Financial Statements & Analysis
Annual Report
a report issued annually by a corporation to its stockholders. managements opinion of the past years operations and the firms future prospects.
Annual Report
basic financial statements
income statement balance sheet statement of retained earnings statement of cash flows
It is an evaluation of both firms past financial performance & its prospects for the future. A financial analyst use the ratios to make two types of comparison: 1. Industry Comparison (Dun & Bradstreet, Robert Morris & Associates). 2. Trend Analysis.
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Horizontal Analysis: To evaluate the trend in the accounts over the years. Vertical Analysis: A significant item on a financial statement is used as a base value, & all the other items on the financial statement are compared to it. Ratio Analysis: To compare figures from different categories.
Present & prospective shareholders. Creditors. Firms own management. Regulatory Bodies. Others.
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Liquidity Ratios, Activity/Turnover/Asset Management Ratios, Leverage/Solvency Ratios, Profitability Ratios, & Market Ratios.
It measures the companys ability to meet its maturing short-term debt obligations. The two types of liquidity ratios are:
a) Current Ratio = Current Assets / Current Liabilities. b) Quick Ratio or Acid Test = [Current Assets Inventory] / Current Liabilities.
Measures the speed with which various accounts are converted into sales or cash inflows or outflows. The ratios are:
a) Accounts Receivables Turnover = Net Credit Sales / Average Accounts receivables. b) Average Collection Period = 365 / Accounts Receivables Turnover. c) Inventory Turnover = Cost of Goods Sold / Inventory. d) Total Asset Turnover = Sales / Total Assets. e) Fixed Asset Turnover = Sales / Fixed Assets.
It measures the companys ability to meet its long-term obligations as they become due. The ratios are:
a) Debt Ratio = Total Liabilities / Total Assets b) Debt- Equity Ratio = Total Liabilities / Stockholders Equity c) Times Interest Earned = EBIT / Interest Expenses. d) Fixed-payment Coverage EBIT = + Lease payments Interest + Lease + Sinking fund payments (1 - Tax rate ) Charges payments
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An indication of good financial health & how effectively the firm is being managed is the companys ability to earn satisfactory profit & return on investment. The ratios are: a) Profit Margin = Net Income After Tax / Net Sales. b) Return on Assets (ROA) = Net Income After Tax / Total Assets. or, ROA = Profit Margin X Total Asset Turnover c) Return on Equity (ROE) = Net Income After Tax / Stockholders Equity. or, ROE = ROA X Equity Multiplier.
## equity multiplier = total assets / stockholders equity
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Relate a firms market value, as measured by its current share price, to certain accounting values. The ratios are: a) Earnings Per Share (EPS) = Net Income after Tax / No. of common stock outstanding. b) Price/Earnings (P/E) Ratio = Market Price Per Share / EPS c) Dividend Per Share (DPS) = Cash Dividend / No. of common stock outstanding. d) Dividend Yield = DPS / Market Price Per Share. e) Dividend Payout = DPS / EPS.
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Comparison with industry averages is difficult if the firm operates many different divisions. Average performance is not necessarily good. Seasonal factors can distort ratios. Window dressing techniques can make statements and ratios look better. Different accounting and operating practices can distort comparisons. Sometimes it is difficult to tell if a ratio value is good or bad. Often, different ratios give different signals, so it is difficult to tell, on balance, whether a company is in a strong or weak financial condition.
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DuPont analysis is an expression which breaks ROE (Return On Equity) into three parts. This analysis enables the analyst to understand the source of superior (or inferior) return by comparison with companies in similar industries (or between industries). Basic formula ROE = (Profit margin)*(Asset turnover)*(Equity multiplier)
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