ANALYSIS

&
INTERPRETATION
of
FINANCIAL
STATEMENT
 Methods of
Financial Statement Analysis
1. Horizontal Analysis
2. Vertical Analysis
3. Common-Size Statements
4. Trend Percentages
5. Ratio Analysis

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 Horizontal Analysis
Using
Using comparative
comparative financial
financial
statements
statements to to calculate
calculate PKR
PKR //
$$ or
or %
% changes
changes in in aa financial
financial
statement
statement item
item from
from oneone
period
period to
to the
the next
next

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 Vertical Analysis
For
For aa single
single financial
financial
statement,
statement, each
each item
item isis
expressed
expressed as as aa %
% of
of aa
significant
significant total,
total, e.g.,
e.g., all
all
income
income statement
statement items
items
are
are expressed
expressed as as aa %% of
of
sales
sales
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 Common-Size Statements
Financial
Financial statements
statements that
that
show
show only
only %
% and
and no
no absolute
absolute
PKR
PKR // $$ amounts
amounts

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 Trend Percentages
Show
Show changes
changes over
over time
time in
in
given
given financial
financial statement
statement items
items
(can
(can help
help evaluate
evaluate financial
financial
information
information of
of several
several years)
years)

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 Ratio Analysis

Expression
Expression ofof logical
logical
relationships
relationships between
between items
items in
in
aa financial
financial statement
statement ofof aa
single
single period
period (e.g.,
(e.g., %
%
relationship
relationship between
between revenue
revenue
and
and net
net income)
income)
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 Categories of Ratios
1. Liquidity Ratios
– Indicate a company’s short-term debt-paying ability
2. Equity (Long-Term Solvency) Ratios
– Show relationship between debt and equity financing in
a company
3. Profitability Tests
– Relate income to other variables
4. Market Tests
– Help assess relative merits of stocks in the marketplace

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 10 Ratios You Must Know
Liquidity Ratios
1.Current (working capital) ratio
2.Acid-test (quick) ratio
• Cash flow liquidity ratio
3.Accounts receivable turnover
4.Number of days’ sales in accounts receivable
5.Inventory turnover
• Total assets turnover

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 10 Ratios You Must Know
Equity (Long-Term Solvency) Ratios
6.Equity (stockholders’ equity) ratio
• Equity to debt
• Return on operating assets

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 10 Ratios You Must Know
Profitability Tests
7.Net income to net sales (return on sales or
“profit margin”)
margin”
8.Return on average common stockholders’
equity (ROE)
ROE
• Cash flow margin
9.Earnings per share
• Times interest earned
• Times preferred dividends earned
• Earnings yield on common stock
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 10 Ratios You Must Know
Market Tests
10.Price-earnings ratio
• Payout ratio on common stock
• Dividend yield on common stock
• Dividend yield on preferred stock
• Cash flow per share of common stock

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