analysis and interpretation of fs

8/11/2019 Analysis and Interpretation of FS

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Cunent Ratio orWorking CapitalRatio or Bankers'Ratio

Cunent AsseECurrent Liabilities

Test of short-termdebt paying ability.

Acid Test orQuick Ratio

Quict Assets*Cunent Liabiiiiies

Quick Asefs= C-ash +Cash Equivalents +Net Receilrables +

Marketable Securities

Measures the firm'sability to pay itsshort-term debts fromits most liquid assetswithout having to relyon inventory.

> Cash Ratio

Gsh + CashEquivalents +

MarketableSecurihes

Current UabiliUes

A more conservativevariation in OuickRatio. It tests shori-term liquidity withouthaving to rely onreceivables andinventory.

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> Cash toCurrentAssets Ratio

Cash + CashEquivaients +

Marketable

SecuritiesCurrent Assets

Meaqrres trle llquuiry

oF current assebs.

P Cash FlowRatio

Operating CashFlow

Cunent Liabilities

Shows thesignificance of cashflcw for settlin-ocurrent obligations asthev become due.

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3. DefensiveInterval

Cash Equivalentsf

Net Rreivables +MarketableSecurities

Daily OperatingCash Flow

Reflects thepercentage of near-

cash items to thedaily operating cashflow,

Pn'mary gocrl of Tin. n1mt'. i

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sis and tnterpretation of Financiar statements 61 9is and tnterpretation of Financial Statements 6 l 942 qbi/itv /o canucrt nat2<arh c''t"znt ast?'lg )ntv ash

ATtoS - provide information about the firm's ability tont obligations and continue operations.

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620 PART 2 - FOUNOATIONS OF MANAGEMENT ACCOUNI'ING

b

'well as the risk that the firm may not be able tb ,..i it,maturing obligations, increases.

increase,s the cornpany,s return when it is profitable.* Solvency - the firm,s financial ability to pay long_terrnobligations and survive in the long_term.

KEy lnenrorctrs or SolvrNcy

1. CAptrAt SIRucruns _ the sources of financing

Chapter 11 - Analysis and lnterpretation of Financial Statements 621

Eanrutrue PowER - the capacity of the firm's operations tr.r

produce cash inflows

Equity (tlr. risk capitar of thefirm) - the ownershiprrrtcrcsl in the firm

Debl lhc interest of creditors in the firm

RATD

FinancialLeverageRatio or EquityMultiplier orLeverageFactor

2. FinancialLeverageIndex

AverageTotal Assets

AverageCommon

Equity

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Arnount of totalassets financed byeqLrty. The hiqherthe ratio, the qroateris the leverage

(assets financed lrydebt) and thegreater the risk

Return onCommon

_ EquityReturn on

Asseb

Interest-bearing DebtRatio

' Interest-

.-U9e 9 sE-Equity +Interest-

bearing Debt----Total -

LiabilitiesTotal Assets

If the index exceeds1.0, it is favorableand the use offinancial leverage issuccessful.

Measures the extentto which the assetshavinq explicit cost(total capital) arefinanced by interest-

-Qg4lgqett. ___Measures thepercentage of fundsprovided bycreditors.

Debt to Equity

Ratio

_l

Debt toTangible NetWorth Ratio

Total

- _u_a I 99_Equity -

IntangibleAssets

Earnings. trefore

lnterest .rnd

-I L(ESD_InterestExpense

Interest-Earned Ratiobr lnterestCoverageRatio

Compares resourcesprovided by creditorswrth resourcesprovided by

A more conservativemeasure of long-term debt-paymentability than the debtratio or debt toequity ratio

Indicates the marqrnoI s.rfcty forl)ayrnent of fixedinierest charges.



622 PART 2 - FOUNDATIONS OF MANAGEMENT ACCOUNTING

EBIT +

Interestportion ofOperating

LeasesInterest +

Interestportion ofOperating

c. AssET MANAGEMEITT RATlos - measure how the firm uses its assets togenerate revenue and income

1. Finished Goods or./Merdtandise

'/ Inventory Tumover

R4rb

IMicatesithe marginof safety fotpaylnent of all fixedcharges.

Measures the portionof total liabilities thatcan be paid out ofthe cash flows fronr

FoRuuLA

--__ Jqst of SalesAverage Inventory

Chapter 1'l - Analysis and lnterpretation of Financial Statements

3. -,4,eceivables/ Tumover Ratio

Number of Days in

____ a YearIrrventory Tumover

Ratio

or

Average InventoryAverage Daily Cost

of Sales

Indicates if a firm holdsexcdssive stocks of inventoritsthat are unproductive and tntlessen the company'sprofitability.

I

I

I

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ttovrtauc

Average Age ofReceivables orNumber ofDays ofReceivable orAverageCollectionPeriod

. ryg _qed{_sales__Average Accounts

Measures the average numberof dap tlat inventory is heftlbefore sale.

Number of Daysrn a Year

ReceivablesTurnover Raho

or

Average AccountsReceivable

Average DailySales

5. Operating

,,/ cvcle or.-LonvergonPeriod

6. Average Age ofAccountsPayable

Measure the average numberof days to collect a receivaUe.

Average Age ofInventories + Average

Age of Receivables

7. Fixed AssetsTurnover Ratio

Measures the averagenumber of days to collcrta receivable.

8.Tatal AssetsTurnover Ratio

AverageAccounts Payable_

Average Daily

9. Total CapitalTumover iatio

Net SalesAvrlrage Net.Fixed Assets

Measures the averagenumber of days to convertinventoriG to cash.

Net SalesAverage Total

Assets

Determines whether thehrm is paying rts invoiceson a timely basis.

10. InvestmentRate

Net SalesTotal Capital*

*Total Chpital = lolalassels having explicit

costs (equity +inl'prpst-hparino dpht)

Measures the level of useof property, plant, andeq.uipment.

Measures the level of

capital investment relatjveto sales volume.

11. Plowback Ratio

Total Capital,2008t -.TotalCapit;rl" 200ATotal (hpital,

2t)0A

Measures the level oftotal assets havingexplicit costs relative tosales volume.

ArrrountAvailable for

ReinvestmentNet lncorne

Measures the percentagechange in total capital.

Measure the percentageof net income available forinvestment.* A high rate means lessexternal financing.



624 PART 2 - FOUNDATIONS OF MANAGEMENT ACOOUNTING

d. Cosr IVIANAGEMENT RATtos - measure how well a firm controls ltscosts

RAno

l. Gross ProfitRate or GrossProfitPercentage

2. Labor CostRatio

FoRNULA

Net Sales - Costof Sales

Net Sales

3. EmploymentGrowth Rate

e. PRorrestLtry Retros - tlleasure earnings in relation to some bas

such as assets, sales, or capital

Labor CostNet Sales

(otraYn o"

Number ofWorkers, 2008 -

Number ofWorkers,200A

Number ofWorkers, 200A

Measures how much canbe spent for marketing,R&D, and administrativecosts while still readtingtaroeted inbome.

t?MEMNCE

0yovaVn9

Measures he percentageof labor cost to sales.

Chapter.ll-AnalysisandlnterpretaticlnofFinancialStatements

Used as a measure ofoperational growth. It iscompared with theinvesfnent rate todetermine whethercapital is beingsubstituted for labor.

_ Net IncomeNet Sales

5. Marginal.

ProfitabilitYBate

EBITNet Sales

Eii.

6. Return onCommonEquity

Net OperalinglIncome trrTotal Capital

5taruflcaNe

7. Marginalrefurn onCommonEouitv

,l

Measures thepercentage

of operating income tosales

Net Income -Preferred

---qivrqg q -verageComrnon Eouitv

EBITEquity + Interest-

bearing Debt

8.-.Return ony' Totalequity

Indicates whehermanagement is usingfunds wisety.

\\

625\

Change inNet Income

Change inCommon EouiN

A variation of the Net

Operating Incometo

Total_Gpital .1"j1"

Measures the return on

the carrying amount ofequity.

9. EconbmicValue Added(EVA)

A variation of the Retunr

on.Total Assets thatexcludes non-interest-bearing debt from to.talassets.

Net Income -Dividends onRedeemable

Preferred StockAverage Total EquitY

f.GRoWTHRettos-measurethechangesintheeconomicstatusofa firm over a Period of time

Net Operating Profit .after Taxes less CaPital

Charge* orJotal {Jost of CaPital

+Capital Charge=tolalcapital employed x

Weighted Average Costof Caoital

A variation of the returnon common equitY.

A measure of theshareholder valuecreation.

Basic Earningsper Share.(BEPS)

Reflects the comPanY'searning power, i.e., its

ability to generateincome from normaloperations.

Shows the relationshiP ofeanlutgs per slrare to Lhe

market price Per share.

analysis and interpretation of fs

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