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Financial analysis ppt
- 1. Financial Analysis &Ratios
- 2. Comparative Analysis There arethree types of comparisons to provide decision usefulness of financial information: • Intra-company basis • Inter-company basis • Industry averages
- 3. Comparative Analysis • Intra-companybasis – comparisons within the company. • Inter-company basis – comparisons with other companies. • Industry averages – comparisons with other companies in the same industry.
- 4. Financial Statement Analysis Threebasic tools are used in financial statement analysis : 1. Horizontal analysis 2. Vertical analysis 3. Ratio analysis
- 5. Horizontal Analysis • Isa technique for evaluating a series of financial statement data over a period of time. • Did an increase or decrease take place?
- 7. Vertical Analysis • Expresseseach item in a financial statement as a percent of a base amount. • Total Assets is the base amount on a Balance Sheet. • Common-size balance sheet • Net Sales is the base amount on an Income Statement. • Common-size income statement
- 9. Ratio Analysis ➨ Five types: ➨ Liquidityratios ➨ Solvency ratios ➨ Turnover ratios ➨ Profitability ratios ➨ Market value ratios
- 10. Liquidity Ratios Measure theshort-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. WHO CARES? Short-term creditors such as bankers and suppliers
- 11. Current Ratio Indicates short-termdebt-paying ability Current Assets Current Liabilities
- 12. Acid-Test Ratio Indicates immediateshort-term debtpaying ability Current Assets - Inventory Current Liabilities
- 13. Cash Ratio Indicates short-termdebt-paying ability (cash basis) Cash _ Current Liabilities _
- 14. Solvency Ratios Measure theability of the enterprise to survive over a long period of time WHO CARES? Long-term creditors and stockholders
- 15. Debt to AssetsRatio Indicates % of total assets provided by creditors Total Liabilities Total Assets
- 16. Times Interest EarnedRatio Indicates company’s ability to meet interest payments as they come due _ EBIT _ Interest Expense
- 17. Cash Debt CoverageRatio Indicates long-term debt-paying ability (cash basis) Cash provided by operations Average total liabilities
- 18. Turnover Ratios Measure howefficiently, or intensively, a firm uses its assets to generate sales . WHO CARES? Short-term creditors such as bankers and suppliers
- 19. Inventory Turnover Ratio Indicatesliquidity of inventory Cost of Goods Sold Inventory
- 20. Average Days inInventory Indicates liquidity of inventory and inventory management 365 days Inventory Turnover Ratio
- 21. Receivables Turnover Ratio Indicatesliquidity of receivables Net Sales Accounts Receivable
- 22. Average Collection Period Indicatesliquidity of receivables and collection success 365 days Receivables Turnover
- 23. Asset Turnover Ratio Indicateshow efficiently assets are used to generate sales Net Sales Total Assets
- 24. Profitability Ratios Measure theincome or operating success of an enterprise for a given period of time WHO CARES? Everybody WHY? A company’s income affects: ➩ its ability to obtain debt and equity financing ➩ its liquidity position ➩ its ability to grow
- 25. Profit Margin Ratio Indicatesnet income generated by each dollar of sales Net Income Net Sales
- 26. Return On Assets Revealsthe amount of net income generated by each dollar invested Net Income Average Total Assets
- 27. Return on Equity Indicatesprofitability of common stockholders’ investment Net Income Average Total Equity
- 28. Market Value Ratios Dealswith market value of stock. . WHO CARES? Stockholder’s
- 29. Earnings Per Share(EPS) Indicates net income earned on each share of common stock sales Net Income Shares Outstanding
- 30. Price Earnings Ratio Indicatesrelationship between market price per share and earnings per share Stock Price Earnings Per Share
- 31. Payout Ratio Indicates %of earnings distributed in the form of cash dividends Dividends Net Income
- 32. Retention Ratio Indicates %of earnings plowed back into the corporation. Addition to Retained Earnings Net Income
- 33. Limitations Of Financial Analysis • Horizontal, vertical, and ratio analysis are frequently used in making significant business decisions. • One should be aware of the limitations of these tools and the financial statements.