Financial Statement and Ratio analysis

activity ratios

activity ratios measure the efficiency of converting assets to sales of cash

income statement

A financial statement showing the revenue and expenses for a fiscal period. It is usually states as revenues added to gains less expenses and losses. It is divided into two sections. 1.) operating activities and 2.) financing activities

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date. The left hand side of the balance sheet makes up the assets of the firm. ride hand side of the balance sheet makes up the liabilities and stockholders equity. total on right must equal total on left.

Common sized financial statements

common sized financial statements present each entry as a ratio, with the denominator either being total assets or total sales.

5 categories of ratios

profitability, liquidity, activity, financing, market ratios

Profitability Ratio: Return on assets ROA

the ROA measures the overall effectiveness of the management in generating profits with its available assets. it is also called the firms return on investment. net income after tax / total assets

MR> Average payment period

the average payment period is the number of days a firm takes to pay its bills. often times the cost of gods sold is used in place of average purchases. accounts payable / average purchase per day or accts payable// annual purchases */* 365

Du Pont Ratio Analysis

A method of financial analysis that provides a framework for dissecting a firm's financial statements and assessing its financial condition. the du pont analysis uses ROE to help organize th analysis by examining profit margin, total asset turnover, and leverage. the problem exists in ROE these three areas can be examined to find the root of the problem. ROE= NET INCOME/sales X sales/total assets X 1/ 1-(total debt//total assets)

Market ratio: Earnings per share

EARNINGS per share represent the number of dollars earned on eacch outstanding she of common stock. the net income figure used in the numerator should have any dividends payments to preferred shareholders subtracted out. NET INCOME/ numbers of shares outstanding

Profitability ratios

Measures of the operating success of a company for a given period of time. measure how effectively a firm is using its resources to generate profit. the greater the profitability ratio the happier the firms are.

Liquidity Ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

profitability ratio Operating Profit Margin

Operating profit margin measures the percentage of profit earned on each sales dollar before interest and taxes. Operating profit margin: operating profits/ sales = EBIT/ sales

Profitability ratio: Return on EQUITY

ROE ratio, measures the return received on each dollar of equity. Netincome after tax / common equity.

two types of ratio analysis

cross sectional and time seres. Cross sectional: compares a firms ratios to those of its peers in the same point in time. compare to industry leader, peer group or the industry average. the most common method of classifying firms by industry is the standard industry classification code. SIC.

Management Ratios

deal with receivables, payments, and collections management

activity ratio : Inventory turn over

inventory turn over measures how many times per year the inventory is sold and replaced. COGS/ inventory

MR: Average collection period

is also called the days sales in receivables. represent the number of days credit sales there are in accounts recievable accounts revivable / daily credit sales or accounts receivable // annual credit sales*/* 365

common sized financial statements

is prepared by dividing all balance sheet items by total assets. it provides the firm with a view of how the assets of the firm were financed and which types of assets short term or long term dominate the firm. The common sized income statement : divides each entry by total sales, this statement shows how each dollar of sales affects the bottom line. a firms cost control is shown through the common sized income statement.

MR : Accounts receivable turnover

is the number of times per year accounts receivable is paid and replaced. sales/ accounts receivable

Financing Ratios

measure how much leverage a firm has undertaken. also called leverage ratios. a firms risk is closely related to the amount of the firms leverage.

Activity Ratio: Total Asset Turnover

measures the efficiency of all assets fixed and current to generate sales. Sales/ total assets total asset turnover may be good to use to identify which assets might be causing problems. if the fixed asset turnover is good but total asset turnover is low, then current assets may be examined because the problem could i.e. there.

Net working capital Liquidity ratio

net working capital is not a ratio but it still measures the firms overall liquidity. it is especially helpful in time series analysis . Net working capital = current assets - current liabilities

MR: Price/ earnings ratio

p/e ratio represents the amount investors are willing to pay for each dollar of earnings. A HIGH P/E raitio denotes a projection of increasing future earnings. market price of stock/ earnings per share.

Market Ratios

people considering a purchase of securities from the firm are interested in market ratios normally not found in the firms financial statements.

liquidity ratio: current ratio:

the current ratio measures the firms ability to meet its short term obligations. current assets are those that can be converted to cash in less than one year to pay current liabilities. a current ratio of 1 indicates that a firm is just meeting its short term obligations. most firms want to have a current ratio of above 1 to have a cushion. current assets/ current liabilities

FR Debt Ratio

the debt ratio measures the proportion of total assets financed by the firms creditors. greater leverage will result in higher debt ratios. Total liabilities/ total assets; if the ratio is below 1, then total assets excel total liabilities.

FR debt to equity ratio:

the debt to equity ratio is the relationship between long term funds provided by creditors and those provided by the firms stockowners. long term debt / stockholders equity

activity ratio: Fixed asset turnover

the fixed asset turnover measured how effectively fixed assets are used to generate sales. Sales/ fixed assets

profitability ratio: Gross profit margin:

the gross profit margin measures the percentage of each sales dollar remaining after the firm has paid for all of its costs of goods sold. Sales - cost of goods sold / sales = Gross profit / sales

MR: Market to book ratio

the market to book ratio measures the market value of the firm compares to the value of the first according to accountants. market value per share/ book value per share Book value per share can be found by dividing total equity by the number of shares outstanding. the firms market value per share is represented by the stock price.

Profitability ratio: Net Profit Margin: The net profit margin measures.

the percentage of profit earned after all expenses and taxes on each sales dollar. net profit after taxes/ sales

Liquidity ratio: Quick Ratio:

the quick ratio or acid test subtracts inventory from current assets since inventory cannot always be converted to cash easily Current assets - inventory / current liabilities Quick rates close to 1 are generally considered to be indication of good liquidity.

Cash Flow Statement

the statement of cashflows shows how the firms cash flow has changed over time. it is divided into three sections. 1.) cash flow from operations 2.) cash flow from investments and 3.) cash flow from financing.

times interest earned FR

this ratio measures the firms ability to meet its interest payments the primary use of this ratio is for creditors to see if the firm is having trouble meeting its interest payments. EARNING BEFORE INTEREST AND TAXES/ INTEREST