FINANCIAL

STATEMENT ANALYSIS
Ma. Cristina P. Obeso, CPA, MBA
MODELS OF FINANCIAL STATEMENT
ANALYSIS

 There are at least four traditional techniques of

interpreting financial statements namely:

1. Horizontal Analysis
2. Trend Analysis
3. Vertical Analysis
4. Ratio Analysis
HORIZONTAL ANALYSIS
 Also known as Comparative Analysis

 Presents the differences in absolute amount and in

percentage between two compared variables such as:
1. years, quarters, etc.
2. two companies
3. actual and budgeted data
4. other bases of analysis

 The difference could either be an increase or decrease both

in amount and in percentage
Percentage of change = amount of change/base

The base may either be last year’s data, budgeted data,

average industry data, or chief competitor’s data
HORIZONTAL ANALYSIS
2010 2009 Increase %
(decrease)
Sales 550,000 450,000 100,000 22%
Gross Profit 260,000 180,000 80,000 44%
Operating Expenses 85,000 64,000 21,000 33%
Net Income 175,000 116,000 59,000 51%
TREND ANALYSIS
 Comparative analysis which extends beyond two
years
 Uses indexes and ratios to simplify the visible
complication of numbers contained in the
financial reports

 Indexes are expressed in hundreds while ratios

are expressed in normal decimal places.

In computing the trend index or ratio, the base

year (100%) is normally the earliest year
TREND ANALYSIS
2010 2009 2008 2007 2006
Sales 50,756,260 45,358,467 38,357,459 33,483,290 30,378,494
Ratios 1.67 1.49 1.26 1.10 1.00
Indexes 167 149 126 110 100

Loans 10,265,489 2,578,900 2,850,300 5,643,289 20,850,378

Payable
Ratios 0.49 0.12 0.14 0.27 1.00
Indexes 49 12 14 27 100
VERTICAL ANALYSIS
 Also known as common-size analysis

 Gets the proportional component of each of the

variables in the financial statements in relation to a
chosen base (i.e. 100%)

The base in the income statement is net sales

The base in the balance sheet is the total assets
The base in the statement of cash flows may be the
total cash available for use

By expressing financial data in percentage using a

particular base, the size of different companies is
brought to a common expression
VERTICAL ANALYSIS
2010
Sales 10, 567,895 100%
Less: Cost of Sales 4,246,489 40%
Gross Profit 6,321,406 60%
Less: Operating Expenses
Salaries Expense 1,056,290 10%
Utilities Expense 490,396 5%
Transportation Expense 250,339 2%
Delivery Expense 132,905 1%
Rent Expense 395,741 4%
Total operating expenses 2,325,671 22%
Net Income 3,995,735 38%
FINANCIAL MIX RATIOS (RATIO ANALYSIS)
 We relate an information contained in one
statement with the related information found in
another.

 Also known as inter-financial statements

analysis
4 BASIC CLASSIFICATIONS OF FINANCIAL
RATIOS

1. PROFITABILITY RATIOS
2. GROWTH RATIOS
3. LIQUIDITY RATIOS
4. LEVERAGE RATIOS (Financing Ratios)
RATIOS
Profitability Ratios
- measures the ability of the business to generate profit in
relation to sales, investments, assets, equities or common shares
outstanding

Growth ratios
- indicative of the organization’s potential and attractiveness
as an investment option

Liquidity ratios
- ability of the business to pay its obligations in cash as they
mature
- ability of the management to convert its current assets into
cash in a quick,stable, and regular manner

Financial leverage ratios

- measure of risk; use of debt to increase stockholder’s equity
PROFITABILITY RATIOS
 Return on sales = Net income/Net sales
measures profit percentage per peso sales

 Gross profit rate = Gross Profit/Net sales

measures gross profit percentage on sales to
recover operating expenses

 Return on investment = Operating income

average total assets
measures divisional performance;
determines acctg. rate of return on every peso of
investment in a project or business
PROFITABILITY RATIOS
 Return on Stockholder’s equity
= Net income
Average stockholder’s equity
measures percentage of income derived for every
peso of owner’s equity

 Earnings per share

= Net income – preferred dividends
Average common shares outstanding
measures rate of earnings per share of
common stock

 Cash realization
= Cash generated by operations
Net income
LIQUIDITY RATIOS
Current ratio = Current assets
Current liabilities
measures the ability of the business to meet its
currently maturing obligations

Quick assets ratio = Quick assets

Current liabilities
more severe test of immediate liquidity to meet
currently maturing obligations; also known as acid-
test ratio

Quick assets – cash,marketable securities and

receivables
LIQUIDITY RATIOS

 Inventory turnover
= Cost of Goods Sold/Ave. inventory
indicates the number of times inventories were
acquired and sold during the period

 Inventory days = 360 days/inventory turnover

indicates the length of time spent before the
average inventory is sold to customers

 Receivable turnover = Net credit sales

Average trade receivables
indicates the efficiency in credit and collection
policies
LIQUIDITY RATIOS

 Collection period = 360 days

Receivable turnover
measures quickness in collecting trade
receivables

 Assets turnover = Net sales/Ave. Total assets

measures effectiveness of asset utilization
LIQUIDITY RATIOS

 Working capital
= Current assets – current liability
amount invested by business to operate its
normal business activities

 Cash turnover = Cash operating expenses

average cash balance
measures ability of the business to meet
operating expenses payments given a
particular cash balance
LIQUIDITY RATIOS
 Days to pay operating expenses
= 360 days/Cash turnover

indicates the number of days spent before

meeting operating expense payments
GROWTH RATIOS
 Earnings per share
= Net income – preferred dividends
Average common shares outstanding
measures rate of earnings per share of
common stock

 Price-earnings ratio = Market price per share

earnings per share
measures the profitability of the firm in
relation to the market value of the stock
GROWTH RATIOS

Dividend-payout ratio = Dividend per share

Earnings per share
represents the percentage of net income distributed
as dividends

Dividend-yield ratio = dividends per share

market price per share
measures rate of cash return to investment in stock

Book value per share = Stockholders’ equity

average shares outstanding
indicates the value of the stock on cost
perspective
LEVERAGE RATIOS
Shows the financial structure of business
 Debt to Equity Ratio = Total debt
stockholder’s equity
measures the use of debt to finance
operations

 Debt to Assets Ratio = Total debt

Total assets
measures the relative share of creditors over
the total resources of the firm
LEVERAGE RATIOS
 Equity to Assets Ratio
= Net stockholder’s equity
•Total assets
measures the amount of resources provided
by the owners in the firm

 Total Assets to total liabilities

= Total assets / Total liabilities

a rough estimate of the firm’s ability to meet

interest payments to creditors