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Learning Objectives
1. Users of Financial Statement2. Importance of Financial Statement
Analysis3. Basic Analytical Procedures4. Solvency Analysis5. Profitability Analysis6. Efficiency Analysis7. Summary of Analytical Measures
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Financial Statement AnalysisFinancial Statement AnalysisTopic 7
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USERS OF FINANCIAL STATEMENT
BusinessEntity
GovernmentTaxation
Stockholdersand Creditors
Suppliers and Customers Regulatory
Bodies
Employeesand Managers
InternalStakeholders
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DIFFERENT USERS NEED OF INFORMATIONDIFFERENT USERS NEED OF INFORMATION
MANAGERPlanning and organizing
business
Banks To approve loan application
vendorsDetermine credit term and
credit limit
ShareholdersPredict investment return &
Future risk
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IMPORTANCE OF FINANCIAL STATEMENT ANALYSISIMPORTANCE OF FINANCIAL STATEMENT ANALYSIS
Analysis helps user to…..
generate more meaningful information for making decision.
analyse relationship between financial statement components and the trend.
measure company’s performance & to predict potential risk in the future
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BASIS OF COMPARISONS BASIS OF COMPARISONS
Intra company to compare one company’s performance
for several years (3 to 5 years)
Inter company (competitor) Compare company’s performance with other company (similar industries)
Industrial averageto compare company’s performance with industrial average performance (average performance of the companies in similar industries)
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BASIC ANALYTICAL PROCEDURESBASIC ANALYTICAL PROCEDURES
COMMON-SIZEHORIZONTAL VERTICAL
PERCENTAGE ANALYSIS
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PERCENTAGE PERCENTAGE ANALYSISANALYSIS
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HORIZONTAL ANALYSIS HORIZONTAL ANALYSIS
Analysing performance change by percentage inrelated items in comparative financial statements.
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Tanjak Holding Sdn BhdComparative Balance SheetDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000RM 533,000 RM 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Fixed assets (net) 444,500 470,000 (25,500) (5.4%)Intangible assets 50,000 50,000 —
RM1,139,500RM1,230,500RM (91,000) (7.4%) LiabilitiesCurrent liabilities RM 210,000 RM 243,000RM (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%)
RM 310,000 RM 443,000RM(133,000) (30.0%) Stockholders’ EquityPreferred 6% stock,RM100RM150,000 RM 150,000 — Common stock, RM10 par 500,000 500,000 — Retained earnings 179,500 137,500 RM42,000 30.5%Total stockholders’ equity RM829,500RM 787,500 RM42,000 5.3%Total liabilities andStockholders’ equity RM1,139,500RM1,230,500 RM(91,000) (7.4%)
Increase (Decrease)
2008 2007 Amount Percent
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Tanjak Holding Sdn BhdComparative Balance SheetDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000RM 533,000 RM 17,000 3.2%Long-term investments 95,000 177,500 (82,500) (46.5%)Fixed assets (net) 444,500 470,000 (25,500) (5.4%)Intangible assets 50,000 50,000 —
RM1,139,500RM1,230,500RM (91,000) (7.4%) LiabilitiesCurrent liabilities RM 210,000 RM 243,000RM (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%)
RM 310,000 RM 443,000RM(133,000) (30.0%) Stockholders’ EquityPreferred stock,RM100 parRM150,000RM 150,000 — Common stock, RM10 par 500,000 500,000 — Retained earnings 179,500 137,500 RM42,000 30.5%
RM 829,500 RM 787,500 RM42,000 5.3% RM1,139,500RM1230,500 RM(91,000) (7.4%)
Increase (Decrease)
2008 2007 Amount Percent
Horizontal Analysis: Horizontal Analysis:
Current year (2008) RM550,000Base year (2007) RM533,000
= 103.2%
Increase amount RM17,000Base year (2007) RM533,000
= 3.2%
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Tanjak Holding Sdn BhdComparative Income Statement
For the Years Ended December 31, 2008 and 2007
Sales RM1,530,500RM1,234,000RM296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales 1,498,000 1,200,000 298,000) 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit 455,000 380,000 75,000 19.7%Selling expenses 191,000 147,000 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses 295,000 244,400 50,600 20.7%Operating income 160,000 135,600 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) 168,500 146,600 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax 162,500 134,600 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income 91,000 76,500 14,500 19.0%
Increase (Decrease)
2008 2007 Amount Percent
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Tanjak Holding Sdn BhdComparative Income Statement
For the Years EndedDecember 31, 2008 and 2007
Sales RM1,530,500RM1,234,000RM296,500 24.0%Sales returns 32,500 34,000 (1,500) (4.4%)Net sales 1,498,000 1,200,000 298,000) 24.8%Cost of goods sold 1,043,000 820,000 223,000 27.2% Gross profit 455,000 380,000 75,000 19.7%Selling expenses 191,000 147,000 44,000 29.9%Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses 295,000 244,400 50,600 20.7%Operating income 160,000 135,600 24,400 18.0%Other income 8,500 11,000 (2,500) (22.7%) 168,500 146,600 21,900 14.9%Other expense 6,000 12,000 (6,000) (50.0%)Income before income tax 162,500 134,600 27,900 20.7%Income tax 71,500 58,100 13,400 23.1%Net income 91,000 76,500 14,500 19.0%
Increase (Decrease)
2008 2007 Amount Percent
Horizontal Analysis: Horizontal Analysis:
Current year (2008) RM1,498,000Base year (2007) RM1,200,000
= 124.8%
Increase amount RM298,000Base year (2007)RM1,200,000
= 24.8%
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VERTICAL ANALYSIS VERTICAL ANALYSIS
Analysing performance change by percentage of each component to the total within a single statements
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Tanjak Holding Sdn BhdComparative Balance SheetDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000 48.3% RM 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
RM1,139,500 100.0%RM1,230,500 100.0% LiabilitiesCurrent liabilities RM 210,000 18.4% RM 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
RM 310,000 27.2% RM 443,000 36.0% Stockholders’ EquityPreferred stock, RM100 parRM150,000 13.2% RM 150,000 12.2% Common stock, RM10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
RM 829,500 72.8% RM 787,500 64.0% RM1,139,500 100.0% RM1230,500 100.0%
2008 2007 Amount Percent Amount Percent
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Tanjak Holding Sdn BhdComparative Balance SheetsDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000 48.3% RM 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
RM1,139,500 100.0%RM1,230,500 100.0% LiabilitiesCurrent liabilities RM 210,000 18.4% RM 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
RM310,000 27.2% RM 443,000 36.0% Stockholders’ EquityPreferred stock, RM100 parRM150,000 13.2% RM 150,000 12.2% Common stock, RM10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
RM829,500 72.8% RM787,500 64.0% RM1,139,500 100.0% RM1230,500 100.0%
2008 2007 Amount Percent Amount Percent
Vertical Analysis: Asset items Vertical Analysis: Asset items
2008Current assets RM550,000Total assets RM1,139,500
= 48.26%
2007Current assets RM533,000Total assets RM1,230,500
= 43.32%
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Tanjak Holding Sdn BhdComparative Balance SheetsDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000 48.3% RM 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
RM1,139,500 100.0%RM1,230,500 100.0% LiabilitiesCurrent liabilities RM 210,000 18.4% RM 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
RM310,000 27.2% RM 443,000 36.0% Stockholders’ EquityPreferred stock, RM100 parRM 150,000 13.2% RM 150,000 12.2% Common stock, RM10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
RM829,500 72.8% RM787,500 64.0% RM1,139,500 100.0% RM1230,500 100.0%
2008 2007Amount Percent Amount Percent
Vertical Analysis: liability items Vertical Analysis: liability items
2008 :Current liabilities RM210,000Liability & equity RM1,139,500
= 18.4%
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Tanjak Holding Sdn BhdComparative Balance SheetsDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000 48.3% RM 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
RM1,139,500 100.0%RM1,230,500 100.0% LiabilitiesCurrent liabilities RM 210,000 18.4% RM 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
RM310,000 27.2% RM 443,000 36.0% Stockholders’ EquityPreferred stock, RM100 parRM 150,000 13.2% RM 150,000 12.2% Common stock, RM10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
RM829,500 72.8% RM787,500 64.0% RM1,139,500 100.0% RM1230,500 100.0%
2008 2007 Amount Percent Amount Percent
Vertical Analysis: liability items Vertical Analysis: liability items
2007 :Current liabilities RM243,000Liability & equityRM1,230,500
= 19.75%
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Tanjak Holding Sdn BhdComparative Balance SheetsDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000 48.3% RM 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
RM1,139,500 100.0%RM1,230,500 100.0% LiabilitiesCurrent liabilities RM 210,000 18.4% RM 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
RM310,000 27.2% RM 443,000 36.0% Stockholders’ EquityPreferred stock, RM100 parRM 150,000 13.2% RM 150,000 12.2% Common stock, RM10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
RM829,500 72.8% RM787,500 64.0% RM1,139,500 100.0% RM1230,500 100.0%
2008 2007 Amount Percent Amount Percent
Vertical Analysis: Owner’s equity items Vertical Analysis: Owner’s equity items
2008:Retained earning RM179,500Liability & equity RM1,139,500
= 15.75%
2008:Retained earning RM137,500Liability & equity RM1,230,500
= 11.17%
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Tanjak Holding Sdn BhdComparative Income Statement
For the Years Neded December 31, 2008 and 2007
Sales RM1,530,500RM1,234,000Sales returns 32,500 34,000Net sales 1,498,000 1,200,000Cost of goods sold 1,043,000 820,000Gross profit 455,000 380,000Selling expenses 191,000 147,000Administrative expenses 104,000 97,400Total operating expenses 295,000 244,400Operating income 160,000 135,600Other income 8,500 11,000 168,500 146,600Other expense 6,000 12,000Income before income tax 162,500 134,600Income tax 71,500 58,100Net income 91,000 76,500
Increase (Decrease)
2008 2007 Amount Percent
vertical analysis: income statement items vertical analysis: income statement items
Net income (2008) RM 91,000Net sales (2008) RM1,498,000
= 6.07%
Net income (2007) RM 76,500Net sales (2007) RM1,200,000
= 6.4%
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COMMON-SIZE STATEMENTS COMMON-SIZE STATEMENTS
Useful to compare the current with prior periods, individual businesses, or one business with industry percentages. All items are normally expressedin percentages.
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Tanjak Holding Sdn BhdComparative Balance SheetsDecember 31, 2008 and 2007
AssetsCurrent assets RM 550,000 48.3% RM 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
RM1,139,500 100.0%RM1,230,500 100.0% LiabilitiesCurrent liabilities RM 210,000 18.4% RM 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
RM310,000 27.2% RM 443,000 36.0% Stockholders’ EquityPreferred stock, RM100 parRM150,000 13.2% RM 150,000 12.2% Common stock, RM10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
RM829,500 72.8% RM787,500 64.0% RM1,139,500 100.0% RM1230,500 100.0%
2008 2007Amount Percent Amount PercentCommon-Size StatementsCommon-Size Statements
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BUILDING BLOCKS OF BUILDING BLOCKS OF FINANCIAL STATEMENT ANALYSISFINANCIAL STATEMENT ANALYSIS
EFFICIENCYSOLVENCY PROFITABILITY
RATIO ANALYSIS
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Ratio Ratio AnalysisAnalysis
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Solvency AnalysisSolvency Analysis
Solvency is the ability of a business to meet its financial obligations (debts) as they are due.
Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities.
This ability is normally assessed by examining balance sheet relationships.
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Solvency RatiosSolvency Ratios
Solvency (short term/ liquidity)• Working capital• Current ratio• Acid-test ratio
Solvency (long-term)• Fixed assets to long term liabilities• Ratio of liabilities to shareholder’s equity• Times interest charges• Debt ratio• Equity ratio
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Solvency Measures — Solvency Measures — The Short-Term Creditor (liquidity)The Short-Term Creditor (liquidity)
Current assets RM550,000 RM533,000Current liabilities 210,000 243,000
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
2008 2007
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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
Use: To indicate the ability to meet currently maturing obligations.
2008 2007Current assets RM550,000 RM533,000Current liabilities 210,000 243,000Working capitalWorking capital RM340,000RM340,000 RM290,000RM290,000
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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Current assets RM550,000 RM533,000Current liabilities 210,000 243,000Working capital RM340,000 RM290,000
Current ratioCurrent ratio 2.6 2.6 2.2 2.2
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
Use: To indicate the ability to meet currently maturing obligations.
Divide current
assets by current
liabilities
Divide current
assets by current
liabilities
2008 2007
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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Quick assets:Cash RM 90,500 RM64,700Marketable securities 75,000 60,000Accounts receivable (net) 115,000 120,000 Total RM280,500 RM244,700
Current liabilities RM210,000 RM243,000
Acid-Test RatioAcid-Test RatioAcid-Test RatioAcid-Test Ratio
2008 2007
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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Acid-Test RatioAcid-Test RatioAcid-Test RatioAcid-Test Ratio
Use: To indicate instant debt-paying ability.Use: To indicate instant debt-paying ability.
2008 2007Quick assets:
Cash RM 90,500RM 64,700Marketable securities 75,000 60,000Accounts receivable (net) 115,000 120,000 Total RM280,500RM244,700
Current liabilities RM210,000RM243,000Acid-test ratioAcid-test ratio 1.3 1.3 1.0 1.0
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term Liabilities
Fixed assets (net) RM444,500 RM470,000Long-term liabilities RM100,000 RM200,000
2008 2007
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Use: To indicate the margin of safety to long-term creditors.
Use: To indicate the margin of safety to long-term creditors.
2008 2007
Fixed assets (net) RM444,500 RM470,000Long-term liabilities RM100,000 RM200,000
Ratio of fixed assets toRatio of fixed assets to
long-term liabilitieslong-term liabilities 4.4 4.4 2.4 2.4
Ratio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term Liabilities
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity
2008 2007
Total liabilities RM310,000 RM443,000Total stockholders’ equityRM829,500RM787,500
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity
Use: To indicate the margin of safety to creditors.Use: To indicate the margin of safety to creditors.
2008 2007
Total liabilities RM310,000 RM443,000Total stockholders’ equityRM829,500RM787,500Ratio of liabilities toRatio of liabilities to
stockholders’ equitystockholders’ equity 0.37 0.37 0.56 0.56
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned
2008 2007
Income before income tax RM 900,000 RM 800,000Add interest expense 300,000 250,000Amount available for interest 1,200,000 1,050,000
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned
Use: To assess the risk to debtholders in terms of number of times interest charges were earned.
Use: To assess the risk to debtholders in terms of number of times interest charges were earned.
2008 2007
Income before income tax RM 900,000 RM 800,000Add interest expense 300,000 250,000Amount available for interest 1,200,000 1,050,000
Number of times earnedNumber of times earned 4.0 4.0 4.2 4.2
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Debt Ratio Debt Ratio Debt Ratio Debt Ratio
Total liabilities RM 310,000 RM 443,000 Total assets RM1,139,500 RM1,230,500
2008 2007
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Use: To measure the extent of credit used to finance the assets.
Use: To measure the extent of credit used to finance the assets.
2008 2007
Total liabilities RM 310,000 RM 443,000 Total assets RM1,139,500 RM1,230,500
Debt RatioDebt Ratio 0.27 0.27 0.36 0.36
Debt RatioDebt RatioDebt RatioDebt Ratio
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Equity Ratio Equity Ratio Equity Ratio Equity Ratio
Stockholders’ equity RM 829,500 RM 787,500 Total assets RM1,139,500 RM1,230,500
2008 2007
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Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Use: To measure the extent of owners’ equity used to finance the assets.
Use: To measure the extent of owners’ equity used to finance the assets.
2008 2007
Stockholders’ equity RM 829,500 RM 787,500 Total assets RM1,139,500 RM1,230,500
Equity RatioEquity Ratio 0.73 0.73 0.64 0.64
Equity RatioEquity RatioEquity RatioEquity Ratio
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Profitability AnalysisProfitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.
Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.
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Profitability RatiosProfitability Ratios
• Profit margin• Gross profit margin• Rate earned on total assets (ROA)• Rate earned on stockholders’s equity (ROE)• Rate earned on common stockholder’s equity• Earning per share• Price earning ratio• Dividends per share• Dividend yield
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Profitability Measures — OperatingProfitability Measures — Operating
Profit Margin Profit Margin Profit Margin Profit Margin
Use: To assess the efficiency of the business in controlling all costs relating to sales.
Use: To assess the efficiency of the business in controlling all costs relating to sales.
2008 2007Net profit RM 91,000 RM 76,500Net sales 1,498,000 1,200,000
Profit margin 0.06 0.06 Profit margin 0.06 0.06
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Profitability Measures — OperatingProfitability Measures — Operating
Gross Profit Margin Gross Profit Margin Gross Profit Margin Gross Profit Margin
Use: To assess the efficiency of the business in dealing with purchases and its related costs.
Use: To assess the efficiency of the business in dealing with purchases and its related costs.
2008 2007Gross profit RM 455,000 RM 380,000Net sales 1,498,000 1,200,000
Gross profit margin 0.3 0.32 Gross profit margin 0.3 0.32
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
2008 2007Net income RM 91,000 RM 76,500Plus interest expense 6,000 12,000
Total 97,000 88,500Total assets:
Beginning of year 1,230,500 1,187,500End of year 1,139,500 1,230,500Total 2,370,000 2,418,000Average 1,185,000 1,209,000
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
Use: To assess the profitability of the assets.Use: To assess the profitability of the assets.
2008 2007Net income RM 91,000 RM 76,500Plus interest expense 6,000 12,000
Total 97,000 88,500Total assets:
Beginning of year 1,230,500 1,187,500End of year 1,139,500 1,230,500Total 2,370,000 2,418,000Average 1,185,000 1,209,000
Rate earned on total assetsRate earned on total assets 8.2% 8.2% 7.3% 7.3%
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ Equity
2008 2007Net income RM 91,000 RM 76,500Stockholders’ equity:
Beginning of year 787,500 750,000End of year 829,500 787,500Total 1,617,000 1,537,500Average 808,500 768,750
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ Equity
Use: To assess the profitability of the investment by stockholders.
Use: To assess the profitability of the investment by stockholders.
Net income RM 91,000 RM 76,500Stockholders’ equity:
Beginning of year 787,500 750,000End of year 829,500 787,500Total 1,617,000 1,537,500Average 808,500 768,750
Rate earned on equityRate earned on equity 11.3% 11.3% 10.0% 10.0%
2008 2007
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity
2008 2007Net income RM 91,000 RM 76,500Less preferred dividends 9,000 9,000Remainder—common stock 82,000 67,500Common stockholders’ equity:
Beginning of year 637,500 600,000End of year 679,500 637,500Total 1,317,000 1,237,500Average 658,500 618,750
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
2008 2007Net income RM 91,000 RM 76,500Less preferred dividends 9,000 9,000Remainder—common stock 82,000 82,000 67,500 67,500Common stockholders’ equity:
Beginning of year 637,500 600,000End of year 679,500 637,500Total 1,317,000 1,237,500Average 658,500 658,500 618,750 618,750
Rate earned on common equityRate earned on common equity 12.5% 12.5% 10.9% 10.9%
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Earnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common Stock
2008 2007Net income RM 91,000 RM 76,500Less preferred dividends 9,000 9,000Remainder—common stock 82,000 67,500Shares of common stock 50,000 50,000
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Earnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common Stock
2008 2007Net income RM 91,000 RM 76,500Less preferred dividends 9,000 9,000Remainder—common stock 82,000 67,500Shares of common stock 50,000 50,000
Earnings per share on commonEarnings per share on common RM1.64 RM1.64 RM1.35 RM1.35
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Price-Earnings RatioPrice-Earnings RatioPrice-Earnings RatioPrice-Earnings Ratio
2008 2007Market price per share of common RM20.50 RM13.50Earnings per share on common RM 1.64 RM 1.35
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Price-Earnings RatioPrice-Earnings RatioPrice-Earnings RatioPrice-Earnings Ratio
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
2008 2007Market price per share of commonRM41.00 RM27.00Earnings per share on common RM 1.64 RM 1.35
Price-earnings ratio on commonPrice-earnings ratio on common 25 25 20 20
C6- 55
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Dividends per ShareDividends per ShareDividends per ShareDividends per Share
Use: To indicate the rate of return to common stockholders in terms of dividends.
Use: To indicate the rate of return to common stockholders in terms of dividends.
2008 2007Dividends on common stock RM40,000 RM30,000Common stock outstanding 50,000 50,000
Dividends per share RM0.80 RM0.60 Dividends per share RM0.80 RM0.60
C6- 56
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Dividend YieldDividend YieldDividend YieldDividend Yield
2008 2007Dividends per share of common RM 0.80 RM 0.60Market price per share of common RM41.00 RM27.00
C6- 57
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Dividend YieldDividend YieldDividend YieldDividend Yield
Use: To indicate the rate of return to common stockholders in terms of dividends.
Use: To indicate the rate of return to common stockholders in terms of dividends.
2008 2007Dividends per share of common RM 0.80 RM 0.60Market price per share of commonRM41.00 RM27.00
Dividend yield on common stockDividend yield on common stock 1.95%1.95% 2.22%2.22%
C6- 58
Efficiency AnalysisEfficiency Analysis
Efficiency is the ability of a business to manage the resources available in an effective way.
Efficiency analysis focuses on the ability of a business to manage its receivables and inventories.
This ability is normally assessed by examining balance sheet relationships.
C6- 59
Efficiency RatiosEfficiency Ratios
• Account receivable turnover
• Number of days sales in receivables
• Inventory turnover
• Number of days sales in inventory
• Ratio of net sales to assets
C6- 60
Efficiency Measures — Receivable AnalysisEfficiency Measures — Receivable Analysis
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Net sales on account RM1,498,000RM1,200,000Accounts receivable (net):
Beginning of year 120,000 140,000End of year 115,000 120,000Total 235,000 260,000
Average 117,500 130,000
2008 2007
C6- 61
Efficiency Measures — Receivable AnalysisEfficiency Measures — Receivable Analysis
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
Net sales on account RM1,498,000RM1,200,000Accounts receivable (net):
Beginning of year 120,000 140,000End of year 115,500 120,000Total 235,000 260,000
Average 117,500 130,000
Accts. receivable turnoverAccts. receivable turnover 12.7 12.7 9.2 9.2
2008 2007
C6- 62
Efficiency Measures — Receivables AnalysisEfficiency Measures — Receivables Analysis
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
2008 2007Accounts receivable (net)
end of year RM 115,000 RM 120,000Net sales on account 1,498,000 1,200,000Average daily sales on
on account (sales 365) 4,104 3,288
Number of days’ sales in Number of days’ sales in
receivablesreceivables 28 28 36.5 36.5
C6- 63
Efficiency Measures — Inventory AnalysisEfficiency Measures — Inventory Analysis
Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
2008 2007Cost of goods sold RM1,043,000RM 820,000Inventories:
Beginning of year 283,000 311,000End of year 264,000 283,000Total 547,000 594,000
Average 273,500 297,000
C6- 64
Efficiency Measures — Inventory AnalysisEfficiency Measures — Inventory Analysis
Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
2008 2007Cost of goods sold RM1,043,000RM 820,000Inventories:
Beginning of year 283,000 311,000End of year 264,000 283,000Total 547,000 594,000
Average 273,500 297,000
Inventory turnoverInventory turnover 3.8 3.8 2.8 2.8
C6- 65
Efficiency Measures — Inventory AnalysisEfficiency Measures — Inventory Analysis
Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
2008 2007Inventories, end of year RM 264,000 RM 283,000Cost of goods sold 1,043,000 820,000Average daily cost of
goods sold (COGS 365) 2,858 2,247
Number of days’ sales Number of days’ sales
in inventoryin inventory 92.4 92.4 125.9 125.9
C6- 66
Efficiency Measures — The Common StockholderEfficiency Measures — The Common Stockholder
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
2008 2007Net sales RM1,498,000RM1,200,000Total assets:
Beginning of year 1,053,000 1,010,000End of year 1,044,500 1,053,000Total 2,097,500 2,063,000
Average 1,048,750 1,031,500 Excludes long-term investmentsExcludes long-term investments
C6- 67
Efficiency Measures — The Common StockholderEfficiency Measures — The Common Stockholder
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
Use: To assess the effectiveness of the use of assets.
Use: To assess the effectiveness of the use of assets.
2008 2007Net sales on account RM1,498,000RM1,200,000Total assets:
Beginning of year 1,053,000 1,010,000End of year 1,044,500 1,053,000Total 2,097,500 2,063,000
Average 1,048,750 1,031,500
Ratio of net sales to assetsRatio of net sales to assets 1.4 1.4 1.2 1.2