MINDANAO STATE UNIVERSITY

MGT 205 – ADAVANCED FINANCIAL

MANAGEMENT
FINANCIAL
ANALYSIS
FINANCIAL
ANALYSIS
FINANCIAL ANALYSIS
PROFITABILITY
RATIO
(ADVANCED FR
LIQUIDITY RATIO ANALYSIS)
OUTLINE OF THE TOPIC
SOLVENY
RATIO
• FINANCIAL ANALYSIS
SOLVENCY
RATIO
• PROFITABILITY RATIO
• LIQUIDITY RATIO
SOLVENCY
RATIO • SOLVENCY RATIO BY:
NOMAN S SATAR
AL-KHAIR U.
FINACIAL
ANALYSIS Financial analysis
FINANCIAL is the process of analyzing a company’s
ANALYSIS
PROFITABILITY
financial statements for decision-
RATIO making purposes.
LIQUIDITY is part of a greater framework of
RATIO
business analysis that allows analysts to
SOLVENCY
RATIO assess the performance of a company
SOLVENCY and identify in advance potential
RATIO indicators of deterioration or even
SOLVENCY
RATIO
failure.
 COMPARATIVE FINANCIAL STATEMENT

ASSETS 2019 2020 INC/(DEC) %INC/(DEC)

FINACIAL CASH 3,000.00 5,000.00 2,000.00 67%

ANALYSIS ACCOUNT RECEIVABLE 40,000.00 25,000.00 -15,000.00 -38%
INVENTORY 27,000.00 30,000.00 3,000.00 11%
FINANCIAL TOTAL CURRENT ASSETS 70,000.00 60,000.00 -10,000.00 -14%
ANALYSIS LONG-TERM INVESTMENT 15,000.00 -15,000.00 -100%
LAND, BUILDINGS, AND EQUIPMENT 100,000.00 75,000.00 -25,000.00 -25%
PROFITABILITY
INTANGIBLE ASSETS 10,000.00 10,000.00 0.00 0%
RATIO
OTHER ASSETS 5,000.00 20,000.00 15,000.00 300%
TOTAL ASSETS 200,000.00 165,000.00 -35,000.00 -18%
LIQUIDITY
RATIO LIABILITIES
ACCOUNTS PAYABLE 20,000.00 27,000.00 7,000.00 35%
SOLVENCY
ACCRUED EXPENSES 10,000.00 20,000.00 10,000.00 100%
RATIO TOTAL CURRENT LIABILITIES 30,000.00 47,000.00 17,000.00 57%

SOLVENCY MORTGAGE PAYABLE 88,000.00 74,000.00 -14,000.00 -16%

TOTAL LIABILITIES 118,000.00 121,000.00 3,000.00 3%
RATIO
OWNER'S EQUITY

SOLVENCY CITY MALL EQUITY 82,000.00 44,000.00 -38,000.00 -46%

200,000.00 165,000.00 -18%
RATIO TOTAL LIABILITIES AND OWNER'S EQUITY -35,000.00
 COMMON-SIZE FINANCIAL STATEMENT

ASSETS 2019 2020 2019 2020

FINACIAL
CASH 3,000.00 5,000.00 2% 3%
ANALYSIS
ACCOUNT RECEIVABLE 40,000.00 25,000.00 20% 15%

FINANCIAL INVENTORY 27,000.00 30,000.00 14% 18%

ANALYSIS TOTAL CURRENT ASSETS 70,000.00 60,000.00 35% 36%

LONG-TERM INVESTMENT 15,000.00 8% 0
PROFITABILITY LAND, BUILDINGS, AND EQUIPMENT 100,000.00 75,000.00 50% 45%
RATIO INTANGIBLE ASSETS 10,000.00 10,000.00 5% 6%
OTHER ASSETS 5,000.00 20,000.00 3% 12%
LIQUIDITY TOTAL ASSETS 200,000.00 165,000.00 100% 100%
RATIO
LIABILITIES
SOLVENCY ACCOUNTS PAYABLE 20,000.00 27,000.00 10% 16%
RATIO ACCRUED EXPENSES 10,000.00 20,000.00 5% 12%
TOTAL CURRENT LIABILITIES 30,000.00 47,000.00 15% 28%
SOLVENCY MORTGAGE PAYABLE 88,000.00 74,000.00 44% 45%
RATIO TOTAL LIABILITIES 118,000.00 121,000.00 59% 73%
OWNER'S EQUITY
SOLVENCY CITY MALL EQUITY 82,000.00 44,000.00 41% 27%
RATIO TOTAL LIABILITIES AND OWNER'S EQUITY 200,000.00 165,000.00 100% 100%
 Financial Ratio
 is one of the analytical tools that finance managers and analyst use to
FINANCIAL
measure how financially healthy a company is.
ANALYSIS
 analysis involves methods of calculating and interpreting financial ratios to
FINANCIAL analyze and monitor a firm's performance.
ANALYSIS
PROFITABILITY
RATIO

PROFITABILTY The three main categories of financial ratios

RATION

LIQUIDITY
RATIO
SOLVENCY
RATIO
SOLVENCY
RATIO
  PROFITABILTY RATIOS – show how efficiently a company generates
FINANCIAL profit and value for shareholders. measure the ability of the business
ANALYSIS to make a profit which is the primary goal of every business
FINANCIAL
ANALYSIS
PROFITABILITY
RATIO

PROFITABILTY
RATION
PROFITABILTY RATIOS
LIQUIDITY
RATIO
Gross profit margin
SOLVENCY Operating profit margin
RATIO
Net profit margin
SOLVENCY
RATIO
FINANCIAL
1. GROSS PROFIT MARGIN - Is the indicator of how much profit is
ANALYSIS
earned from selling a company’s products without taking selling and
FINANCIAL administration costs into consideration. It is important that this ratio
ANALYSIS should always be positive and the higher it is the better.
PROFITABLITY
RATION FORMULA:

PROFITABILY GROSS PROFIT MARGIN = GROSS PROFIT

RATIO NET SALES
EXAMPLE:
LIQUIDITY
RATIO Given: Gross Profit = P 1,299,184; Net Sales: P 7,457,736

SOLVENCY GROSS PROFIT MARGIN = 1,299,184 = 0.16

RATIO 7,457,736
SOLVENCY
RATIO
FINANCIAL
ANALYSIS 1. OPERATING PROFIT MARGIN – is computed by deducting
FINANCIAL operating expenses from the gross profit.
ANALYSIS
FINANCIAL FORMULA:
ANALYSIS
OPERATING PROFIT MARGIN = OPERATING PROFIT
PROFITABILITY NET SALES
RATIO EXAMPLE:

OPM Given: Operating Profit = P 343,008; Net Sales: P 7,457,736

GROSS PROFIT MARGIN = 343,008 = 0.05

SOLVENCY 7,457,736
RATIO
SOLVENCY
RATIO
 FINANCIAL
ANALYSIS 1. NET PROFIT MARGIN or RETURN ON SALES – is an overall
FINANCIAL measure of profitability.
ANALYSIS
FIANACIAL FORMULA:
ANALYSIS
NET PROFIT MARGIN = NET INCOME
PROFITABILITY NET SALES
RATIO EXAMPLE:

LIQUIDITY Given: NET INCOME = P 268,799; Net Sales: P 7,457,736

RATIO
NET PROFIT MARGIN = 268,799 = 0.04
SOLVENCY 7,457,736
RATIO
OPM
 FINANACIAL
ANALYSIS
FINANCIAL
1. LIQUIDITY RATIOS: determine a company’s ability
ANALYSIS to cover short-term obligations and cash flow.
FINANCIAL
ANALYSIS Under LIQUIDITY RATIOS:
PROFITABILITY
RATIO 2. Current ratio
3. Quick ratio
LIQUIDITY
RATIO
4. Receivable turnover
5. Inventory turnover
OPM

LIQUIDITY
RATIO
CURRENT
1. CURRENT RATIO (also know as working capital ratio) is one way
RATIO to assess the overall liquidity of a company by comparing current
QUICK RATIO assets to current liabilities.

FORMULA:
ART
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
IT EXAMPLE:

SOLVENCY Given: Current Assets = P 2,421,678; current liabilities: P 1,766,108

RATIO
CURRENT RATIO = 2,421,678
= 1.37
SOLVENCY 1,766,108
RATIO
ACCEPTABLE CURRENT RATIO: BETWEEN 1.5 to 3.0
SOLVENCY
RATIO
CURRENT
1. QUICK RATIO (also know as acid test ratio), the quick ratio is
RATIO more conservative in the sense that it does not include all current
QUICK RATIO assets in the computation.
QUICK ASSETS ARE: CASH, RECEIVABLES AND
FORMULA:
ART MARKETABLE SECURITIES (SHORT-TERM INVESTMENT)

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITIES
IT
EXAMPLE:

SOLVENCY Given: Quick Assets = P 684,203; current liabilities: P 1,766,108

RATIO
CURRENT RATIO = 684,203 = 0.39
SOLVENCY 1,766,108
RATIO
ACCEPTABLE QUICK RATIO: 1.0
SOLVENCY
RATIO
 3. ACCOUNTS REVEIVABLE TURNOVER – Is the number of
QFD AND HQ times that receivables on credit sales are collected.

QFD AND HQ FORMULA:

AR TURNOVER = NET CREDIT SALES

ART AVERAGE RECEIVABLES
EXAMPLE:
IT Given: Net Credit Sales = P 1,795,400; Average AR: P 33,500

SOLVENCY AR TURNOVER = 1,795,400

33,500 = 53
RATIO
SOLVENCY ACCEPTABLE: THE HIGHER THE BETTER
RATIO
AGE OF RECEIVABLES: 365 DAYS
SOLVENCY RECEIVABLE TUROVER
RATIO

365/53 = 7
 4. INVENTORY TURNOVER – is the number of times that inventory is
QFD AND HQ sold during the accounting period.

FORMULA:
QFD AND HQ
INVENTORY TURNOVER = COST OF GOODS SOLD
AVERAGE INVENTORY
IT
EXAMPLE:

SOLVENCY Given: Cost of Goods Sold = P 5,859,680; Average Inventory: P 1,377,475

RATIO
INVENTORY TURNOVER = 5,859,680
= 4.25
SOLVENCY 1,377,475
RATIO
ACCEPTABLE: THE HIGHER THE BETTER
SOLVENCY
RATIO AGE OF INVENTORY: 365 DAYS
INVENTORY TUROVER
SOLVENCY
RATIO 365/4.25 = 91.25 DAYS
 QFD AND HQ

4. SOLVENCY – is a key metric used to measure and enterprise’s ability

QFD AND HQ to meet it’s debt obligations and is used often by propective business
lenders. The solvency ratio indicates whether a company’s cash flow is
QFD AND HQ sufficient to meet its short-and long-term liabilities.

SOLVENCY SOLVENCY RATIOS:

RATIO
5. TIME INTEREST EARNED
TIE 6. DEBT RATIO
7. EQUITY RATIO
8. DEBT TO EQUITY RATIO
DEBT RATIO 9. EQUITY TO DEBT RATIO

EQUITY
RATIO
SOLVENCY
RATIO 1. TIME INTEREST EARNED – it evaluates the ablity of accompany to
pay the interest on its debt.
TIE
FORMULA:
DEBT RATIO
TIME INTEREST EARNED = OPERATING INCOME
INTEREST EXPENSE
EQUITY EXAMPLE:
RATIO
Given: Operating Income = P343,008; interest Expenses: P 74,208
SOLVENCY
RATIO TIME INTEREST EARNED = 343,008 = 4.62
74,208
SOLVENCY
RATIO ACCEPTABLE: THE HIGHER THE BETTER

SOLVENCY
RATIO
SOLVENCY
2. DEBT RATIO – measures the percentage of assets funded by creditors.
RATIO
SOLVENCY FORMULA:
RATIO
DEBT RATIO= TOTAL LIABILITIES
DEBT RATIO TOTAL ASSETS
EXAMPLE:
EQUITY
Given: Total liabilities = P 1,832,936; total assets: P 74,208
RATIO
SOLVENCY DEBT RATIO = 1,832,936 = 0.47
74,208 or 47%
RATIO
SOLVENCY ACCEPTABLE: THE LOWER THE BETTER
RATIO
SOLVENCY
RATIO
 SOLVENCY
RATIO 3. EQUITY RATIO – indicates the percentage of assets funded by the
owners.
SOLVENCY
RATIO FORMULA:
DEBT RATIO
EQUITY RATIO= TOTAL EQUITY
TOTAL ASSETS
EQUITY EXAMPLE:
RATIO
Given: Total Equity= P2,089,017; total assets: P3,921,953
SOLVENCY
RATIO EQUITY RATIO = 2,089,017 = 0.53
3,921,953 or 53%
SOLVENCY
RATIO ACCEPTABLE: THE HIGHER THE BETTER

SOLVENCY
RATIO
SOLVENCY
RATIO 4. DEBT TO EQUITY RATIO – is a financial ratio indicating the
relative proportion of shareholders’ equity and debt used to finance a
SOLVENCY companys’ assets.
RATIO
DEBT RATIO FORMULA:

DEBT TO EQUITY RATIO= TOTAL DEBT

EQUITY OWNER’S EQUITY
RATIO EXAMPLE:

DER Given: Total Debt = P705,000; owner’s equity: P 1,003,500

DEBT TO EQUITY RATIO = 705,000

SOLVENCY = 00.70
1,003,500
RATIO
ACCEPTABLE: THE LOWER (1) THE BETTER
SOLVENCY
RATIO
SOLVENCY
RATIO 4. EQUITY TO DEBT RATIO – refers to the proportion of owner’s
equity to debt.
SOLVENCY
RATIO FORMULA:
SOLVENCY
EQUITY TO DEBT RATIO= TOTALEQUITY
RATIO LONG-TERM DEBT
SOLVENCY EXAMPLE:
RATIO
Given: Owner’s Equity = P 1,003,500; Total Debt: P 475,000
SOLVENCY
RATIO EQUITY TO DEBT RATIO = 1,003,500
475,000 = 2.11
EDR
ACCEPTABLE: THE HIGHER THE BETTER

SOLVENCY
RATIO