FINANCIAL STATEMENT ANALYSIS Financial Ratios

- Can be used by managers, equity Profitability Ratios

investors, creditors, regulators, - Measure the returns to investors
labor unions, employees, the and the performance of a company
public, and potential investors and during a given accounting period
creditors. - Ratios measure the ability of a
company to cover its expenses
- Used for investment and credit
from the revenues generated. In
decisions.
determining a company’s profitability,
- Used for regulating companies it is important to determine if the
such as what the Energy profits come from the core business or
Regulatory Commission (ERC) the company’s main operations
- Used in monitoring the company’s a) Return on equity- is a profitability
financial performance and in measure that should be of
appraising the performance of the interest to the company
managers owners, whether they are single
proprietors, partners, or
shareholders
VERTICAL ANALYSIS
b) Return on assets- measures the
- Sometimes called common size
ability of a company to
analysis is an important financial
generate income out of its
statement analysis tool resources
- All accounts in the statement of c) Gross profit margin- ability of a
financial position are presented as company to cover its goods sold
a percentage of total assets, while from its sales
all accounts in the statement of d) Operating profit margin –
profit or loss are presented as a measures the amount of
percentage of net sales or income to generated from the
revenues core business of a company.
Operating profit is computed as the
difference between gross profit
HORIZONTAL ANALYSIS
and operating expenses
- Can be called trend analysis e) Net profit margin – measures
- Shows changes in financial how much net profit a company
statement accounts overtime. generates for every peso of net
- Changes can be shown both in sales or revenues that it
absolute peso amounts and in generates
percentage Efficiency Ratios
- (CURRENT YEAR – PREVIOUS - Otherwise known as turnover ratio
YEAR)/ PREVIOUS YEAR and activity ratios, are called as
such because they measure the
managements efficiency in utilizing
the company’s assets
a) Total asset turnover ratio –
measures the company’s ability to
generate revenues for every peso
of asset invested
 b) Fixed asset turnover ratio- if a
company is heavily invested in PPE Stability or Leverage Ratios
or fixed asset, it pays to know - Also a solvency ratios or debt
how efficient the management ratios
is with utilizing these assets - They use interchangeably
- Can be applied to the companies that - Show the company’s capital
are characterized by high PPE structure. i.e how much of the
c) Accounts receivable ratio- company’s total assets are financed
measure the efficiency by which by debt and how much is financed by
accounts receivable are equity
managed - They can also be used to measure a
d) Inventory turnover ratio – company’s ability to meet long term
measure company’s efficiency obligations
managing its inventories a) Debt Ratio – measures how much
e) Accounts payable turnover of the total assets are financed
ratio- provides information by liabilities
regarding the rate by which b) Debt equity ratio – variation of
trade payable are paid the debt ratio. Debt to equity ratio
f) Operating cycle and cash of more than one means that
conversion cycle – covers the accompany has more liabilities
period from the time the than stakeholders
merchandise is bought to the c) Interest coverage ratio – provides
time the proceeds from the information if a company has
sale are collected enough operating income to
Liquidity Ratios cover interest expenses
- The ability of a company to pay
maturing obligations. In assessing the
liquidity position of a company, an
analysis of its current assets has to be
made
a) Current Ratio – current assets
include cash and other assets
expected to be converted into
cash within 12 months , such as
account receivable and
inventories
b) Acid - test ratio or sometimes
called quick ratio – measures of a
company s liquidity position.
Some textbooks compute quick
assets as current assets less
inventories
FORMULAS
Profitability Ratio
 Return on equity ROE = (Net Income / Equity) x100%
 Return on assets ROA = (Net Income / Total assets) x100%
 Net profit margin = (Net Income / Net Sales) x100%
 Gross profit margin = (Gross Profit / Net Sales) x100%
 Operating profit margin = Operating income / Net Sales) x 100%

Efficiency Ratios
 Total asset turnover ratio = (Net Sales / total asset)
 Fixed asset turnover ratio = (Net Sales / PPE)
 Accounts receivable turnover ratio = (Net Sales / Gross trade accounts receivable)
 Inventory turnover ratio = (Cost of sales / inventories)
Days Inventories = 360 / Inventory turnover ratio
 Accounts payable turnover ratio = (Cost of sales / Trade accounts payable
Days Payable = 360 / Accounts payable turnover
ratio
 Operating Cycle and cash conversion cycle = Operating cycle- Days Payable (PAG MAS
MABABA MAS MABUTI)

Liquidity Ratios
 Current ratio = (Current assets / current liabilities) GOOD IF MORE THAN 1
 Quick ratio = (Cash + Current accounts receivable + short term marketable
securities) /current liabilities GOOD IF MORE THAN 1
 ALTERNATIVE Quick ratio = (current asset – inventories) / current liabilities

Stability or Solvency Ratios

 Debt Ratio = (total liabilities / total assets) GOOD IF LESS THAN 1
 Debt to equity ratio = (total liabilities / equity)
 Interest coverage ratio = (Operating income / Interest expense) MORE THA 5 GOOD
PLAN - it should be quantified numbers
INVESTORS
– aware they are the acquire funds
– They finance, when the purchase stocks
FINANCIAL – quantified
- Budget
- Financial Ratios

FINANCIAL PLANNING
1. Set the goal – can be short (to have cash within one year), medium (one to three years),
long (more than five years) buying fixed asset, use strategic planning
2. Identify resources – Human resource, Man Power, Production Capacity
3. Determine the Financial Cost - buying equipment, expanding business, create budget
4. Identify the sources of financing – long term loan, borrowing, know the interest
- Share of stock
- They can issue bond
- Long term, stock, bonds
5. Establish a timeline – decided to adapt apply loans
- When to apply loan
- When to buy machinery
- Apply credits line to bank – it renewable

6. Establish an evaluation system

- Budget
- CASA Current Account saving Account (60M ADB AVERAGE DAILY BALANCE)
7. Determine Contingency Plan – not materialized
- Anchored an assumptions
- If didn’t work there’s an option

PRODUCTION
Operation - reflects sales and production budget

SEVERAL TYPE OF BUDGET

1. Sales Budget
– provides information regarding the peso value and the estimated number of units of
products to be sold or the value of services rendered in the future.
– Affects by internal and external factor. INTERNAL: Factor that affects strike.
Management style; Autocratic Democratic EXTERNAL: Interest Rate
2. Production Budget
- cost of producers – factory overhead
- schedule that provides information regarding the number of units produced over a given
accounting period
3. Operation Budget
- Reflects sales of production budget
4. Cash Budget
- Cash in cash out Cash Disbursement