ANALYZING AND INTERPRETING

FINANCIAL STATEMENTS
 FINANCIAL STATEMENT ANALYSIS

• APPLICATIONS OF ANALYTICAL TOOLS TO

GENERAL PURPOSE FINANCIAL STATEMENTS

AND RELATED DATA FOR MAKING BUSINESS

DECISIONS.
 PURPOSE OF ANALYSIS

TO EVALUATE COMPANY PERFORMANCE AND

FINANCIAL CONDITION REGARDING PAST AND
CURRENT PERFORMANCE; CURRENT
FINANCIAL POSITION; AND FUTURE
PERFORMANCE AND RISK.
 BUILDING BLOCKS OF ANALYSIS

• LIQUIDITY AND EFFICIENCY – WHICH IS THE

ABILITY TO MEET SHORT TERM OBLIGATIONS

AND EFFICIENTLY GENERATE REVENUES

• SOLVENCY – ABILITY TO GENERATE FURTURE

REVENUES AND MEET LONG TERM

OBLIGATIONS.
• PROFITABILITY – ABILITY TO PROVIDE

FINANCIAL REWARDS SUFFICIENT TO ATTRACT

AND RETAIN FINANCING

• MARKET PROSPECTS – ABILITY TO GENERATE

POSITIVE MARKET EXPECTATIONS

 INFORMATION FOR ANALYSIS
GENERAL PURPOSE FINANCIAL STATEMENTS
SUCH AS:
 INCOME STATEMENT
 BALANCE SHEET
 STATEMENT OF STOCKHOLDERS’ EQUITY OR
STATEMENT OF RETAINED EARNINGS
 STATEMENT OF CASH FLOWS
 NOTES TO FINANCIAL STATEMENTS
 STANDARDS FOR COMPARISONS
• INTRACOMPANY

THE COMPANY UNDER ANALYSIS CAN PROVIDE

STANDARDS ON ITS OWN PRIOR

PERFORMANCE AND RELATIONS BETWEEN ITS

FINANCIAL ITEMS.
 COMPETITOR

ONE OR MORE DIRECT COMPETITORS OF THE

COMPANY BEING ANALYZED CAN PROVIDE

STANDARDS FOR COMPARISON.

 INDUSTRY

STATISTICS CAN PROVIDE STANDARDS OF

COMPARISON
 GUIDELINES

General standards of comparisons can

develop from experience (rules of thumbs)

 Tools of Analysis

• Horizontal Analysis- • Comparative balance

comparison of a sheet
company’s financial
condition and • Comparative income
performance across statement
time

• Trend analysis
 Vertical Analysis

It is a comparison of • Common-size balance

company’s financial sheet
condition and
performance to a base • Common-size income
amount. statement

• Common-size graphics
 Ratio Analysis

It is a measurement of key • liquidity and efficiency

relations between • solvency
financial statement • profitability
items
• market prospects
• ratio summary
 Comparative Statements
• Comparing financial statements over
relatively short time periods (2 to 3 years) is
often done by analyzing changes in line items.

• A change analysis usually includes analyzing

absolute peso amount changes and percent
changes.

• Both analyses are relevant

 Formula:
Peso Change
Peso Change = Analysis period
amount – Base Period
Amount
** Analysis period is the point
or period of time for the
financial statements under
analysis
Percent Change
Percent Change (%) = Analysis
period amount – Base
period amount/Base period
amount x 100
** Base period is the point or
period of time for the
financial statements used
for comparison purposes.
 Trend Analysis

• It is also called trend percent analysis or index

number analysis

• It is a form of horizontal analysis that can

reveal patterns in data across successive
periods.
 Formula and Procedure

Trend percent (%) = • Select a base period

Analysis period and assign each item in
amount /Base period the base period weight
amount x 100 of 100%
• Express financial
numbers as percent of
their base period
number
In 1999 2000 2001 2002 2003
thousands
Total
revenue 180,880 220,243 300,715 394,354 491,549
Operating
expenses 159,941 190,003 260,690 316,946 381,489
General and
Adm.exp. 10,897 14,586 20,061 27,562 28,897

In 1999 2000 2001 2002 2003

thousands
Total
revenue 100% 121.8% 166.3% 218.0% 271.8%
Operating
expenses 100% 118.8 156.7 198.2 238.5
General and
Adm. Exp. 100% 136.3 184.1 252.9 265.2
 Common-Size Statements

Common-size percent (%) • Its purpose is to reveal

= Analysis amount/Base changes in the relative
amount x 100 importance of each
item
In thousands Common-size Percents
2002 2003 2002 2003
Current
Assets 101,769 141,128 39.9% 34.4%
Non-current
Assets 153,607 269,659 60.1% 65.6
Total Assets 255,376 410,787 100.0% 100.0%

Current
Liabilities 52,533 59,687 20.6% 14.5%
Non-current
Liabilities 12,685 72,255 5.0% 17.6%
Total
Liabilities 65,218 131,942 25.6% 32.1%
SHE 190,158 278,545 74.4% 67.9%

Total SHE
Total Equities 255,376 410,487 100.0% 100.0%
 2.5%
7.7.6%
5.9%

5.9%
 Ratio Analysis

• Liquidity – refers to the availability of

resources to meet short term cash

requirements
• Efficiency – is usually measured relative to

how much revenue is generated from certain

level of assets
• Solvency – refers to a company’s long term

financial viability and its ability to cover long-

term obligations.
• Profitability – company’s ability to use its

assets efficiently to produce profits and its

ability to generate an adequate return on

invested capital.
Market Prospects. Market measures are useful
for analyzing corporations with publicly traded
stock. These market measures use stock price
which reflects the market’s (public’s)
expectations for the company.
 RATIO FORMULA MEASURE OF:
LIQUIDITY & EFFICIENCY
Current ratio = current assets Short term debt-paying
Current liabilities ability
Acid –Test Ratio = Cash + inv.+current A/R Immediate short-term
Current Liabilities debt-paying ability
Accounts Receivables = Net Sales ______
Turnover Efficiency of collections
Av. Accounts
receivables
Inventory Turnover = Cost of goods sold Efficiency of inventory
Average inventory management
Days’ sales uncollected = AR/Net sales x 365 Liquidity of receivables
Days’ sales in inventory = Ending Inv./COGS x 365 Liquidity of inventory
Total asset turnover = Net Sales/Av. Total Efficiency of assets in
assets producing sales
RATIO FORMULA MEASURE OF:

SOLVENCY

Debt Ratio = Total Liabilities Creditor financing and

Total Assets leverage
Equity Ratio = Total Equity
Total Assets Owner financing
Pledged Assets to secured =BV of pledged assets Protection to secured
liabilities BV of secured liabilities creditors

Times Interest Earned =Income before interest Protection in meeting

expenses and income interest payments
taxes / interest expense
 RATIO FORMULA MEASURE OF
PROFITABILITY
Profit Margin Ratio = Net Income/Net Sales Net income in each peso
sales
Gross Margin Ratio = Net sales – COGS/Net Gross margin in each peso
Sales sales
Return on total assets = Net income/Av. Total Overall profitability of
assets assets
Return on Common SHE = Net income – Pref. Div. Profitability of owner
Av. Common SHE investment
Book value per common = SHE applicable to Liquidation at reported
share common share/ no. of amount
common shares
outstanding
Basic Earnings per share = Net income – Pref. Div. Net income per common
Wtd. Ave. com. Shares share
outstanding
 RATIO FORMULA MEASURE OF:

MARKET PROSPECTS

Price Earnings Ratio =market price per C share Market value relative to
Earnings per share earnings

Dividend yield = annual cash div. per share Cash return per
market price per share common share