Financial Statement

Analysis

6.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial statement analysis
Financial statement analysis involves:
1. Comparing the performance of a firm with
that of the other firms in the same
industry.

2. Evaluating trends in the financial position of

the firm over time.

6.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Importance of Financial
statement analysis
For investor For financial managers
Predicting the future It is useful both to help
earnings, dividends, anticipate future
and cash flow. conditions and more
important, as a starting
point for planning actions
that will improve the
future performance.

6.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Use of Financial Ratios

A Financial Ratio is Types of

an index that relates Comparisons
two accounting
numbers and is Internal
obtained by dividing Comparisons
one number by the External
other. Comparisons

6.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Balance Sheet Ratios
1. Liquidity ratios: deal with this question: will the
firm be able to pay off its debts as they come due
over the next year or not?
a) Current ratio b) Acid test ratio
2. Financial leverage ratios:
Debt –to- equity
Debt -to- total assets
Total capitalization

6.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Income Statements Ratios

Interest Coverage ratio

Profitability Ratios:
1) Gross profit margin
2) Net profit margin

6.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Income statement and
balance sheet ratios
Profitability Ratios:
1) Return on investment
2) Return on equity

6.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 BALANCE SHEET RATIOS

6.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Liquidity Ratios
Balance Sheet Ratios Current Ratio =

Current Assets
A) Liquidity Ratios Current Liabilities
Shows a firm’s
For Basket Wonders
ability to cover its December 31, 2007
current liabilities
with its current $1,195 = 2.39
assets. $500
6.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Liquidity Ratio
Comparisons: example
Current Ratio
Year BW Industry
2007 2.39 2.15
2006 2.26 2.09
2005 1.91 2.01
Ratio is stronger than the industry average.
6.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Liquidity Ratios
Balance Sheet Ratios Acid-Test (Quick)

B) Liquidity Ratios

Shows a firm’s ability to

meet current liabilities with $1,195 – $696 = 1.00
its most liquid assets. $500
6.11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Liquidity Ratio
Comparisons:
example
Acid-Test Ratio
Year BW Industry
2007 1.00 1.25
2006 1.04 1.23
2005 1.11 1.25
Ratio is weaker than the industry average.
6.12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial Leverage Ratios
Balance Sheet Ratios Debt-to-Equity=

Total liabilities
Financial Leverage Shareholders’ Equity
Ratios
For Basket Wonders
December 31, 2007
Shows the extent to
which the firm is $1,030 = 0.90
financed by debt. $1,139
6.13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial Leverage
Ratio Comparisons
Debt-to-Equity Ratio
Year BW Industry
2007 0.90 0.90
2006 0.88 0.90
2005 0.81 0.89
BW has average debt utilization
relative to the industry average.
6.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial Leverage Ratios
Balance Sheet Ratios Debt-to-Total
Assets=
Financial Leverage
Total liabilities
Ratios
Total Assets

Shows the percentage For Basket Wonders

of the firm’s assets December 31, 2007
that are supported by $1,030 = 0.47
debt financing. $2,169
6.15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial Leverage
Ratio Comparisons
Debt-to-Total-Asset Ratio
Year BW Industry
2007 0.47 0.47
2006 0.47 0.47
2005 0.45 0.47
BW has average debt utilization
relative to the industry average.
6.16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial Leverage Ratios
Total Capitalization
Balance Sheet Ratios
(Long- term liabilities+ Equity)

Long-term liabilities
Financial Leverage
Ratios Total Capitalization

Shows the relative For Basket Wonders

importance of long term December 31, 2007
debt to the capital $1,030 = 0.62
structure (long-term $1,669
financing) of the firm.
6.17 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Financial Leverage
Ratio Comparisons
Total Capitalization Ratio
Year BW Industry
2007 0.62 0.60
2006 0.62 0.61
2005 0.67 0.62
BW has average long-term debt utilization
relative to the industry average.
6.18 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INCOME STATEMENT RATIOS

6.19 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Coverage Ratios
Income Statement Interest Coverage=
Ratios
Operating Income (EBIT)
Interest expenses
Coverage Ratios
For Basket Wonders
Indicates a firm’s December 31, 2007
ability to cover
interest expenses. $210 = 3.56
$59
6.20 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Coverage
Ratio Comparisons
Interest Coverage Ratio
Year BW Industry
2007 3.56 5.19
2006 4.35 5.02
2005 10.30 4.66
BW has below average interest coverage
relative to the industry average.
6.21 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Coverage Ratio – Trend
Analysis Comparison
Trend Analysis of Interest Coverage Ratio
11.0

9.0
Ratio Value

7.0 BW
Industry
5.0

3.0
2005 2006 2007
Analysis Year
6.22 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Summary of the Coverage
Trend Analysis
• The interest coverage ratio for BW has
been falling since 2005. It has been
below industry averages for the past
two years.
• This indicates that low earnings (EBIT)
may be a potential problem for BW.

6.23 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability Ratios
Income Statement Gross Profit Margin=
Ratios
Gross Profit
Sales
Profitability Ratios
For Basket Wonders
December 31, 2007
Indicates the efficiency
of operations and firm $612 = 0.277= 2.8%
pricing policies. $2,211
6.24 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
6.25 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability
Ratio Comparisons
Gross Profit Margin
Year BW Industry
2007 27.7 31.1
2006 28.7 30.8
2005 31.3 27.6
BW has a weak Gross Profit Margin.
6.26 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Gross Profit Margin –
Trend Analysis Comparison
Trend Analysis of Gross Profit Margin
35.0

32.5
Ratio Value (%)

30.0 BW
Industry
27.5

25.0
2005 2006 2007
Analysis Year

6.27 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability Ratios
Income Statement Net Profit Margin =
Ratios
Net Profit after Taxes
(Net income EAT)
Sales
Profitability Ratios

Indicates the firm’s For Basket Wonders

profitability after taking December 31, 2007
$91 = 0.041=4.1%
account of all expenses
$2,211
and income taxes.
6.28 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability
Ratio Comparisons
Net Profit Margin
Year BW Industry
2007 4.1 8.2
2006 4.9 8.1
2005 9.0 7.6
BW has a poor Net Profit Margin.
6.29 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Net Profit Margin –
Trend Analysis Comparison
Trend Analysis of Net Profit Margin
10
9
Ratio Value (%)

8
7 BW
Industry
6
5
4
2005 2006 2007
Analysis Year
6.30 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INCOME STATEMENT AND
BALANCE SHEET RATIOS

6.31 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability Ratios
Return on
Investment(ROI) or
Income Statement/ Return on Asset (ROA)=
Balance Sheet
Ratios Net Profit after Taxes
(net income EAT)
Total Assets
Profitability Ratios

Indicates the For Basket Wonders

profitability on the December 31, 2007
assets of the firm (after $91 = 0.042=4.2%
all expenses and taxes). $2,160
6.32 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability
Ratio Comparisons
Return on Investment
Year BW Industry
2007 4.2 9.6
2006 5.0 9.1
2005 9.1 10.8
BW has a poor Return on Investment.
6.33 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Return on Investment –
Trend Analysis Comparison
Trend Analysis of Return on Investment
12

10
Ratio Value (%)

8 BW
Industry
6

4
2005 2006 2007
Analysis Year

6.34 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability Ratios
Income Statement/ Return on Equity=
Balance Sheet
Ratios Net Profit after Taxes
(Net income EAT)
Shareholders’ Equity
Profitability Ratios

Indicates the profitability For Basket Wonders

to the shareholders of December 31, 2007
the firm (after all $91 = 0.08 = 8%
expenses and taxes). $1,139
6.35 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Profitability
Ratio Comparisons
Return on Equity
Year BW Industry
2007 8.0 18.0
2006 9.4 17.2
2005 16.6 20.4
BW has a poor Return on Equity.
6.36 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Return on Equity –
Trend Analysis Comparison
Trend Analysis of Return on Equity
21.0
Ratio Value (%)

17.5

14.0 BW
Industry
10.5

7.0
2005 2006 2007
Analysis Year
6.37 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Project
Due Date: April 20 th 2024
Case Study
After you have studied the financial
statement analysis, think about yourself as
a financial analyst and analyse the financial
statements of a company of your choice.
To do so, kindly conduct the following
steps:
6.38 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 1- Choose one company from a sector of your
choice.
2- Derive the financial statements (the income
statement and the balance sheet) of the
company and write it.
Hint: you can find the above financial statements
of the chosen company on: Mubasher.info or
https://egx.com.eg or on the company’s website.

6.39 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 3- Calculate and evaluate different financial ratios of the
company (for TWO different years).
NOTE: One of the years must be the most recent one.
- From the balance sheet, your focus will be on: Liquidity
ratios and Financial leverage ratios.
- From the Income statement, your focus will be on: Interest
Coverage ratios and some of profitability ratios.
- From both the Income statement and the balance sheet,
your focus will be on some profitability ratios.
- You have to comment on each ratio.
- You have to compare between the ratios of the two chosen
years and evaluate the financial performance of the chosen
company over the two years (base year and recent one).

6.40 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 4- As a financial analyst, would you recommend
this company for investors? Why?

6.41 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.