Techniques of financial statement analysis ppt

financial ratio analysis ppt slides and international financial statement analysis ppt and introduction to financial statement analysis ppt
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Published Date:26-07-2017
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CHAPTER 19 FINANCIAL STATEMENT ANALYSIS www.ThesisScientist.comBASICS OF FINANCIAL STATEMENT ANALYSIS • Analysing financial statements involves evaluating three characteristics of a company: 1. its liquidity 2. its profitability 3. its solvency www.ThesisScientist.comCOMPARATIVE ANALYSIS • Three types of comparisons: – Intracompany basis – Intercompany basis – Industry averages COMPARATIVE ANALYSIS • Three tools: – Horizontal analysis – Vertical analysis – Ratio analysisHORIZONTAL ANALYSIS Change Current year amount — Base year amount since base ——————————————————————— period Base year amount ANY COMPANY INC. Assumed Net Sales For the Year Ended December 31 (in millions) 2003 2002 2001 2000 1999 6,562.8 6,295.4 6,190.6 5,786.6 5,181.4 127% 121% 119% 112% 100% www.ThesisScientist.comVERTICAL ANALYSIS • Expresses each item in a financial statement as a percent of a base amount (total assets or net sales) ANY COMPANY, INC. Condensed Balance Sheets (Partial) December 31 (in millions) 2002 2001 . Assets Amount Percent Amount Percent Current assets 1,496.5 29.6 1,467.7 30.1 Capital assets 2,888.8 57.2 2,733.3 56.9 Other assets 666.2 13.2 636.6 13.0 Total assets 5,051.5 100.0% 4,837.6 100.0% www.ThesisScientist.comRATIO ANALYSIS Liquidity Ratios Measure short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash. Profitability Ratios Revenues Expenses Measure the income or Net operating success of an - Income = enterprise for a given period of time. Since 1892 Solvency Ratios Measure the ability of the XYZ enterprise to survive over a Co. www.ThesisScientist.com long period of time.LIQUIDITY RATIOS • Current ratio • Acid test ratio • Cash current debt coverage ratio • Receivables turnover • Collection period • Inventory turnover • Days sales in inventory www.ThesisScientist.comCURRENT RATIO • Measures short-term debt-paying ability Current ratio = Current assets Current liabilities (Discussed in Chapter 4) www.ThesisScientist.comACID TEST RATIO • Measures immediate short-term debt-paying ability Acid test ratio = Cash + temporary investments + net receivables Current liabilities (Discussed in Chapter 9) www.ThesisScientist.comCASH CURRENT DEBT COVERAGE RATIO • Measures short-term debt-paying ability (cash basis) Cash current debt coverage ratio = Cash provided by operating activities Average current liabilities (Discussed in Chapter 18) www.ThesisScientist.comRECEIVABLES TURNOVER • Measures liquidity of receivables Receivables turnover = Net credit sales Average net receivables (Discussed in Chapter 9) www.ThesisScientist.comCOLLECTION PERIOD • Measures number of days receivables are outstanding Collection period = 365 days Receivables turnover (Discussed in Chapter 9) www.ThesisScientist.comINVENTORY TURNOVER • Measures liquidity of inventory Inventory turnover = Cost of goods sold Average inventory (Discussed in Chapter 5) www.ThesisScientist.comDAYS SALES IN INVENTORY • Measures number of days inventory is on hand Days in inventory = 365 days Inventory turnover (Discussed in Chapter 5) www.ThesisScientist.comPROFITABILITY RATIOS • Book value per share • Profit margin • Cash flow per share • Gross profit margin • Earnings per share (EPS) • Cash return on sales • Price-earnings (PE) ratio • Asset turnover • Payout ratio • Return on assets • Dividend yield • Return on common shareholders’ equity www.ThesisScientist.comPROFIT MARGIN • Measures net income generated by each dollar of sales Profit margin = Net income Net sales (Discussed in Chapter 5) www.ThesisScientist.comGROSS PROFIT MARGIN • Measures margin between selling price and cost of goods sold generated by each dollar of sales Gross profit margin = Gross profit Net sales (Discussed in Chapter 5) www.ThesisScientist.comCASH RETURN ON SALES • Measures net cash flow generated by each dollar of sales Cash return on sales = Net cash provided by operating activities Net sales (Discussed in Chapter 18) www.ThesisScientist.comASSET TURNOVER • Measures how efficiently assets are used to generate sales Asset turnover = Net sales Average total assets (Discussed in Chapter 10) www.ThesisScientist.com

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