ANALYSIS OF FINANCIAL STATEMENTS

1. Comparative FS / Horizontal analysis

• Information revealed is trend: direction, speed, and extent of trend
• Provides information (>=2y) about two or more years' figures as well as any increase or decrease
from the previous year's figure (absolute change) and its percentage of increase or decrease
• Helps in identifying the major improvements and weaknesses

2. Common-size statements / Vertical analysis

• Evaluates financial statements by expressing each line item as a percentage of the base amount
for that period
• Helps to understand the impact of each item in the financial statement and its contribution to the
resulting figure
• An analysis of percentage financial statements where all balance sheet items are divided by total
assets and all income statement items are divided by net sales or revenues

3. Ratio analysis
 • A ratio expresses a mathematic relation between two quantities (two accounts on financial
statements)
• A ratio must refer to an economically important relation
Useful
• Ratios standardize numbers and facilitate comparisons
• Ratios are used to highlight weaknesses and strengths
• Ratio comparisons should be made through time and with competitors
+ Trend analysis
+ Peer (or Industry) analysis
5 majors:
▫ Liquidity: the firm’s ability to pay off debts that are maturing within a year Can we pay off debts
that are maturing within 1 year?

▫ Asset management: how efficiently the firm is using its assets. Right amount of assets vs. sales?
How efficiently the firm is using its assets?
▫ Debt management: how the firm has financed its assets as well as the firm’s ability to repay its
long-term debt. Right mix of debt and equity?
Ex: if a firm borrowed too much in the past and its debt now threatens to drive it into bankruptcy
▫ Profitability: How profitably the firm is operating and utilizing (sử dụng) its assets? Do sales
prices exceed unit costs, and are sales high enough as reflected in PM, ROE (return on equity),
and ROA?
▫ Market value: What do investors think about the firm and its future prospects? Do investors like
what they see as reflected in P/E and M/B ratios?

3.1. Liquidity Ratios: show the relationship of a firm’s cash and other current assets to its
current liabilities
Current assets
▫ Current ratio =
Current liabilities
+ If current liabilities are rising faster than current assets, the current ratio will fall, and this is a
sign of possible trouble
+ High CR indicates a very strong, safe liquidity position; it might also indicate that the firm has
too much old inventory and old accounts receivable that may turn into bad debts (nợ khó đòi) Or
that the firm has too much cash, receivables, and inventory relative to its sales
Ex: If a company is having financial difficulty, it typically begins to pay its accounts payable
more slowly and to borrow more from its bank => increase current liabilities.
Current ratio = 3.2 (well below the industry average of 4.2)  liquidity position is weak
 Current assets−Inventori es
▫ Quick / acid test ratio = measures the firm’s ability to pay off
Current liabilities
short-term obligations without relying on the sale of inventories
+ Inventories are typically the least liquid of current assets
+ Inventories are the assets on which losses are most likely to occur in the event of liquidation
+ QR Ít nhất ph lớn hơn 1

Firm CA CL NWC CR?

A 1000 800 200
B 100 50 50
CR(A) = 1000/800 = 1.2…
CR(B) = 100/50 = 2
4-19. The Stewart Company has $2,392,500 in current assets and $1,076,625 in current liabilities. Its
initial inventory level is $526,350, and it will raise funds as additional notes payable and use them to
increase inventory. How much can its short-term debt (notes payable) increase without pushing its current
ratio below 2.0?
If company want a current ratio below 2.0
CA+ x
>=2  x >= 239250
CL+ x
3.2. Asset Management Ratios:
If firm has too many assets, its cost of capital will be too high, which will depress its profits. On the other
hand, if its assets are too low, profitable sales will be lost
Sales
- Inventory turnover ratio = (cho biết toàn bộ quá trình, thời gian lượng hàng hóa
Inventories
trong kho được vận chuyển hoặc bán ra thị trường. Hiểu một cách đơn giản, đây là hệ số thể hiện
bình quân số lần hàng hóa trong kho được luân chuyển trong thời gian một kỳ kế toán)
▫ Inventory is sold and restocked x times per year (số lần quay vòng vốn)
▫ ITR helps businesses make smarter decisions in a variety of areas (pricing, manufacturing,
marketing, purchasing and warehouse management)
▫ A low turnover implies weak sales and possibly excess inventory, also known as
overstocking
▫ A high ratio implies either strong sales or insufficient inventory
▫ Make an adjustment if business is highly seasonal
Receivavles
- Days sales outstanding (DSO)/ average collection period (ACP) =
Average sales per day
It indicates the average length of time the firm must wait after making a sale before it receives cash
 ▫ Can be compared with industry average or firm’s credit terms
▫ A high DSO suggests that firm is experiencing delays in receiving payments => can
cause a cash flow problem. If DSO is increasing, it's a warning sign that something is
wrong
▫ A low DSO value means that it takes fewer days to collect its accounts receivable.
However, low AR could lead to lower sales
4-20. Ingraham Inc. currently has $205,000 in accounts receivable, and its days sales outstanding (DSO)
is 71 days. It wants to reduce its DSO to 20 days by pressuring more of its customers to pay their bills on
time. If this policy is adopted, the company’s average sales will fall by 15%. What will be the level of
accounts receivable following the change? Assume a 365-day year
DSO (71) = ARx360/sales => sales = 1053873.24
Expected sales = 1053873.24x(1-0.15) = 295793.954
Expected AR: 20 = ARx360 / 295793.954  AR = …
Sales
- Fixed assets turnover ratio = assets ¿ measures how effectively the firm uses its plant and
Net ¿
equipment
o A high ratio indicates that firm efficiently uses its fixed assets to generate sales
o Inflation has caused the value of many assets that were purchased in the past to be
seriously understated, as well as depreciation, causing problem If we compare an old firm
with a new one
o Low NFA because depreciate FA already (historical costs - depreciation)
Sales
- Total assets turnover ratio = measures how effectively the firm uses its total assets
Total assets
o The higher the asset turnover ratio, the better the company is performing, since higher
ratios imply that the company is generating more revenue per dollar of assets
o The TAT ratio tends to be higher for companies in certain sectors than in others
o The TAT ratio may be artificially deflated (giảm phát chủ động) when firm makes large
asset purchases in anticipation of higher growth. Also, factors (seasonality) can affect
firm’s TAT ratio
3.3. Debt Management Ratios: The use of debt will increase, or “leverage up,” a firm’s ROE if
the firm earns more on its assets than the interest rate it pays on debt. However, debt exposes the firm
to more risk than if it financed only with equity.
 Net income
Return on Equity (ROE) = đo lường khả năng sinh lợi trên mỗi đồng vốn của cổ
Equity
đông thường
• Decisions about the use of debt require firms to balance higher expected returns against increased
risk
• We examine: (1) the proportion of total funds represented by debt; (2) the extent to which interest
is covered by operating profits
▫ Total debt to total capital
▫ Times-interest-earned ratio
▫ EBITDA coverage ratio
3.3.1. Total debt to total capital: measures the percentage of the firm’s capital provided by
debtholders
Total debt
Debt ratio = =
Total(invested )capital
Total debt
HYPERLINK ¿ totalinvestedcapital Total debt+ Equity
▫ All else being equal, the higher the debt-to-capital ratio, the riskier the company
 ▫ Creditors prefer low debt ratios because the lower the ratio, the greater the cushion
(opportunity) against creditors’ losses in the event of liquidation
▫ Stockholders may want more leverage because it can magnify expected earnings
3.3.2. Times-interest-earned ratio (TIE) measure of the firm’s ability to meet its annual interest
EBIT
payments TIE ratio =
interest charges
▫ A better TIE number means a company has enough cash after paying its debts to continue
to invest in the business
▫ Failure to pay interest will bring legal action by the firm’s creditors and probably result in
bankruptcy
▫ Because interest is paid with pretax dollars, the firm’s ability to pay current interest is not
affected by taxes
EBITDA + Lease payments
3.3.3. EBITDA coverage ratio =
Interest + Principal payments+ Lease payments
▫ Measures the ability of an organization to pay off its loan and lease obligations. This
measurement is used to review the solvency of entities that are highly leverage
▫ This ratio is more complete than the TIE ratio because it recognizes that DA expenses are
not cash expenses, and thus are available to service debt, and that lease payments and
principal repayments on debt are fixed charges

3.4. Profitability Ratios A group of ratios that show the combined effects of liquidity,
asset management, and debt on operating results; reflect the net result of all of the firm’s
financing policies and operating decisions
Sales−COGS Gross profit
▫ Gross profit margin = = Shows the amount of profit made
Sales Net sales
before deducting selling, general, and administrative costs => kiểm soát COGS
EBIT (operating income ) Sales rev .−operating costs
▫ Operating margin = =
Sales Sales
▫ If operating margin = 15% => sales = $100, EBIT = $15 => operating costs = $85 =>
kiểm soát operating costs
▫ Measures how much profit on a dollar of sales after paying for cost of production, but
before paying interest or tax
▫ Higher margins are considered better than lower margins
Net income
▫ (Net) profit margin = = return on sales (ROS)
Sales
▫ If profit margin = 10% => $90; operating costs + interest ex + tax exp
▫ Represents what percentage of sales has turned into profits (after all other expenses,
including interest and taxes, have been removed from revenue)
▫ When two companies have the same operating margin but different debt ratios, we can
expect the company with a higher debt ratio to have a lower profit margin
▫ While a high return on sales is good, we must also be concerned with turnover
▫ Return on total assets (ROA) measures the rate of return on the firm’s assets
Net income
ROA =
Total assets
 ▫ An indicator of how well firm utilizes its assets (mức độ sd tài sản) in terms of
profitability by comparing the profit it is generating to the capital it’s investing in assets
▫ The higher the return, the more productive and efficient management is in utilizing
economic resources
▫ Be careful with the scale of a business and the operations performed when comparing two
different firms using ROA
▫ ROA does NOT take into account a company’s debt, while ROE does
▫ Return on common Equity (RO(C)E)
Net income
ROE =
Common Equity
▫ Measures firm’s profitability in relation to stockholders’ equity; how efficiently a firm
can use the money from shareholders to generate profits and grow the company
▫ Investors want to see a high ROE because this indicates that the company is using its
investors’ funds effectively
▫ However, ROE can be indicative of a number of issues - such as inconsistent (ko nhất
quán) profits or excessive debt (financial leverage generally increases the ROE but also
increases the firm’s risk)
4-18. MPI Incorporated has $6 billion = 6000M in assets, and its tax rate is 35%. Its basic earning power
(BEP) ratio is 11%, and its return on assets (ROA) is 6%. What is MPI’s times-interest-earned (TIE)
ratio?
EBIT
• BEP = = 11% => EBIT = 660M
Total assets
Net income
• ROA = = 6% => net income = 360M
Total assets
• EBT = NI / (1-0,35) = 553,8 => Interest = 660 – 553,8
EBIT
• TIE ratio = = 660 / (660 – 553,8) = 6,2%
interest charges
▫ Return on Invested capital (ROIC)
EBIT (1−T )
ROIC =
Total invested capital
▫ ROIC differs from ROA in two ways:
(1) its return is based on total invested capital (Total debt + equity) rather than total assets
(2) it uses NOPAT rather than net income
HYPERLINK Chap%202%20lý%20thuyết.docx ¿ NOPAT2 NOPAT
ROIC =
Total invested capital
▫ ROIC simply tells how well the firm is using its money to generate profit. Besides, ROIC
can be compared with WACC. If ROIC > WACC (weight average cost of capital),
managers are creating value in the business
▫ Basic earning power ratio indicates the ability of the firm’s assets to generate operating
income
EBIT
BEP =
Total assets
 ▫
This ratio shows the raw earning power of the firm’s assets before the influence of taxes
and debt, and it is useful when comparing firms with different debt and tax situations
▫ Together with ROA, BEP allows for more accurate comparisons of companies
3.5. Market Value ratios: (định giá) relate the firm’s stock price to its earnings and book value
per share
• The market value ratios are used in 3 primary ways:
(1) by investors when they are deciding to buy/sell a stock
(2) by investment bankers when they are setting the share price for a new stock issue (an IPO)
(3) by firms when they are deciding how much to offer for another firm in a potential merger
▫ P/E ratio: shows the dollar amount investors will pay for $1 of current earnings
▫ Market/Book (M/B or P/B) ratio
▫ Enterprise value / EBITDA (EV/EBITDA) ratio
Price per share
Price/Earnings (P/E) ratio =
earnings per share
▫ A high P/E ratio could mean that a company's stock is overvalued, or else that investors are
expecting high growth rates in the future (indicates increased demand)
▫ P/E ratio can be used to determine the relative value of a company's shares (valuation)
▫ Firms with high P/E are considered to be growth stocks
Market price per share
P/B ratio = >1
Book value per share
▫ Companies that are well regarded by investors - which means low risk and high growth -
have high M/B ratios
▫ M/B ratios typically exceed 1.0, which means that investors are willing to pay more for
stocks than the accounting book values of the stocks
Enterprise value (EV) = market value of equity + MV of total debt + MV of other financial claims + cash
and equivalants => bỏ

3.6. The Dupont Equation

ROE = ROA x Equity multiplier
= profit margin x total assets turnover x Equity multiplier (1)
Net income Sales Total assets
= x x (2)
Sales Total assets Total common equity
(1) Show how much the firm earns on its sales. This ratio depends primarily on costs and sales prices
—if a firm can command a premium price and hold down its costs, its profit margin will be high,
which will help its ROE
(2) “multiplier” that tells us how many times the profit margin is earned each year
 A formula that shows that the rate of return on equity can be found as the product of profit
margin, total assets turnover, and the equity multiplier. It shows the relationships among asset
management, debt management, and profitability ratios

3.7. Potential misuses (lạm dụng) of ROE

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
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