METHODS OR TOOLS

OF ANALYSIS OF
FINANCIAL STATEMENT

Ms. Joselyn M. Amon

 Prayer
Almighty God, our Father, we praise and thank you for this day. You
have given us another opportunity to appreciate life and to fulfill
our mission as Your instruments of peace and progress. Please
pardon us for our shortcomings. Help us to amend our impieties,
may we learn to pattern our lives through Your Sons example.
Father, bless all our endeavors, especially todays meeting. Guide
us in our discussions. Enlighten our minds in every lesson that we
need to learn. Give us Your grace that we may effectively do our
parts as students. Bless us, so that we may achieve our objectives,
for Your greater glory.
All these we ask in Jesus name. Amen.
Objectives
1.Define the measurement levels, namely, liquidity,
solvency, stability, and profitability.
2.Describe the financial analysis and its objective
3.Compute and interpret financial ratios such as
current ratio, working capital, gross profit ratio,
net profit ratio, receivable turnover, inventory
turnover, debt-to-equity ratio, and the like.
 Financial Analysis
Financial analysis – make financial statement useful,
primarily to the management then to other interested
parties.
Objective:
 Analyzing the financial statement is to asses the overall
performance of the business for a given period of time.
 To be used in basis for evaluating performance of the
managers of the different departments of the company.
 It can uncover the strengths and weaknesses of the
business.
 Methods and Tools
Financial ratio – is the ratio of one item in the financial
statement to another item in the same financial
statement.
Ratio analysis expresses the relationship among selected
items of financial statement data. The relationship is
expressed in terms of a percentage, a rate, or a simple
proportion
 Financial ratio
Profitability ratios measure the ability of the company to generate
income from the use of its assets and invested capital as well as control
its cost.
Operational efficiency is measured based on the company’s ability to
generate sales from the utilization of its assets, as a whole or
individually. The turnover ratios are primarily used to measure
operational efficiency
Financial Health Ratios look into the company’s solvency and liquidity
ratios. Solvency refers to the company’s capacity to pay their long term
liabilities. On the other hand, liquidity ratio intends to measure the
company’s ability to pay debts that are coming due (short term debt).
 Profitability
Gross profit ratio reports the peso value of the gross profit earned for
every peso of sales. We can infer the average pricing policy from the
gross profit margin.
Operating income ratio expresses operating income as a percentage of
sales. It measures the percentage of profit earned from each peso of
sales in the company’s core business operations
Net profit ratio relates the peso value of the net income earned to
every peso of sales. This shows how much profit will go to the owner for
every peso of sales made.
Return on asset(ROA) measures the peso value of income generated by
employing the company’s assets. It is viewed as an interest rate or a
form of yield on asset investment. The numerator of ROA is net income.
Return on equity(ROE) measures the return (net income) generated by
the owner’s capital invested in the business
 Operational efficiency
Asset turnover measures the peso value of sales generated for every peso of the
company’s assets. The higher the turnover rate, the more efficient the company is in
using its assets.
Fixed asset turnover is indicator of the efficiency of fixed assets in generating
sales.
Inventory turnover is measured based on cost of goods sold and not sales. As
such both the numerator and denominator of this ratio are measured at cost. It is
an indicator of how fast the company can sell inventory. An alternative to inventory
turnover is “days in inventory”. This measures the number of days from acquisition
to sale.
Accounts receivables turnover the measures the number of times the company
was able to collect on its average accounts receivable during the year. An alternative
to accounts receivable turnover is “days in accounts receivable”. This measures the
company’s collection period which is the number of days from sale to collection.
Financial Health Ratio ( Solvency)
Debt ratio indicates the percentage of the company’s assets that are
financed by debt. A high debt to asset ratio implies a high level of debt.
Equity ratio indicates the percentage of the company’s assets that are
financed by capital. A high equity to asset ratio implies a high level of
capital.
Debt to equity ratio indicates the company’s reliance to debt or liability
as a source of financing relative to equity. A high ratio suggests a high level
of debt that may result in high interest expense.
Interest coverage ratio measures the company’s ability to cover the
interest expense on its liability with its operating income. Creditors prefer
a high coverage ratio to give them protection that interest due to them can
be paid.
Equity Ratio
Equity to debt ratio
Debt to capitalization Ratio
Financial Health Ratio ( Liquidity)
Working Capital
Current ratio is used to evaluate the company’s liquidity.
It seeks to measure whether there are sufficient current
assets to pay for current liabilities
Quick ratio is a stricter measure of liquidity. It does not
consider all the current assets, only those that are easier
to liquidate such as cash and accounts receivable that are
referred to as quick assets
Operational (Liquidity)
Formula with Example
Profitability
Liquidity
solvency
Exercises