Analyzing Financial Data

Ratio Analysis

Lesson Components
Four Key Financial Statements Ratio Overview Ratio Categories
Liquidity Activity Debt Profitability Market

Practice

Four Key Financial Statements

Each corporation is required to file with the Securities and Exchange Commission (SEC) four key financial statements: Income statement: provides a financial summary of the companys operating results over a specified period of time. Balance sheet: provides a summary statement of the companys financial position at a given point in time. Statement of Stockholders Equity: shows all the equity account transactions in a given year. Statement of Cash Flows: summary of cash flows of a given period of time.

Learning Statements
These financial statements are also used in order to do ratio analysis to examine the performance of a firm.
Income Statement Sample Accounts Sales COGS Operating Expenses Selling Expenses Interest Expense Earnings before Interest & Taxes (EBIT) Net Income Balance Sheet Sample Accounts Cash Accounts Payable Accounts Receivable Notes Payable Inventories Accruals Total Current Assets Total Current Liabilities Land and Buildings Preferred Stock Machinery & Equipment Common Stock Vehicles Retained Earnings

Ratio Overview
Many internal and external stakeh0lders use ratios A ratio is not enough information on its own. Several limitations exist to ratio analysis
Seasonality Inflation Summarization Asset valuation

Five Categories of Ratios

Liquidity Activity Debt Profitability Market

Liquidity Ratios
Liquidity is the companys ability to pay its short-term bills
Current ratio = Current assets Current liabilities $72,000 $69,000 =???

Quick ratio =

Current assets-inventory Current liabilities $72,000-45,500 $69,000 =???

Activity Ratios
Inventory Turnover = Average Collection Period = Total Asset Turnover = COGS Inventory $106,000 $45,500 =???

Activity is a measure of how quickly the firms current assets are converted into cash.

Accts rec Annual sales/365

$25,000 160,000/365 =???

Sales Total Assets

$160,000 $150,000

=???

Debt Ratios
You should be concerned with whether the firm is able to meet long-term financial obligations.
Debt Ratio = Total liabilities Total assets $91,950 $150,000 =???

Times Interest = EBIT Earned Ratio Interest expense

$17,000 6,100

=???

Profitability Ratios
Gross Profit Margin = Sales-COGS Sales $160,000-106,000 $160,000 $17,000 160,000 $6,540 160,000 $6,540 3,000 $6,540 150,000 $6,540 31,500 =??? =??? =??? =??? =??? =??? Operating Profit Margin = EBIT Sales Net Profit Margin = Earnings per Share = Return on Total Assets = Return on Equity = Net Income = Sales Net Income = Shares Outstanding Net Income = Total Assets Net Income = Common stock

Market Ratios
This set measures how well the firm is doing in terms of the stock price and risk and return
PE Ratio = Mkt price per share common stock= EPS $25 $2.18 = ???

MB Ratio = Market price per share common stock = $25 =??? (Common stock/shares outstanding) ($31,500/3000)

Check Your Understanding

Check Your Understanding

Which of the following measure a companys liquidity without considering inventory? a. Current ratio b. Rapid test ratio c. Quick ratio d. Inventory ratio