Course : ACCT6497055- Accounting & Finance for

Digital Business
Effective Period : February 2023

Financial Statement Analysis

Session 7
 Material References :

Warren, Carl S. & Jones, Jefferson P. (2021). Corporate

Financial Accounting. 16, Cengage. Boston
 Targeted Learning Outcome :

LO2 : Identify accounting transaction, financial report and

business organization

LO3 : Apply the accounting cycle, internal control and

cash, financial statement analysis, bank loans, working
capital management and short-term financing for
business.
 Sub topic
Analysing Liquidity

Analysing Solvency

Analysing Profitability
 Analysing Liquidity

Short-term creditors such as banks and financial institutions are

primarily concerned with whether a company will be able to repay short-
term borrowings such as loans and notes. As such, they are most
interested in evaluating a company’s ability to convert assets into cash,
which is called liquidity.
 Analysing Liquidity

Current Ratio

The current ratio is a more reliable indicator of a company’s ability to

pay its current liabilities than is working capital, and it is much easier to
compare across companies.
 Analysing Liquidity

Quick Ratio

One limitation of working capital and the current ratio is that they do not
consider the types of current assets a company has and how easily they
can be turned into cash. A ratio that captures this difference and
measures the “instant” debt-paying ability of a company is the quick
ratio, sometimes called the acid-test ratio.
 Analysing Solvency

Long-term creditors, such as bondholders, loan money for long periods

of time. Thus, they are interested in evaluating a company’s ability to
make its periodic interest payments and repay the face amount of debt
at maturity, which is called solvency.
 Analysing Solvency

Ratio of Fixed Assets to Long-term Liabilities

Fixed assets are often pledged as security for long-term notes and
bonds. The ratio of fixed assets to long-term liabilities provides a
measure of how much fixed assets a company has to support its long-
term debt. This measures a company’s ability to repay the face amount
of debt at maturity and is computed as follows:
 Analysing Solvency

Ratio of Liabilities to Stockholder Equity

The ratio of liabilities to stockholders’ equity measures how much of the

company is financed by debt and equity.
 Analysing Profitability

Investors, such as stockholders, are the owners of the company. They

benefit from increases in the price of a company’s shares and are
interested in evaluating the potential for the price of the company’s
stock to increase. The price of a company’s stock depends on a variety of
factors, including the company’s current and potential future earnings.
As such, investors focus on evaluating a company’s ability to generate
earnings, which is called profitability.
 Analysing Profitability

Return on Total Assets

The return on total assets measures the profitability of total assets,

without considering how the assets are financed. In other words, this
ratio is not affected by the portion of assets financed by creditors or
stockholders.
 Analysing Profitability

Return on Total Equity

Return on equity (ROE) is the measure of a company's net income

divided by its shareholders' equity. ROE is a gauge of a corporation’s
profitability and how efficiently it generates those profits. The higher the
ROE, the better a company is at converting its equity financing into
profits.
 Assignment
1. After learning about profitability, liquidity and
solvability analysis. Please open the LPFF annual
report and calculate some of the ratio below :
- Current Ratio
- Quick Ratio
- ROA
- ROE
DAR
- DER
 Assignment
2. Do you think the company perform better than the
previous year based on those analysis ?
Explain your reason.
 Thank you
and
See you next week