FINANCIAL

STATEMENT
SLIDESMANIA.CO

ANALYSIS
Ms. Ali-Aya May J. de los Reyes, MBA
 AT THE END OF THIS CHAPTER, YOU SHOULD BE
ABLE TO UNDERSTAND THE FOLLOWING
CONCEPTS:

■ Financing Ratios (Leverage ratio)

■ Profitability Ratio

■ Growth Ratio
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■ Liquidity Ratio

■ Gearing ratio
 FINANCING RATIO
(LEVERAGE RATIO)
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 FINANCING RATIOS
Financing refers to the amount of money raised primarily from
owners and creditors in order to fund the investment activities and
strategies of the business.

Financing ratios measure a company’s ability to meet its

financial obligations and the extent to which it is financed by debt
versus equity.
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 FINANCING RATIOS
FORMULAS:
Debt rate = (Total Debt/Total Assets)

Debt-to-Equity Ratio= (Total Debt/Shareholders’ Equity)

Equity Multiplier= (Total Assets/Shareholder’s Equity)

Times Interest Earned= (EBIT/Interest Expense)

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 WORKING SAMPLES: Two companies have the same total equity of
P200 million pesos. However, they have raised the money needed to
finance investments differently as follows:

Determine the following for A Co. and B Co.

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1. Debt rate
2. Debt-to-equity ratio
3. Equity multiplier
4. Times interest earned
 SOLUTION:

At a glance, it can be noticed that

Company B uses more debt to finance its
investing activities.
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 PROFITABILITY RATIO
Profitability is the ability of the This provides valuable insight
business to generate profit. into a company’s financial
performance and profitability.
Profitability Ratios measures the
ability of the business to generate
profit in relation to sales,
investments, assets, equities, or
ordinary shares outstanding.
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 PROFITABILITY RATIO
FORMULAS:
Profit Margin (PM)
=Profit/Sales
This ratio measures the
ability of the management
to produce return for every
peso of net sales.
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Return on Assets (ROA) ROA measures the ability of
management to generate
=Profit/Assets return on every peso of
resources employed in
Derived equation:
operating the business. The
=(Profit/Sales) x higher the ratio, the more
(Sales/Assets) favorable it is for the
business.
=Profit Margin x Assets
Turnover
 PROFITABILITY RATIO
FORMULAS:
Return on Equity (ROE)
=Profit/Shareholders’
Equity
This measures the
effectiveness of
management in generating
wealth from the normal
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Return on Ordinary Earnings Per Share (EPS)
Equity
=(Profit-Preference
=(Profit-Applicable Dividends
Preference Requirement)/Average
Dividends)/Average Ordinary Shares
Ordinary Shareholders’ Outstanding
Equity

business operations in
relation to the investment of
the owners.
 WORKING SAMPLES: The following selected data were taken from
the financial records of South Corporation:

Determine the following:

1. Profit Margin
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2. Return on Asset
3. Return on Shareholders’ Equity
4. Return on Ordinary Equity
5. Earnings per Share
SOLUTION:
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SOLUTION:
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 GROWTH RATIOS
Growth ratios are indicative of the organization’s potential
and attractiveness as an investment option. This measures a
company’s growth over a period of time.

This is commonly used to evaluate the rate at which a

company’s financial metrics, such as sales, earnings, assets,
or market share, are growing or declining.
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 GROWTH RATIO FORMULAS:
Price-Earnings Ratio
=Market price per
share/Earnings per share
The P/E ratio indicates the
organization’s ability to
recover investments from
earnings. The higher the P/E
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ratio, the better.
Dividend Yield Ratio
=Dividend per share/Market
price per share
The yield ratio reflects the
ability of organization to
return investments to
owners in terms of cash or
dividend, not terms of
accrual profit.
Dividend Payout Ratio
=Dividend per
share/Earnings per share
The payout ratio indicates
how generous management
is in distributing earnings to
owners.
 GROWTH RATIO FORMULAS:
Book Value per Share Book value per ordinary share
Book value per share is a
=Ordinary shareholders equity/Ordinary
measure of company’s
share outstanding
wealth based on the value
of its net assets. This is Book value per preference share
based on the accounting
measurement method used =Preference shareholders’ equity/Preference
which is predominantly share outstanding
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based on cost or fair value.

 WORKING SAMPLES: Bucayao Corp. provided the following selected
financial data of Strawberry Corp. on December 31, 20CY

Determine the following:

1. Price-earnings ratio
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2. Dividend yield ratio

3. Payout ratio
4. Book value per preference share
5. Book value per ordinary share
SOLUTION:
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SOLUTION:
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 LIQUIDITY RATIOS
Liquidity refers to the ability of the business to pay its
obligations in cash as they mature. Therefore, the focal point
of liquidity analysis is cash. It includes the ability of the
management to convert its current assets into cash in a quick,
stable, and regular manner. It also deals with the ability of
management to use trade credits and stretch the payments to
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trade credits in financing operating activities.

 LIQUIDITY RATIOS
Inventory-conversion cycle measures the number of days it
takes for a company to buy and sell its inventory base.

Receivable conversion cycle measures the number of days it

takes for a company to collect its base receivable.

The total days it takes for a company to sell its inventories

and collect its receivable is the operating cycle.
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 LIQUIDITY FORMULAS:
Inventory Turnover Receivable turnover Payable turnover

Indicates the effectiveness of the
business in selling its
inventories. It determines the
number of times the entire
inventory base is sold in a given
period.
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Measures the effectiveness of
using the investment in
receivables to generate net credit
sales. It measures the number of
times the receivable base is used
in a given period.
Reflects how effective the
business is in utilizing the trade
credit line offered by
merchandise creditors in
financing its purchases.

The higher the turnover, the shorter the conversion period, the shorter the operating cycle,
and the more liquid the business will be.
 LIQUIDITY FORMULAS:
Inventory turnover = Cost of sales/Average inventories

Days to sell inventories = 365 days/ Inventory turnover

Receivables turnover = Net credit sales/ Average trade receivables

Collection period = 365 days/ Receivables turnover

Payable turnover = Net credit purchases/ Average trade payables

Payment period = 365 days/ Payable turnover

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These formulas are sometimes referred to as activity ratios or effectiveness ratios.

Many analysts use the 360-day year in analyzing the conversion cycles.
 WORKING SAMPLES: The following are selected financial data from
the records of David Corporation and Dean Corporation as of and for
the year ended Dec 31, 20CY

Determine the following for David Corp. and Dean Corp.

for 20CY. Use a 360-day year.
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1. Inventory turnover and inventory days

2. Receivable turnover and collection period
3. Payable turnover and payment period
4. Operating cycle and net cash cycle
SOLUTION:
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THANK YOU!
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