# FINANCIAL ANALYSIS GUIDE

Size: px
Start display at page:

## Transcription

1 MAN 4720 POLICY ANALYSIS AND FORMULATION FINANCIAL ANALYSIS GUIDE Revised -August 22, 2010

2 FINANCIAL ANALYSIS USING STRATEGIC PROFIT MODEL RATIOS Introduction Your policy course integrates information learned in previous courses through the use of case analyses. One of the first steps in analyzing a firm is to assess its financial situation. For many of you, it may have been awhile since you have practiced these techniques. This supplement is intended to provide you with a relatively easy approach to quickly calculate some key ratios and assess the financial condition and performance of firms. Although this analytical technique is not a substitute for an in-depth financial analysis, it does provide a sense of how the firm is doing and what its financial options and limitations might be. Financial statement analysis is used to: assess the current financial condition of the firm assess a firm s access to additional resources. assess a firm s strength within its industry. Objectives The premise of the Strategic Profit Model is that a firm should target itself to do three things: 1. Attain target levels of profitability 2. Maintain adequate liquidity 3. Generate funds to exploit growth opportunities Limitations Comparing the ratios with commonly accepted targets and standards, an analyst can only identify possible problem areas that need further investigation. Most ratio targets are industry and/or situation specific. The targets in this supplement are intended to be used for case analysis only when actual industry comparisons are not available. The course website lists targets for most industries which you can use for your written analysis. Any financial analysis is based on accounting data. Accounting data can comply with all applicable laws and regulations, and still use different methodologies between firms, or between years for the same firm. The analysis is based on past performance - which may not accurately predict future performance. If only one year is calculated, you have a snapshot that may be distorted due to unusual data for that year. Always calculate all ratios in the model for at least the previous five years. Financial Analysis - Using High Performance Ratios Page 1

3 Using Ratio Analysis A single ratio, by itself, has very little meaning. Ratios gain meaning when they are compared to other ratios. There are essentially three primary ways to compare ratios. 1. Internal Comparisons, or Trends - Trends are useful to compare a ratio with itself over time. Using ratios calculated for only a single year can be seriously misleading if unusual events occurred in that year. Single year accounting adjustments can inflate or understate revenues or costs, and therefore distort profitability. 2. External Comparisons - The most common external comparison is with a firm s industry averages. However, comparisons can also be made with just a few key competitors or with benchmark firms. Any external measure that is considered relevant to the firm's performance can be useful in assessing whether a performance ratio is 'good' or 'bad'. 3. Normative comparisons - Normative standards are arbitrary targets that are set either by the firm or external markets. normative standards set internally by the firm emphasize measures important to the firm, such as quality, market share, annual growth rates, and customer service levels normative standards set by external market forces can be based on tradition, such as liquidity measures and leverage. The Strategic Profit Model Ratios Worksheet The Strategic Profit Model Ratios (SPMR) worksheet is designed to provide information about a firm s profitability, liquidity and growth in an easily interpretable format. The SPMRW is available on the course website in either Excel or pdf format as Strategic Profit Model Worksheet. Note that an in-depth financial analysis would require many more ratios that are mentioned in the course text and discussed in financial analysis texts. The SPMR worksheet uses five types of ratios: 1. profitability, 2. activity, 3. leverage, 4. liquidity, 5. growth. USING GENERIC TARGET RATIOS A primary method of evaluating a ratio is to compare it with an industry average. To allow a quick assessment of possible problem areas that need more research when industry averages are not available (e.g., in class discussions and quizzes) generic target values for the ratios are provided in the following discussion. Bear in mind some significant limitations: Generic targets are primarily for a quick analysis to identify obvious problems. For some industries, one or more of these generic targets may not apply, but they are good general guides for a quick analysis. For class exercises, quizzes and discussions you will Financial Analysis - Using High Performance Ratios Page 2

4 memorize and use these generic targets. Outside of class and after you graduate, the generic targets are still useful but when possible, comparisons should be made to actual industry or key competitor data. A current Fortune 500 Industry Average is provided on the course website. Most of the targets in this guide are for strong competitors - top quartile firms, or firms that want to be in the top quartile. Failure to achieve an ROE of 15% does NOT necessarily mean a firm is poorly run. FIRST AREA - CURRENT DATA Put the year being calculated in the year box. Record the firm s profits, sales, total assets and net worth for the year being analyzed in millions. Note that for this class the profits and revenues are always entered in millions. Data from annual reports as well as tables in cases you will analyze are variously provided in thousands or millions (or even billions) depending on the size of the firm. For the purposes of grading quizzes, your instructor will expect all data entries to be in millions on this worksheet. Thus all data extracted from financial worksheets should be converted to millions, and all numbers used in calculating ratios should be to one decimal place. All ratios calculated should be reported to one decimal place (with the sole exception of EPS, which is two decimal places). Note that if the numbers used in calculations are other than in millions, or one decimal place, you may get an answer that is incorrect for grading purposes. SECOND AREA - PROFITABILITY - DUPONT FORMULA Next to the Current Data box, are the five ratios comprising the Dupont formula. The major benefit of the Dupont formula is that it combines into a single profit planning equation the principal elements of a firm s operating statement and balance sheet. Dupont Formula Net Profits x Net Sales = Net Profits x Total Assets = Net Profits Net Sales Total Assets Total Assets Net Worth Net Worth Although the formula looks at three profitability measures - profit margin, ROA and ROE - the primary emphasis of the Dupont formula is ROE. In general, ROE is a measure of return to an investor - and economic theory predicts that investors compare returns on their money irrespective of where the money is invested. Therefore, for investments of similar risk, the returns should be the same regardless of the nature of the investment or the type of industry. The shaded areas on the SPMR worksheet are for entering the financial data extracted from financial statements. Calculated results should be entered into the appropriate box to one decimal place. The Dupont formula recognizes that there are three managerial decision areas (profit paths) to improve ROE. Financial Analysis - Using High Performance Ratios Page 3

5 1. Margin manager - improve profit margin 2. Asset manager - use assets more productively 3. Financial manager - Balance use of debt and equity to finance firm, and maximize leverage within the bounds of acceptable risk. Note: ROE and ROA are measures of profitability - NOT sources. PROFIT MARGIN There are three primary types of profit margin: 1. GROSS PROFIT MARGIN = (SALES - COS) SALES SALES are net sales after returns, and COS is cost of sales. 2. OPERATING PROFIT MARGIN = EBIT SALES EBIT (Earnings Before Interest and Taxes) is Net Income plus Interest plus Taxes. Operating profitability disregards financing decisions (interest) and regulatory impacts (taxes) to focus on the contribution of continuing operations. Operating profit is an important measure because it indicates the performance of the firm s business model. Extraordinary charges, sales/purchases of subsidiaries, etc., are not reflected in operating profit. 3. NET PROFIT MARGIN = NET PROFITS SALES Net profit margin is a costs versus price indicator Net profit margin is the primary profit margin measure, and looks at the bottom line contribution of each sales dollar. Being an effective margin manager is the first step in increasing ROE (the organizational goal). Because profits are equal to revenues minus costs, thus improving profit margin requires increasing revenues, cutting costs, or both. ASSET TURNOVER Net Profit Margin Targets: retail - 5%+; manufacturing - 8%+. Asset turnover is important because being an effective asset manager is the second method for increasing ROE. The activity measure used in the Dupont formula is asset turnover. Asset turnover is very industry and situation specific, so you should look for industry averages to properly evaluate a firm s asset turnover. Although some industries are much higher, we would expect it to be at least 1.0X. Asset Turnover target: 1.0X+ (Use industry average if available). Financial Analysis - Using High Performance Ratios Page 4

6 RETURN ON ASSETS ROA is a measure of the effectiveness of the total assets of the firm - where total assets = debt plus equity. For simplicity, in this class we will use 8%+ as the ROA target if industry data are not available. LEVERAGE ROA target is 8%+ Leverage is a term used to describe some measure of the relative proportions of debt and equity in making up total assets. In other words, leverage identifies the sources of a firm s capital base - investors or creditors. Because debt + equity = total assets, the ratio of any two of these numbers is a measure of leverage. The Dupont formula uses the ratio of total assets to net worth. Financial management is the third approach to increasing ROE, and involves the use of leverage to increase ROE. As leverage increases, however, risk increases. Thus, financial management involves selecting the optimum mix of debt and equity to increase ROE within acceptable risk levels. Historically, for most industries for a firm to be in a position of proper balance between risk minimization and profit maximization, the financial community expects the asset/equity ratio to be between 1.5x - 2.5x. This is comparable to total debt being 40-60% of assets. Generally acceptable leverage: 1.5x to 2.5x ROE - RETURN ON EQUITY (or RONW - RETURN ON NET WORTH) A firm needs to maintain an acceptable ROE to maintain good access to financial markets. Investors do not like to buy stock in companies with poor ROE prospects. For the purposes of our quick analysis, the following are typical targets of top quartile performers. ROE targets: Negative = unacceptable 0%-5% = Poor 5%-10% = Fair 10%-15% = good (but not top quartile) 15-20% = very good (> 15% is generally top quartile) 20-25% = excellent 25%+ = outstanding Concluding comments on the Dupont formula In the unfortunate case where profits are negative, the ROA and ROE ratios should still be calculated and reported, but the assessment is reported as NM (not meaningful). If either or both profits and equity are negative, ROE has no easily interpretable meaning, other than the firm is very likely in serious trouble. THIRD AREA - LIQUIDITY ANALYSIS Liquidity ratios assess the firm's ability to meet short term obligations - to pay the bills. Financial Analysis - Using High Performance Ratios Page 5

7 Liquidity is an extremely important portion of your financial analysis because as long as a firm is liquid it can remain in business. The two primary types of liquidity measures are current and quick ratios: 1. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES The Current Ratio (CR) is the most common liquidity measure. Historically, firms were expected to maintain a CR of about 2.0x. In other words, current assets ought to be twice current liabilities. Deviation from 2.0X does not necessarily mean that the firm is illiquid or overly liquid. Further investigation is necessary to see if CRs above or below 2.0x are a problem. Further investigation means look at historical trends for the firm and industry avaerages. CR Target: 2.0X 2. QUICK RATIO = CURRENT ASSETS-INVENTORY CURRENT LIABILITIES Sometimes called the acid test ratio, the quick ratio (QR) is a stiffer test of liquidity. For some firms, inventory may not be very liquid, and thus the QR is a better test of short term ability to meet obligations. A quick ratio of 1.0x is the common expectation. However, just as for the CR, this is more unexamined truth than a hard standard. For both the CR and QR, in recent years many financial managers have become much more aggressive, utilizing sophisticated cash management techniques, and you will find firms with numbers substantially less than 2.0x/1.0x. These lower numbers are still flags to be investigated further, but comparison with trends or industry data may indicate that the lower numbers are acceptable for the particular firm. Note that numbers significantly higher than the liquidity targets are also flags to be investigated as the firm may be highly liquid due to poor management (bad) or to a defensible strategy (OK). Also note that because the QR is a more demanding test, an acceptable QR is evidence of acceptable liquidity for the firm even if the CR is well below 2.0x. QR Target: 1.0X 3. CASH RATIO = CASH CURRENT LIABILITIES A third measure of liquidity is the cash ratio. Here, the nominal target ratio is 15-20%. However, many firms can operate successfully with lower levels, and many firms maintain significantly higher levels of cash, such as 25-30%. In some cases a firm may reah 60-80%. A firm s historical trend is often the best guide to acceptable levels of cash. Cash Ratio Target: 15-20% 4. Times Interest Earned TIE = EBIT Financial Analysis - Using High Performance Ratios Page 6

8 INTEREST EBIT (Earnings Before Interest and Taxes) is Net Income plus Interest Expense plus Taxes. Times Interest Earned (TIE) is a measure of the cushion lenders have on their loans. Historically, lenders looked for a minimum of 7x, but many firms successfully operate today with TIEs of 5.0x. Note that TIE is not a measure of a firm's ability to make loan payments. It is a measure of ability to make interest payments. 5.0X is the minimum expectation. Higher TIE s are clearly acceptable. TIE Target: 5.0X+ FOURTH AREA - COMPOUND ANNUAL GROWTH RATIOS Compound Annual Growth Rates Growth, and the ability of a firm to sustain its historical growth or, more importantly, support its stated growth objectives is a frequently ignored area. Proper interpretation of compound growth rates requires thoughtful analysis and an assessment of the firm s general situation. The firm s historical compound annual growth rates should be calculated for at least the last five years if data are available. Top quartile target growth rates for assets, sales, profits, equity and EPS are 15%+ but it is rare for even well run firms to achieve all of these. Nominal Growth Rate Targets Assets15%+ Revenues15%+ Profit15%+ Equity15%+ EPS15%+ However, note that these are very demanding targets given a typical GNP growth rate of 2-4%. Many otherwise solidly performing companies will not have growth rates of 15%. Do not be too quick to condemn firms with growth rates of 10-15%. Interpreting Compound Growth Rates Assessing what is an acceptable growth rate is very dependent on the industry growth rate. The economy typically grows at 2-4%, thus a 15% target is very aggressive. But if the industry is growing at 20% or more, then the growth target should be much higher than 15%. Proper consideration of compound growth rates is very important in your analysis. High historical growth rates will likely require substantial funds to sustain future growth. Funds must be generated internally, or obtained from debt or equity sources. A firm s desired growth rates should be compared with historical growth rates to determine the firm's ability to sustain desired growth. Financial Analysis - Using High Performance Ratios Page 7

9 Asset Growth The nominal target is 15%+ but in reality we are more concerned about its relation to profit and equity growth (see below). Revenue Growth The nominal target is 15%+ but in reality we are more concerned about revenue growth in relation to profit and asset growth. Watch out for companies where sales are growing much faster than profits. The financial community typically wants profits to grow at least as fast as sales. Where sales growth is much larger than profit growth, the growth in sales is coming at the expense of profitability and there should be a compelling reason for this. We want revenues to grow faster than assets, otherwise the firm is becoming more asset intensive, and over time, it becomes harder to achieve desired ROA s and ROE s as asset turnover decreases. Profit Growth The target for top quartile firms is 15%+. If the industry is growing significantly faster than the economy (e.g., 10% or more) then the profit growth target should increase. The overall growth goal is for profit > revenue > asset growth. Equity Growth The nominal target is 15%+ but in reality we are more concerned about the relation of equity growth with asset growth. In the long run, equity growth should be comparable to asset growth to keep leverage within the desired target range. if the equity growth rate is not as large as the firm's asset growth rate, this means the firm is adding debt faster than equity and the leverage ratio is increasing. Thus, over time additional stock will have to be sold to keep leverage from becoming too high. if the equity growth rate is larger than the firm's asset growth rate, the firm is funding growth primarily through equity and the leverage ratio is decreasing. Thus, over time the equity growth rate will have to be reduced (dividends, stock buyback) to keep leverage from becoming too low. Although the general equity growth target for high performers would be 15%+, the primary comparison we will make is equity versus asset growth rate in relation to leverage. Our goal is to see if changes are necessary in the firm s financial policies regarding financial structure. If leverage is above the target range we would expect the firm to be taking action to increase equity faster than assets. (e.g., sell stock). If leverage is below the target range we would expect the firm to be taking action to limit equity growth below asset growth. (e.g., buy stock, issue dividends). Financial Analysis - Using High Performance Ratios Page 8

10 EPS Growth EPS growth rates indicate whether the firm is buying or selling stock. If EPS > income growth, the firm is buying back its stock. If the EPS growth is < income growth, the firm is selling stock. If leverage is above the target range we would expect the firm to be taking action to increase equity faster than assets, and one approach is by selling stock. If leverage is below the target range we would expect the firm to be taking action to limit equity growth below asset growth by buying stock, or increasing dividends. Calculating Compound Growth Rates The classic way to calculate compound growth rates is to use the tables in the back of your finance book (you did keep it, didn t you?). More modern and undoubtedly easier ways are to use a spreadsheet or a financial calculator. In Lotus, the formula to use and in Excel it is =RATE. Both spreadsheets and financial calculators require the same inputs: - beginning amount, ending amount, and number of periods - and the result will be the compound annual growth rate. Note that if you have data for five years, say , this is four periods. The number of periods is always one less than the number of years. A quick and dirty method that works well on any calculator if you have five years of data is to: 1. divide the ending number by the beginning number, 2. then take the square root twice 3. Then subtract 1 Example. A firm has profits of \$1500 in 1992 and \$3400 in /1500 = st square root = , 2 nd square root = Subtract 1 =.227 or a 22.7% compound growth rate Remember - this only works if you have five years (four periods) of data. Concluding Remarks The preceding ratios and targets are useful as a baseline to begin your analysis but remember the cautions and limitations mentioned in the guide s discussion of the ratios. Avoid basing conclusions on a single ratio - consider them all together to create a more accurate conclusion. The SPMR form is handy for learning the ratios and calculating a single year. In practice, the complete set of ratios should be calculated for each year for which data are available. A form such as Figure 1 should be used. Remember, although you have been given generally acceptable targets, in the final analysis when assessing the financial performance of a firm, there is no substitute for good judgment. Financial Analysis - Using High Performance Ratios Page 9

11 The objective is to assess the overall financial condition of the firm - not just cite whether specific targets have been met. Many firms announce ambitious growth plans without adequately assessing their ability to generate the needed funds. A critical measure of initiating new strategies that require additional funding is to ensure that access to resources is in place. There are three sources of funds: internal (positive cash flow not profit), stock sales (equity), borrowing (debt). Rapid growth typically requires access to external funding the question is how much and is it available. Access to the financial markets is influenced by existing leverage levels (e.g., debt) for possible borrowing, and profitability measures such as ROE for selling stock. Below is a summary of the targets mentioned in this guide that you can use when no other comparisons are available. A table published every year in the Fortune 500 provides industry averages for most industries. Summary of Targets for Top Quartile Performers: Dupont Formula Net Profit Margin Targets: retail 5%+; manufacturing 8%+. Asset Turnover targets: 1.0X+ ROA target 8%+ Acceptable Leverage (Asset/Equity) 1.5x - 2.5x ROE targets: (for all industries) Negative = Unacceptable 0%-5% = Poor 5%-10% = Fair 10-15% = good (but not top quartile) 15-20% = very good 20-25% = excellent 25%+ = outstanding Liquidity Current Ratio 2.0x Quick Ration 1.0x Cash Ratio 15-20% TIE 5x+ Compound Growth Rates Assets 15%+ Revenues 15%+ Profits 15%+ Equity 15%+ EPS 15%+ Financial Analysis - Using High Performance Ratios Page 10

12 Figure 1 - Five Year Assessment Ratio Year Trend Ind Avg Interpretation PM Turnover ROA Leverage ROE CR QR Cash Ratio TIE Cpd Grwth Assets Sales Equity Earnings EPS

### MAN 4720 STRATEGIC MANAGEMENT AND POLICY FORMULATION FINANCIAL ANALYSIS GUIDE

MAN 4720 STRATEGIC MANAGEMENT AND POLICY FORMULATION FINANCIAL ANALYSIS GUIDE Revised -December 13, 2011 1 FINANCIAL ANALYSIS USING STRATEGIC PROFIT MODEL RATIOS Introduction Your policy course integrates

### HEALTHCARE FINANCE An Introduction to Accounting and Financial Management. Online Appendix A Financial Analysis Ratios

11/16/11 HEALTHCARE FINANCE An Introduction to Accounting and Financial Management Online Appendix A Financial Analysis Ratios INTRODUCTION In Chapter 17, we indicated that financial ratio analysis is

### Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios

### Financial Statement and Cash Flow Analysis

Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

### FI3300 Corporation Finance

Learning Objectives FI3300 Corporation Finance Spring Semester 2010 Dr. Isabel Tkatch Assistant Professor of Finance Explain the objectives of financial statement analysis and its benefits for creditors,

### Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

### Ratios from the Statement of Financial Position

For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends

### What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

### Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

### VOCABULARY INVESTING Student Worksheet

Vocabulary Worksheet Page 1 Name Period VOCABULARY INVESTING Student Worksheet PRIMARY VOCABULARY 1. Savings: 2. Investments: 3. Investing: 4. Risk: 5. Return: 6. Liquidity: 7. Stocks: 8. Bonds: 9. Mutual

### Course 1: Evaluating Financial Performance

Excellence in Financial Management Course 1: Evaluating Financial Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating

### TYPES OF FINANCIAL RATIOS

TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about

### Fundamental Analysis Ratios

Fundamental Analysis Ratios Fundamental analysis ratios are used to both measure the performance of a company relative to other companies in the same market sector and to value a company. There are three

### Financial Ratio Cheatsheet MyAccountingCourse.com PDF

Financial Ratio Cheatsheet MyAccountingCourse.com PDF Table of contents Liquidity Ratios Solvency Ratios Efficiency Ratios Profitability Ratios Market Prospect Ratios Coverage Ratios CPA Exam Ratios to

### Chapter 17: Financial Statement Analysis

FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose

### Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a \$40 stock that pays a annual cash dividend of \$2 a share (a 5% dividend yield) and signs up for the

### Balance Sheet. Financial Management Series #1 9/2009

Balance Sheet Prepared By: James N. Kurtz, Extension Educator Financial Management Series #1 9/2009 A complete set of financial statements for agriculture include: a Balance Sheet; an Income Statement;

### 1.1 Role and Responsibilities of Financial Managers

1 Financial Analysis 1.1 Role and Responsibilities of Financial Managers (1) Planning and Forecasting set up financial plans for their organisations in order to shape the company s future position (2)

### GCSE Business Studies. Ratios. For first teaching from September 2009 For first award in Summer 2011

GCSE Business Studies Ratios For first teaching from September 2009 For first award in Summer 2011 Ratios At the end of this unit students should be able to: Interpret and analyse final accounts and balance

### Chapter. How Well Am I Doing? Financial Statement Analysis

Chapter 17 How Well Am I Doing? Financial Statement Analysis 17-2 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain the need for and limitations of financial statement

### Discussion Board Articles Ratio Analysis

Excellence in Financial Management Discussion Board Articles Ratio Analysis Written by: Matt H. Evans, CPA, CMA, CFM All articles can be viewed on the internet at www.exinfm.com/board Ratio Analysis Cash

### Income Measurement and Profitability Analysis

PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

### Financial Ratios and Quality Indicators

Financial Ratios and Quality Indicators From U.S. Small Business Administration Online Women's Business Center If you monitor the ratios on a regular basis you'll gain insight into how effectively you

### Solutions to Chapter 4. Measuring Corporate Performance

Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Long-term debt ratio 0. 42 7,018 9,724 b. 4,794 7,018 6,178 Total debt ratio 0. 65 27,714 c. 2,566 Times interest earned 3. 75 685 d.

### Financial ratio analysis

Financial ratio analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder

### 140 SU 3: Profitability Analysis and Analytical Issues

140 SU 3: Profitability Analysis and Analytical Issues QUESTIONS 3.1 Profitability Ratios Questions 1 and 2 are based on the following information. The financial statements for Dividendosaurus, Inc., for

### Uses and Limitations of Ratio Analysis

Uses and Limitations of Ratio Analysis Balkrishna Parab ACS, AICWA balkrishnaparab@jbims.edu F inancial statement analysis involves comparing the firm s performance with that of other firms in the same

### Using Financial Ratios: Interested Parties

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

### Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 3 Interpreting Financial Ratios Concept Check 3.1 1. What are the different motivations that

### Referred to as the statement of financial position provides a snap shot of a company s assets, liabilities and equity at a particular point in time.

Glossary Aggressive investor Balance sheet Bear market Typically has a higher risk appetite. They are prepared or can afford to risk much more and for this they stand to reap the big rewards. Referred

### The Interpretation of Financial Statements. Why use ratio analysis. Limitations. Chapter 16

The Interpretation of Financial Statements Chapter 16 1 Luby & O Donoghue (2005) Why use ratio analysis Provides framework Comparison to previous years Trends identified Identify areas of concern Targets

### ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION OCTOBER 2006 Table of Contents 1. INTRODUCTION... 3 2. FINANCIAL RATIOS FOR COMPANIES (INDUSTRY - COMMERCE - SERVICES) 4 2.1 Profitability Ratios...4 2.2 Viability

### BUSINESS TOOLS. Understanding Financial Ratios and Benchmarks. Quick Definitions:

Understanding Financial Ratios and Benchmarks Historically, great production drove success in agricultural businesses. To maintain long-term success in today s volatile and highly competitive marketplace,

### Interpretation of Financial Statements

Interpretation of Financial Statements Author Noel O Brien, Formation 2 Accounting Framework Examiner. An important component of most introductory financial accounting programmes is the analysis and interpretation

### Chapter 3 Analysis of Financial Statements ANSWERS TO END-OF-CHAPTER QUESTIONS

Chapter 3 nalysis of Financial Statements NSWERS TO END-OF-CHPTER QUESTIONS 3-1 a. liquidity ratio is a ratio that shows the relationship of a firm s cash and other current assets to its current liabilities.

### Chapter 4 Analysis of Financial Statements ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 4 nalysis of Financial Statements NSWERS TO SELECTED END-OF-CHPTER QUESTIONS 4-1 a. liquidity ratio is a ratio that shows the relationship of a firm s cash and other current assets to its current

### THE FINANCIAL CRISIS: Is This a REPEAT OF THE 80 S FOR AGRICULTURE? Mike Boehlje and Chris Hurt, Department of Agricultural Economics

THE FINANCIAL CRISIS: Is This a REPEAT OF THE 80 S FOR AGRICULTURE? Mike Boehlje and Chris Hurt, Department of Agricultural Economics The current financial crisis in the capital markets combined with recession

### Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

### Creating a Successful Financial Plan

Creating a Successful Financial Plan Basic Financial Reports Balance Sheet - Estimates the firm s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner s Equity Income Statement

### Key Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 1-1. Chapter 3

Key Concepts and Skills Chapter 3 Working With Financial Statements Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know

### Preparing a Successful Financial Plan

Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

### 2. More important - provide a profile of firm s economic characteristics and competitive strategies.

RATIO ANALYSIS-OVERVIEW Ratios: 1. Provide a method of standardization 2. More important - provide a profile of firm s economic characteristics and competitive strategies. C Company Sales \$ 100,000 \$ 125,000

### Chapter Twenty-One. Statements. After completing this chapter, you should be able to: analysis, vertical analysis, and ratio analysis.

Chapter Twenty-One 21Analyzing Financial Statements After completing this chapter, you should be able to: 1 Explain the objectives of financial statement analysis. 2 Describe and use the following four

### Explanation of : Key Performance Indicators For

Explanation of : Key Performance Indicators For Contact: Andee Sellman Principal and CEO www.thefinancialfence.com www.onesherpa.com Introduction One of the ways to bring the numbers of a business into

### CHAPTER 4. FINANCIAL STATEMENTS

CHAPTER 4. FINANCIAL STATEMENTS Accounting standards require statements that show the financial position, earnings, cash flows, and investment (distribution) by (to) owners. These measurements are reported,

### Ratio Analysis CBDC, NB. Presented by ACSBE. February, 2008. Copyright 2007 ACSBE. All Rights Reserved.

Ratio Analysis CBDC, NB February, 2008 Presented by ACSBE Financial Analysis What is Financial Analysis? What Can Financial Ratios Tell? 7 Categories of Financial Ratios Significance of Using Ratios Industry

### Income Statement. (Explanation)

Income Statement (Explanation) Your AccountingCoach PRO membership includes lifetime access to all of our materials. Take a quick tour by visiting www.accountingcoach.com/quicktour. Introduction to Income

### a. A U.S. Treasury bill is an example of a money market transaction. b. Long-term corporate bonds are examples of capital market transactions.

1-1 A firm s intrinsic value is an estimate of a stock s true value based on accurate risk and return data. It can be estimated but not measured precisely. A stock s current price is its market price the

### Integrated Case. 4-25 D Leon Inc., Part II Financial Statement Analysis

Integrated Case 4-25 D Leon Inc., Part II Financial Statement Analysis Part I of this case, presented in Chapter 3, discussed the situation of D Leon Inc., a regional snack foods producer, after an expansion

### 32 Financial Statement Analysis

32 Financial Statement Analysis 1 32 Financial Statement Analysis Problems 1. GoodRed Corp. started operations at the beginning of Year 1. Given the pre-closing (but post adjustments) trial balance below,

### ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

CHAPTER 11 Creating a Successful Financial Plan The Importance of a Financial Plan Financial planning is essential to running a successful business and is not that difficult! Common mistake among business

### Gleim / Flesher CMA Review 15th Edition, 1st Printing Part 2 Updates Available December 2010

Page 1 of 3 Gleim / Flesher CMA Review 15th Edition, 1st Printing Part 2 Updates Available December 2010 NOTE: Text that should be deleted from the outline is displayed as struck through with a red background.

### FINANCIAL STATEMENTS AND RATIO ANALYSIS

In following we will be demonstrating the use of ratios to help examine the health of a firm. Ratios allow managers evaluate to a firm's financial statements in order to point out the strengths and weaknesses

### CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW

CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and

### Appendix. Selected Financial Ratios Useful in Analytical Procedures

Selected Financial Ratios Useful in Analytical Procedures < Appendix D A number of financial ratios are used by auditors as analytical procedures. These ratios are broken down into four categories: short-term

### Chapters 3 and 13 Financial Statement and Cash Flow Analysis

Chapters 3 and 13 Financial Statement and Cash Flow Analysis Balance Sheet Assets Cash Inventory Accounts Receivable Property Plant Equipment Total Assets Liabilities and Shareholder s Equity Accounts

### Financial Terms & Calculations

Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

### Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio =

1 Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = Cash / CL 98 / 540 =.18 times 2 Computing Leverage

### Financial Ratio Analysis A GUIDE TO USEFUL RATIOS FOR UNDERSTANDING YOUR SOCIAL ENTERPRISE S FINANCIAL PERFORMANCE

Financial Ratio Analysis A GUIDE TO USEFUL RATIOS FOR UNDERSTANDING YOUR SOCIAL ENTERPRISE S FINANCIAL PERFORMANCE December 2013 Acknowledgments This guide and supporting tools were developed by Julie

### HEALTHCARE FINANCE: AN INTRODUCTION TO ACCOUNTING AND FINANCIAL MANAGEMENT. Online Appendix A Financial Ratios

HEALTHCARE FINANCE: AN INTRODUCTION TO ACCOUNTING AND FINANCIAL MANAGEMENT Online Appendix A Financial Ratios INTRODUCTION In Chapter 17, we indicated that ratio analysis is a technique commonly used to

### Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

### Money Matters QUILT TRENDS - - - - - Benchmarks for Quilt Shops: Key Financial Ratios. By Laurie Harsh

Benchmarks for Quilt Shops: Key Financial Ratios By Laurie Harsh Laurie Harsh is the founder and president of The Fabric Shop Network, Inc. Since 1997, this growing trade organization has worked to support

### Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

### ABOUT FINANCIAL RATIO ANALYSIS

ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement

### CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS

CHAPTER 5. RATIO ANALYSIS, FINANCIAL PLANNING AND FINANCIAL ANALYSIS The financial statements discussed in Chapter 4 provide valuable information about a firm s financial and business health. Ratio analysis

### Financial Statement Analysis

Financial Statement Analysis 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 18, 2004 1 Financial Statement Analysis:

### performance of a company?

How to deal with questions on assessing the performance of a company? (Relevant to ATE Paper 7 Advanced Accounting) Dr. M H Ho This article provides guidance for candidates in dealing with examination

### Financial Analysis Project. Apple Inc.

MBA 606, Managerial Finance Spring 2008 Pfeiffer/Triangle Financial Analysis Project Apple Inc. Prepared by: Radoslav Petrov Course Instructor: Dr. Rosemary E. Minyard Submission Date: 5 May 2008 Petrov,

### Ratio Analysis CHAPTER LEARNING OVERVIEW. Ratio basics

Analysis basics Analysis compares one figure in one financial statement (say P&L account or Balance Sheet) with another figure in the same financial statement or in another financial statement of the company.

### FUNDAMENTALS OF HEALTHCARE FINANCE. Online Appendix B Financial Analysis Ratios

3/27/09 FUNDAMENTALS OF HEALTHCARE FINANCE Online Appendix B Financial Analysis Ratios Introduction In Chapter 13 of Fundamentals of Healthcare Finance, we indicated that financial ratio analysis is a

### Brief History of Square Pharmaceuticals & Liquidity Ratios

Brief History of Square Pharmaceuticals & Liquidity Ratios BRIEF HISTORY Square Pharmaceuticals Ltd. is a renowned company in Bangladesh. It is a flagship company in the pharmaceutical industry which has

### FINANCIAL ACCOUNTING TOPIC: FINANCIAL ANALYSIS

SYLLABUS Compulsory part Basic ratio analysis 1. State the general functions of accounting ratios. 2. Calculate and interpret the following ratios: a. working capital/current ratio, quick/liquid/acid test

### Nursery Financial Management: Basis for Decisions

AGRICULTURAL EXTENSION SERVICE THE UNIVERSITY OF TENNESSEE INSTITUTE OF AGRICULTURE AE02-52 Nursery Financial Management: Basis for Decisions Charles R. Hall Professor Agricultural Economics E12-4115-00-001-02

### FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

### RATIO ANALYSIS AND BUSINESS VIABILITY

RATIO ANALYSIS AND BUSINESS VIABILITY Timeframe: Learning Outcome: Recommended reading: Section overview 18 hours Apply ratio analysis in determining the viability of a business. Marx, J., de Swardt, C.,

### 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

### CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the company s financial situation over

### Shipping Companies Financial Performance Measurement using Industry Key Performance Indicators Case Study: The highly volatile period 2007-2010

Shipping Companies Financial Performance Measurement using Industry Key Performance Indicators Case Study: The highly volatile period 2007-2010 Maro Varvate Managing Director, OceanFinance Ltd Scope of

### For our curriculum in Grade 12 we are going to use ratios to analyse the information available in the Income statement and the Balance sheet.

SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: ANALYSIS AND INTERPRETATION-RATIOS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Analysing of financial statements and its purpose

### Calculating profitability indicators - profitability

Calculating profitability indicators - profitability Introduction When a business is deciding whether to grant credit to a potential customer, or whether to continue to grant credit terms to an existing

### Financial/Accounting Analysis Ratios Excel Calculator

User Guide Financial/Accounting Analysis Ratios Excel Calculator Dec 2008 Version 2 copyright 2008 Business Tools Templates Financial/Accounting Analysis Ratios Excel Calculator Financial Analysis Ratios

### Corporate Credit Analysis. Arnold Ziegel Mountain Mentors Associates

Corporate Credit Analysis Arnold Ziegel Mountain Mentors Associates I. Introduction The Goals and Nature of Credit Analysis II. Capital Structure and the Suppliers of Capital January, 2008 2008 Arnold

### CHAPTER 6. P.6.17 The following are the ratios relating to the activities of National Traders Ltd:

CHAPTER 6 Solved Problems P.6.17 The following are the ratios relating to the activities of National Traders Ltd: Debtors velocity (months) 3 Stock velocity (months) 8 Creditors velocity (months) 2 Gross

### The relationship of accounting ratios in balance sheets

The relationship of accounting ratios in balance sheets Accounting Ratios are the ratios show the relationship between accounting data in a balance sheet, profit and loss account in a particular organization.

### Creating a Successful Financial Plan

CHAPTER 11 Creating a Successful Financial Plan The Importance of a Financial Plan Financial planning is essential to running a successful business and is not that difficult! Common mistake among business

### Chapter 8 Is this a good business? How to measure company returns

Chapter 8 Is this a good business? How to measure company returns In the previous chapter, we learnt that profits and cash received (cash flow) are rarely the same value. We looked at free cash flow conversion

### FNCE 3010 (Durham). HW2 (Financial ratios)

FNCE 3010 (Durham). HW2 (Financial ratios) 1. What effect would the following actions have on a firms net working capital and current ratio (assume NWC is positive and current ratio is initially greater

Borrowing Money for Your Business After you have developed a cash flow analysis and determined when your business will make profit, you may decide you need additional funding. Borrowing money is one of

### HOW TO DETECT AND PREVENT FINANCIAL STATEMENT FRAUD (SECOND EDITION) (NO. 99-5401)

HOW TO DETECT AND PREVENT FINANCIAL STATEMENT FRAUD (SECOND EDITION) (NO. 99-5401) VI. INVESTIGATION TECHNIQUES FOR FRAUDULENT FINANCIAL STATEMENT ALLEGATIONS Financial Statement Analysis Financial statement

### How to Forecast Your Revenue and Sales A Step by Step Guide to Revenue and Sales Forecasting in a Small Business

How to Forecast Your Revenue and Sales A Step by Step Guide to Revenue and Sales Forecasting in a Small Business By BizMove Management Training Institute Other free books by BizMove that may interest you:

### http://edugen.wileyplus.com/edugen/courses/crs4479/weygandt715...

Page 1 of 8 Print this page FINANCIAL STATEMENTS STUDY OBJECTIVE 8 Understand the four financial statements and how they are prepared. Companies prepare four financial statements from the summarized accounting

### Financial analysis. Liquidity analysis Liquidity ratios are designed to measure a company's ability to cover its short term obligations.

Financial analysis Financial analysis is a service that allows evaluating company's liquidity, activity, capital structure and profitability indicators on the basis of information in the annual reports

### BUSINESS BUILDER 7 HOW TO ANALYZE PROFITABILITY

BUSINESS BUILDER 7 HOW TO ANALYZE PROFITABILITY zions business resource center 2 how to analyze profitability Although pride of ownership and career satisfaction are healthy goals, generating profit is

### Time Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam

Time Value of Money 2014 Level I Quantitative Methods IFT Notes for the CFA exam Contents 1. Introduction...2 2. Interest Rates: Interpretation...2 3. The Future Value of a Single Cash Flow...4 4. The

### LESSON 6 RATIO ANALYSIS CONTENTS

LESSON 6 RATIO ANALYSIS CONTENTS 6.0 Aims and Objectives 6.1 Introduction 6.2 Definition 6.3 How the Accounting Ratios are Expressed? 6.4 Purpose, Utility & Limitations of Ratio Analysis 6.5 Classification

### Learning Module 3 Journal Entries

Learning Module 3 Journal Entries The Accounting Equation Balance Sheet Income Statement = + + - Assets Liabilities Owners' Equity Revenue Expenses Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Recording journal