introduction to financial statement analysis introduction to financial statement analysis c h a p t...
TRANSCRIPT
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Introduction to Financial Statement AnalysisIntroduction to Financial Statement Analysis
C H A P T E R 5
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Learning Objective 1
Explain the purpose of financial statement analysis.
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What’s the Purpose of Financial Statement Analysis?
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Define Financial Ratios
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Discuss the Need for Financial Statement Analysis
External Users: Internal Users:
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Learning Objective 2
Understand the relationships between financial statement numbers and use ratios in analyzing and describing a company’s performance.
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What Is the Debt Ratio and Its Purpose?
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What Is the Current Ratio and Its Purpose?
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What Is Return on Sales and Its Purpose?
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What Is Asset Turnover and Its Purpose?
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What Is Return on Equity and Its Purpose?
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What Is the Price-Earnings Ratio and Its Purpose?
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Match Financial Ratios
Debt ratio
Total liabilitiesTotal assets
Current assetsCurrent liabilities
SalesTotal assets
Net incomeSales
Net incomeOwners’ equity
Market price per shareEarnings per shareCurrent ratio
Asset turnover
Return on sales
Return on equity
Price-earnings ratio
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Learning Objective 3
Use common-size financial statements to perform comparison of financial statements across years and between companies
$5,400
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Common-Size Financial Statements
Resolves the problem of size or scale in comparisons
Divide all income statement numbers for a given year by the total revenues or all balance sheet items by total revenues for the year.
All amounts are then shown as a percentage of revenues for that year.
Helps to pinpoint problem areas.SEC requires multiple years of financial
statements be provided by publicly traded companies
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Example: Common-Size Income Statement
Uncommon CompanyCommon-Size Income Statement
For the Year Ended 12/31/02
Revenues. . . . . . . . . . . . . . . . $10,000 100%Cost of sales. . . . . . . . . . . . 5,000 50 Selling & admin. exp. . . . . . 1,500 15
Income before taxes. . . . . . . . $ 3,500 35%Income tax expense. . . . . . . . 1,000 10 Net income. . . . . . . . . . . . . . . $ 2,500 25%
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Learning Objective 4
Understand the DuPont framework and how return on equity can be decomposed into its profitability, efficiency and leverage components
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What Does The DuPont Framework Do?
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Match Term to Definition
Return on Sales
Asset Turnover
Assets to Equity Ratio
Profitability
Efficiency
Leverage
Net income divided by sales
Ability to generate sales through the use of assets
Ability to generate net income per sales dollar
Using borrowed funds instead of invested funds
Assets divided by equity
Sales divided by assets
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What Are the Components of ROE?
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Learning Objective 5
Use cash flow information to evaluate cash flow ratios
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Discuss Cash Flows
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What is the Cash Flow to Net Income Ratio?
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What is the Cash Flow Adequacy Ratio?
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Learning Objective 6
Understand the limitations of financial statement analysis
$
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What are the Limitations of Financial Statement Analysis?
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End Chapter 5