24,681.5 / 47,649 = 51.8%
2010: 19,021 / 37,954.5 = 50.1%
Debt Ratio measures the proportion of all assets that are financed with debt.
9. Debt to Equity Ratio 2011: 24,681.5 / 22,967.5 = 107.46%
2010: 19,021 / 18,933.5 = 100.46%
Debt to equity ratio measures the riskiness of the firm’s capital structure in
terms of relationship between the funds supplied by creditors (debt) and investors
(equity).
10. Times Interest Earned 2011: 9,621.5 / 1.292.5 = 7.44 times
2010: 5,903 / 1,138.5 = 5.18 times
It is the most common measure of the ability of a firm’s operations to provide
protection to long-term creditors.
11. Fixed Charge Coverage
2011: (9,621.5+6,529) / (1,292.5+6,529)
= 2.06 times
2010: (5,903 + 3,555.5) / (1,138.5+3,555.5)
= 2 times
It measures the firm’s coverage capability to cover not only interest payments
but also the fixed payment associated with leasing which must be met annually.
12. Gross Profit Margin 2011: 43,118 / 107,800 = 40%
 2010: 30,560.5 / 76,500 = 39.95%
It show the relationship between sales and the cost of products sold,
measures the ability of a company both to control costs and inventories or
manufacturing of products and to pass along price increases through sales to
customers.
13. Operating Profit Margin
2011: 9,621.5 / 107,800 = 8.9%
2010: 5,903 / 76,500 = 7.7%
It measures the overall efficiency and incorporates all of the expenses
associated with ordinary or normal business activities.
14. Net Profit Margin 2011: 4,697 / 107,800 = 4.36%
2010: 2,955 / 76,500 = 3.87%
It measures the profitability after considering all revenue and expenses, including
interest, taxes, and non-operating items such as extra-ordinary items, cumulative effect
of accounting change, etc.

15. Return on Investment or Asset

2011: {4,697+[(1,292.5)(1-45%]} / 43,802
= 12.35%
2010: {2,955+[(1,138.5)(1-43%]} / 39,955
= 9.02%
16. Return on Equity 2011: 4,697 / [(22,967.5+18,933.5)/2)
= 22.42%
2010: 2,955 / 18,933.5 = 15.60%
Return on Assets and Return on Equity are two ratios that measure the overall
efficiency of the firm in managing its total investment in assets and in generating return
to shareholders.
*ROE / ROA = Financial Leverage Index

17. EPS 2011: 4,697,000 / [(2,401,500+2,297,000)/2]

= P2.00
2010: 2,955,000 / 2,297,000 = P1.29
18. Price/Earnings Ratio 2011: 30 / 2 = 15
2010: 17/1.27 = 13.39
Price-earnings ratio relates the EPS to its Market price at which the stock trades,
expressing the “multiple” which the stock market places on firm’s earnings.

19. Dividend Payout 2011: 0.33 / 2 = 16.5%

2010: 0.41 / 1.29 = 31.78%
20. Dividend Yield 2011: 0.33 / 30 = 1.10%
2010: 0.41 / 17 = 2.41%
  Tip: When the ratio is composed of one income statement account and one balance sheet
account, the balance sheet account must be an average balance.

Self-Help: You can also refer to the sources below to help you further
*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).
Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th ed.).
Singapore: Cengage Learning Asia Pte Ltd.
*Agamata, F. T. (2012). Reviewer in management advisory services (2013 Ed.).
Manila: GIC Enterprises & Co., Inc.