Chapter Nine

Financial Statement Analysis

© 2015 McGraw-Hill Education.

Methods of Analysis

Ratio Analysis

Vertical Analysis

Percentage Analysis

Horizontal Analysis

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Horizontal and Percentage Analysis

Horizontal analysis (or trend analysis) refers to studying the behavior of

individual financial statement items over several accounting periods.

Absolute Amounts

Percentage Analysis

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Milavec Company Horizontal Analysis

2015 2014

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Vertical Analysis

Vertical analysis uses percentages to compare

individual components of financial statements to a key statement figure. A common-size financial statement is a vertical analysis in which

each financial statement item is expressed as a

percentage. 9-5

Milavec Company Vertical Analysis

2012 2011

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2012 2011

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Ratio Analysis

Ratio analysis involves studying

various relationships

between different items reported in a

set of financial statements.

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Liquidity Ratios

Liquidity ratios indicate a company’s ability to pay short-

term debts. They focus on current assets and current

liabilities.

1. Working Capital

2. Current Ratio

3. Quick Ratio

4. Accounts Receivable Ratios

5. Inventory Ratios

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Solvency Ratios

Solvency ratios are used to analyze a company’s long-term debt-

paying ability and its financing structure.

1. Debt to Assets Ratio

2. Debt to Equity Ratio

3. Number of Times Interest Earned

4. Plant Assets to Long-Term Liabilities

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Profitability Ratios

Profitability ratios measure a company’s ability to generate

earnings.

1. Net Margin (or Return on Sales)

2. Asset Turnover Ratio

3. Return on Investment

4. Return on Equity

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Stock Market Ratios

Stock market ratios analyze the earnings and dividends of a

company.

1. Earnings Per Share

2. Book Value

3. Price-Earnings (PE) Ratio

4. Dividend Yield

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Earnings Per Share

Earnings per

Share

Net Earnings Available for Common Stock Average Number of Outstanding Common

Shares

=

This measure indicates how muchincome was earned for each share of

common stock outstanding.

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Earnings Per Share

$25,000 (net income) - $3,000 (preferred dividend) = $1.60 per share(15,000 + 12,500)/2 (average outstanding common shares)

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Book Value Per Share

This ratio measures the amount that would be distributed to holders of each share of common

stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.

Book Value per Share

Stockholders’ Equity - Preferred Dividends Outstanding Common Shares=

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Book Value Per Share

$362,000 - $50,000 15,000 = $20.80 per share

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Price-Earnings Ratio

Price-EarningsRatio

Market Price Per Share

Earnings Per Share=

This ratio compares the earnings of a company to the market price for a share

of the company’s stock.

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Dividend Yield

DividendYield

Dividends Per ShareMarket Price Per Share=

This ratio identifies the return, in terms of cash dividends, on the current

market price of the stock.

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Limitations of Financial Statement Analysis

Different Industries

Changing Economic

Environment

Accounting Principles

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End of Chapter Nine

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