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"How Well Am I Doing?" Financial Statement Analysis: Mcgraw-Hill/Irwin
"How Well Am I Doing?" Financial Statement Analysis: Mcgraw-Hill/Irwin
"How Well Am I Doing?" Financial Statement Analysis: Mcgraw-Hill/Irwin
” Financial
Statement Analysis
Chapter 16
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Limitations of Financial Statement Analysis
16-2
Limitations of Financial Statement Analysis
Technological Economic
changes factors
16-3
Statements in Comparative and Common-
Size Form
An item on a financial
statement has little Common-size
meaning by itself. The statements
meaning of the numbers
can be enhanced by
drawing comparisons.
Ratios
16-4
Horizontal Analysis
The dollar
amounts for
2007 become
the “base” year
figures.
16-5
Horizontal Analysis
16-6
Trend Percentages
Trend percentages
state several years’
financial data in terms
of a base year, which
equals 100 percent.
16-7
Trend Analysis
16-8
Common-Size Statements
Vertical analysis focuses
on the relationships
among financial
statement items at a
given point in time. A
common-size financial
statement is a vertical
analysis in which each
financial statement item
is expressed as a
percentage.
16-9
Common-Size Statements
In income
statements, all
items usually
are expressed
as a percentage
of sales.
16-10
Gross Margin Percentage
16-11
Common-Size Statements
In balance
sheets, all items
usually are
expressed as a
percentage of
total assets.
16-12
Common-Size Statements
Wendy's McDonald's
(dollars in millions) Dollars Percentage Dollars Percentage
2007 Net income $ 88 3.60% $ 2,396 10.50%
16-13
Ratio Analysis – The Common Stockholder
NORTON CORPORATION
2008
Number of common shares
The ratios that outstanding
are of the most Beginning of year 17,000
End of year 27,400
interest to Net income $ 53,690
stockholders Stockholders' equity
include those Beginning of year 180,000
ratios that focus End of year 234,390
on net income, Dividends per share 2
16-14
Earnings Per Share
16-15
Earnings Per Share
16-16
Price-Earnings Ratio
Price-Earnings $20.00
= = 8.26 times
Ratio $2.42
16-17
Dividend Payout Ratio
Dividend $2.00
= = 82.6%
Payout Ratio $2.42
16-18
Dividend Yield Ratio
Dividend $2.00
= = 10.00%
Yield Ratio $20.00
16-19
Return on Total Assets
16-20
Return on Common Stockholders’ Equity
16-21
Financial Leverage
Financial leverage results from the difference
between the rate of return the company earns on
investments in its own assets and the rate of return
that the company must pay its creditors.
Fixed rate of
Return on return on Positive
investment in > borrowed = financial
assets funds leverage
16-22
Book Value Per Share
16-23
Book Value Per Share
16-24
Ratio Analysis – The Short–Term Creditor
NORTON CORPORATION
Short-term 2008
creditors, such as Cash $ 30,000
suppliers, want to Accounts receivable, net
16-25
Working Capital
16-26
Working Capital
December 31,
2008
Current assets $ 65,000
Current liabilities (42,000)
Working capital $ 23,000
16-27
Current Ratio
16-28
Current Ratio
Current $65,000
= = 1.55
Ratio $42,000
16-29
Acid-Test (Quick) Ratio
Acid-Test $50,000
= = 1.19
Ratio $42,000
16-30
Accounts Receivable Turnover
Accounts
Sales on Account
Receivable =
Average Accounts Receivable
Turnover
Accounts
$494,000
Receivable = = 26.7 times
($17,000 + $20,000) ÷ 2
Turnover
16-31
Average Collection Period
Average
365 Days
Collection = = 13.67 days
26.7 Times
Period
16-32
Inventory Turnover
If a company’s inventory
turnover Is less than its
industry average, it either
has excessive inventory or
the wrong types of inventory.
16-33
Inventory Turnover
Inventory $140,000
= = 12.73 times
Turnover ($10,000 + $12,000) ÷ 2
16-34
Average Sale Period
16-35
Ratio Analysis – The Long–Term Creditor
NORTON CORPORATION
2008
Earnings before interest
expense and income taxes $ 84,000
Interest expense 7,300
income.
16-36
Times Interest Earned Ratio
Earnings before Interest Expense
Times and Income Taxes
Interest = Interest Expense
Earned
Times
$84,000
Interest = = 11.51 times
$7,300
Earned
This is the most common
measure of a company’s ability
to provide protection for its long-
term creditors. A ratio of less
than 1.0 is inadequate.
16-37
Debt-to-Equity Ratio
Debt–to–
Total Liabilities
Equity =
Stockholders’ Equity
Ratio
16-38
Debt-to-Equity Ratio
Debt–to–
Total Liabilities
Equity =
Stockholders’ Equity
Ratio
Debt–to–
$112,000
Equity = = 0.48
$234,390
Ratio
16-39
Published Sources That Provide
Comparative Ratio Data
16-40
End of Chapter 16
16-41