financial statements

analysis
INTRODUCTIONS

of
transforming
Financial is the art
Statement Analysis
data from Financial statements into information that is

useful for informed

making
decision .

External User of Lenanicial Statement

creditors
liquidity
◦
assess
-

Bondholders
long term cash flow of the firm
→
◦
.

◦
Shareholders →

profitability & long term health

Internal Ursu
◦
Management &
Employees → Internal control

to better shareholders
→
provide what

seek -
an financial position .

→ Plan . Control
-
& Understand
a
Effectively
↓
&
assess current position
evaluate opportunities ✓

Focus o n return

on
investment

\
←
Focus
understanding
on

suppliers of fund
how

the firm
analyze .

Different approaches used firm

maybe in
analyzing a .

|
Business Risks → risk inherent in
operations
sales costs
eg volatility
: in ,

to break point
proximity
-
eve n
RATIO ANALYSIS

Financial Ratios
that two numbers
↳ inden relates
accounting .

→ Types of comparisons → Internal

External

Flow / Flow Ratios

TYPES OF RATIO
Flow / Stock Ratio .

Block Ratio

Ratio
Liquidity
• _

Ratio
Leverage
-

Ratio
Coverage
◦ -

Ratio
Activity
-

Profitability ratio
◦
-

Liquidity
↳
of
Ratko
firms
-
BALANCE SHEET

it's
RAMOS .

's
ability ability to cover
'
current liabilities with it

current assets .

CURRENT RAMO

= Current Assets
Current Liabilities

crude individual not taken into

→ measure as
component is account

→ firm w current asset

principally of cash & receivable → more
liquid
 more severe
liquidity test .
→ w most
liquid assets .

Current Asset Inventories Ideal Ratio 1 :L

-

Current Liabilities

Current
Strong
Ratio & Weak Acid Test →
problems in inventories .

d
en amine size

quantity &
quality

Leverage Ratios → BALANCE SHEET RATIO

DEBT TO EQUITY RANO

→ to which extent the firm is financed by debt

Debt → current Habit He +

long term debt
Total
.

low
Shareholders
Equity Generally proffered to be
→

↓
lower →
higher financing by
shareholders .

debt
depending on it's
preferred stock considered '

use ,
sometimes .

DEBT TO ASSET RATIO

= Total Debt →
greater financed by shareholders → mory

Asset
protection to firms creditors
total
→ ↑ Debt to Asset →
greater financial risk

of asset financed by debt

→
percentage

TOTAL CAPITALIZATION

Total Debt
= -

total
capitalization [ LT Debt -1
Equity]

→ shows relative
importance of long term debt to
long term
financing
 cthatios
Coverage
COVERAGE RATIO
INTEREST

→ Firms
ability
to c ove r interest
charges .

EB . the better
Interest charges → indicates firms ability to take debt

earnings /
low
→ low F- BIT
→ ICR

if we know debt is i n line w

average industry
levels .

additivity ratios

RECIE ✓ ABLE TURNOVER RATIO

of successful the firm is it's

receivables and how in
→
quality
collections

all sales are credit sales

assuming .

=
Annual Net Credit sales →
higher turnover → shorter time bw

Recievables .

typical sale & cash collection

Average collection Period .

Days in the Year

Daissinthehlear
Receivable Turnover

-
-4 ABLE TURNOVER RATIO .

be
→ no need to
early
-
Annualcredltpurc.hu# → collect asap and
pay as late

Accounts Payable

of to suppliers
promptness payments
→ .
INVENTORY TURNOVER RATIO

→ effectiveness of inventory management practices of the firm

↑ efficient
→
generally ITR → m o re

ᵗ{y
,

low levels
sometimes may also indicate maintaining
of
inventory
-
& incurring frequent stock outs .

→ low inventory turnover → slow moving obsolete inventory .

TOTAL ASSET TURNOVER

¥:::÷
-

overall effectives of the firm

utilizing it 's
in asset
→ indicates

to sales
generate
.

Profitability Ratio's →
two tapes → Profitability in relation to sales .

profitability in relation to investment .

GROSS PROFIT MARGIN

=
Gross Profit → if falls → Cosas ↑ relative to sale → low price &
efficiency
if Profit Net Profit declined
Net sales
→ Gross unchanged & .
→

tan rate /
higher Coas .

efficiency of
operations & policies
pricing
NET PROFIT MARGIN

- Net Profit after tan

Net sales

→
profitability after all expenses & takes .
RETURN ON INVESTMENT ROI

=
Net Profit After Tak
→ Low Rot Ithohtability →
employs more

asset to sales
Total Asset generate .

→
profitability on asset after all enpenses

RETURN ON EQUITY

= Net Profit After Tan

Shareholders
Equity

shareholders of the firm

→ profitability to

RETURN ON INVESTMENT & DUPONT APPROACH _

Earning Power Sales

Profitability ✗ Asset
Efficiency
=
.

Roi = Net Profit Margin ✗ Total Asset Turnover

Net Profit
Return on
Equity =
Margin ✗ Total Asset
Turnover ×
Equity Multiplier

Total Assets
Equity Multiplier
-

Shareholder Equity
 comparitime-analys.co
COMMON SIZE AND INDEX ANALYSIS -

Common Size cednalysis

analysis of financial statement where all
percentage
balance sheet items a re divided by total assets

divided
and all income statement items a re
by net

sales or revenues .

Inder cetnalysis
Analysis of percentage financial statements where
all balance sheet or income statement
figures for
base year equal to 100 and
subsequentof FS
statements a re
expressed as
percentage
their

values base
in
year
statement of cash flower
→
sources & Uses of cash

→ divided into 3 sections

C re ve n u e s
↳ operating
,
operating expenses → what ace occurred

investing C. sale purchase of assets]

financing [ issuing shares , raising debts ]

CASH FLOW STATEMENT

◦ cash position , veciepts & Payments .

has changed
•
depicts ways cash
during a
designated
period of time

hash how from operating atctiurtiies

INFLOW -

sales

returns on loans through investment

other cash reciepts

payment for purchase

OUTFLOW →

to
suppliers
Tan to Govt

TO lenders , interest
other
payments not classified as
financing or

investing
cashflow from thrusting adctuuties
INFLOW → Investment sold

Giving loan to other enterpn

-

Providing equity to other entities .

OUTFLOWS investment acquired

→

Payment of loans to other enterprise

other
equity from enterprise
" to
acquire
marketable securities
in
purchase
 cash-flow from Leriancuigodctiuihés
LNFEOW Reciepts from New stock Issue .

Increased borrowing
of debt
OUTFLOW →
Repayment principal
common stock Dividend Payments .

DIFFERENCE BETWEEN PROFIT & CASH FLOW

Accrual concept →
recognize re ve n u e and cost as a business
earns or incurs not a s it re l i eve s or
pays
→
including in relevant period income statement

In Cash Flow statement → records only when cashrecieved and

paid .

Dneysreclation in 3 financial statement

Balance sheet -

Asset -

Depreciation value

Income statement -

Depreciation expense .

Statement of cash Flows -

Calculating operating cashflow
DIRECT METHOD

Operating cash inflow

operating cash outflow

Net cash Flow

operating
-

INDIRECT METHOD

Begin Net Income

-

w
.

adjustments for & sales

-
credit purchase .

unsold inventory
stock based
-

depreciation , compensation ,

unrealized gains / losses .

Net Income

+
Depreciation

changes
in
working capital
+ Increase or decrease in inventory
+
Increase or decrease in recievable
t Increase or decrease in payable .

flows
Net operating cash .