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Chapter 16

Chapter 16. “How Well Am I Doing?” Financial Statement Analysis. Objectives. Objectives differ for investors and creditors Investors - concerned with profitability, dividends and future stock prices Creditors - concerned with liquidity and solvency

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Chapter 16

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  1. Chapter 16 “How Well Am I Doing?” Financial Statement Analysis

  2. Objectives • Objectives differ for investors and creditors • Investors - concerned with profitability, dividends and future stock prices • Creditors - concerned with liquidity and solvency • Short-term creditors - also concerned with short-term liquidity and solvency • Risks are evaluated

  3. Financial Statement Analysis • Trend Analysis • Horizontal Analysis • Trend percentages • Vertical Analysis • Percentages • Common-size statements • Ratio Analysis

  4. Horizontal Analysis • Compare year to year • Actual dollar change • Percentage change: Actual dollar change • Base year • Trend Analysis: Annual amount • Base year • Compare percentage changes and trend analyses to industry averages

  5. Vertical Analysis • Compare figures within the same year • Income statement - all items divided by net sales: Cost of goods sold/Net sales, Operating expenses/Net sales, Net income/Net sales, etc. • Balance sheet - all items divided by total assets: Cash/Total assets, Accounts payable/total assets, etc.

  6. Vertical Analysis • Common-size statements • Balance sheet: • Only percentages shown. • All items divided by total assets to get percentages • Income Statement: • Only percentages shown • All items divided by net sales to get percentages • Benchmark - compare figures to key competitors • Compare to industry averages

  7. Industry Averages • Ratios and trend percentages will vary by industry • Check a particular company’s ratios to the industry averages • Sources: EDGAR, Almanac of Business and Industrial Financial Ratios, AMA Annual Statement Studies, FreeEdgar, Hoover’s Online, Industry Norms & Key Business Ratios, Mergent Industrial Manual and Mergent Bank and Finance Manual, Standard & Poor’s Industry Survey, YahooFinance.com

  8. Ratio Analysis • Categories depend on who is analyzing financial statements • Common Stockholders • Short-term Creditors • Long-term Creditors

  9. Common Stockholders • Earnings per share (Basic and diluted) • Price/earnings ratio (Market price/EPS) • Dividend payout (Divs. Per share/EPS) • Dividend yield (Divs. per share/Mkt price) • Return on total assets (Net income + interest expense x (1-tax rate)/Avrg.assets) • Return on stockholders’ equity (Net income - pref. divs./Average common S/E • Book value per share

  10. Financial Leverage • Acquiring assets with funds that have been obtained from creditors or from preferred stockholders at a fixed rate of return. • Positive financial leverage: ROE > ROA • Negative financial leverage: ROE < ROA

  11. Short-term Creditors • Working capital (CA-CL) • Current ratio(CA/CL) • Acid-test (quick) ratio (Quick assets/CL) • Accounts receivable turnover (Credit sales/Average receivables) • Inventory turnover (COGS/Avg. Inventory)

  12. Long-term Creditors • Times-interest earned (Operating income/interest expense) • Debt-to-equity ratio (Total liabs/total assets)

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