financial ratios

Financial Statements and Analysis

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The Four Key Financial Statements: The Income Statement

• The income statement provides a financial summary of a company’s operating results during a specified period.

• Although they are prepared annually for reporting purposes, they are generally computed monthly by management and quarterly for tax purposes.

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The Four Key Financial Statements

Table 2.1 Bartlett Company Income Statements ($000)

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The Four Key Financial Statements: The Balance Sheet

• The balance sheet presents a summary of a firm’s financial position at a given point in time.

• Assets indicate what the firm owns, equity represents the owners’ investment, and liabilities indicate what the firm has borrowed.

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Table 2.2a Bartlett Company Balance Sheets ($000)

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The Four Key Financial Statements (cont.)

Table 2.2b Bartlett Company Balance Sheets ($000)

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The Four Key Financial Statements: Statement of Retained Earnings

• The statement of retained earnings reconciles the net income earned and dividends paid during the year, with the change in retained earnings.

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Table 2.3 Bartlett Company Statement of Retained Earnings ($000) for the Year Ended December 31, 2009

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The Four Key Financial Statements: Statement of Cash Flows

• The statement of cash flows provides a summary of the cash flows over the period of concern, typically the year just ended.

• This statement not only provides insight into a company’s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.

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Table 2.4 Bartlett Company Statement of Cash Flows ($000) for the Year Ended December 31, 2009

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Using Financial Ratios: Interested Parties

• Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firm’s financial condition and performance.

• It is of interest to shareholders, creditors, and the firm’s own management.

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Using Financial Ratios: Types of Ratio Comparisons

• Trend or time-series analysis

– Used to evaluate a firm’s performance over time

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Using Financial Ratios: Types of Ratio Comparisons (cont.)


• Cross-sectional analysis

– Used to compare different firms at the same point in time

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– Industry comparative analysis

• One specific type of cross sectional analysis. Used to compare one firm’s financial performance to the industry’s average performance

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– Benchmarking

• A type of cross sectional analysis in which the firm’s ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate

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• Combined Analysis– Combined analysis simply uses a combination of

both time series analysis and cross-sectional analysis

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Table 2.5 Industry Average Ratios for Selected Lines of Businessa

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Figure 2.1 Combined Analysis

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Using Financial Ratios: Cautions for Doing Ratio Analysis

1. Ratios must be considered together; a single ratio by itself means relatively little.

2. Financial statements that are being compared should be dated at the same point in time.

3. Use audited financial statements when possible.

4. The financial data being compared should have been developed in the same way.

5. Be wary of inflation distortions.

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Ratio Analysis Example

• We will illustrate the use of financial ratios for analyzing financial statements using the Bartlett Company Income Statements and Balance Sheets presented earlier in Tables 2.1 and 2.2.

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Current ratio = total current assets

total current liabilities

Current ratio = $1,233,000 = 1.97

$620,000

Ratio Analysis

• Liquidity Ratios– Current Ratio

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Quick ratio = Total Current Assets - Inventory

total current liabilities

Quick ratio = $1,233,000 - $289,000 = 1.51

$620,000

Ratio Analysis (cont.)

• Liquidity Ratios– Current Ratio– Quick Ratio

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Inventory Turnover = Cost of Goods Sold

Inventory

Inventory Turnover = $2,088,000 = 7.2

$289,000


• Liquidity Ratios• Activity Ratios

– Inventory Turnover

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Average Age of Inventory = 365

Inventory Turnover

Inventory Turnover = 365 = 50.7 days

7.2



– Average Age of Inventory

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ACP = Accounts Receivable

Net Sales/365

ACP = $503,000 = 59.7 days

$3,074,000/365



– Average Collection Period

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APP = Accounts Payable

Annual Purchases/365

APP = $382,000 = 95.4 days (.70 x $2,088,000)/365



– Average Payment Period

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Total Asset Turnover = Net Sales

Total Assets

Total Asset Turnover = $3,074,000 = .85

$3,597,000



– Total Asset Turnover

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Table 2.6 Financial Statements Associated with Patty’s Alternatives

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Debt Ratio = Total Liabilities/Total Assets

Debt Ratio = $1,643,000/$3,597,000 = 45.7%


• Liquidity Ratios• Activity Ratios• Financial Leverage Ratios

– Debt Ratio

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Times Interest Earned = EBIT/Interest

Times Interest Earned = $418,000/$93,000 = 4.5


• Liquidity Ratios• Activity Ratios• Leverage Ratios

– Times Interest Earned Ratio

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FPCR = EBIT + Lease Payments________________

Interest + Lease Pymts + {(Princ Pymts + PSD) x [1/(1-t)]}

FPCR = $418,000 + $35,000 = 1.9

$93,000 + $35,000 + {($71,000 + $10,000) x [1/(1-.29)]}


• Liquidity Ratios• Activity Ratios• Leverage Ratios

– Fixed-Payment coverage Ratio (FPCR)

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• Liquidity Ratios

• Activity Ratios

• Leverage Ratios

• Profitability Ratios– Common-Size Income Statements

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Table 2.7 Bartlett Company Common-Size Income Statements

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GPM = Gross Profit/Net Sales

GPM = $986,000/$3,074,000 = 32.1%


• Liquidity Ratios• Activity Ratios• Leverage Ratios• Profitability Ratios

– Gross Profit Margin

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OPM = EBIT/Net Sales

OPM = $418,000/$3,074,000 = 13.6%



– Operating Profit Margin (OPM)

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NPM = Earnings Available to Common Stockholders

Sales

NPM = $221,000/$3,074,000 = 7.2%



– Net Profit Margin (NPM)

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EPS = Earnings Available to Common Stockholders Number of Shares Outstanding

EPS = $221,000/76,262 = $2.90



– Earnings Per Share (EPS)

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ROA = Earnings Available to Common Stockholders

Total Assets

ROA = $221,000/$3,597,000 = 6.1%



– Return on Total Assets (ROA)

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ROE = $221,000/$1,754,000 = 12.6%

ROE = Earnings Available to Common Stockholders

Total Equity



– Return on Equity (ROE)

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P/E = Market Price Per Share of Common Stock Earnings Per Share

P/E = $32.25/$2.90 = 11.1


• Liquidity Ratios• Activity Ratios• Leverage Ratios• Profitability Ratios• Market Ratios

– Price Earnings (P/E) Ratio

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BV/Share = Common Stock Equity Number of Shares of Common Stock

BV/Share = $1,754,000/72,262 = $23.00



– Market/Book (M/B) Ratio

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M/B Ratio = Market Price/Share of Common Stock Book Value/Share of Common Stock

M/B Ratio = $32.25/$23.00 = 1.40



– Market/Book (M/B) Ratio

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Summarizing All Ratios (cont.)Table 2.8 Summary of Bartlett Company Ratios (2007–2009, Including 2009 Industry Averages)

financial ratios

Documents

financial ratios

financial summary

key financial statementstable

key financial statements

firms financial performance

firms financial position

firms financial condition

time series analysis