Chapter 5: Financial Statement Analysis

Financial Statement ratios

 express the relationship among specific financial statement data.

Financial Ratios
 composed of a numerator and a denominator. It expresses the relationship between specific
financial statement data. The resulting ration may be interpreted as a percentage, a rate or a
proportion.

Profitability Ratios
 measures the ability of the company to control costs and generate income from the use of its
assets and invested capital.

a) Gross Profit margin

 measures the peso value of the gross profit earned for every peso of sales.
b) Operating Profit margin
 expresses operating income as a percentage of sales
c) Net Profit Margin
 measures the peso value of net income earned for every peso of sales
d) Return on Assets
 measures the profitability of the company’s assets
e) Return on Equity
 measures the return generated by the capital invested by the owner in the business

Name of Ratios Formula 2015 DC Trades Ratio

Gross Profit
Gross Profit Margin
Net Sales
4,011.07
5,385.86
Net Sales – Cost of Goods Sold
Gross Profit Rate
Net Sales
Operating Income Operating Income 604.61
Margin Net Sales 5,385.86
Net Income 592.79
Net Profit Margin
Net sales 5,385.86
Net Income 592.79
Return on Assets
Average Assets 8,352.96
Net Income 592.79
Return on Equity
Average Equity 6,594.99
Asset Management Ratio/Operational Efficiency

 measured based on the company’s ability to generate sales from its utilization of assets, as a
whole or individually.

a) Assets Turnover Ratio

 an indicator of the efficiency with which the company is utilizing all of its assets
b) Fixed Assets Turnover
 measures the efficiency of fixed assets to generate sales
c) Inventory Turnover
 an indicator of how fast the company can sell its inventory
d) Days in Inventory
 computes the average number of days an item stays in the company’s inventory
until it is sold
e) Accounts Receivable Turnover
 measures the number of times the company can convert accounts receivable to
cash during the year.
f) Days in Accounts Receivable
 computes for the average collection period of accounts receivable.

Ratio Formula 2015 DC Trades Ratio

Asset Turnover Net sales 5,385.86
Average assets 8,352.92
Fixed Asset Turnover Net Sales 5,385.86
Average Fixed Asset 5,706.10
Inventory Turnover Cost of Goods Sold 1,374.79
Average Inventory 604.27
Days in Inventory 365 365
Average Accounts Receivable 2.28
Accounts Receivable Net Sales 5,385.86
Turnover Average Accounts Receivable 612.64
Days in Accounts Receivable 365 365
Average Collection Period Accounts Receivable Turnover 8.79
Debt Management Ratio/Financial Health

Solvency
 refers to the company’s capacity to pay their long term liabilities

Liquidity ratio
 measures the company’s ability to pay short-term debts

a) Debt to Equity Ratio

 indicates the company’s reliance to debt as a source of financing relative to equity
b) Debt Ratio
 indicates the company’s assets that are financed by debt
c) Interest Coverage Ratio
 measures the company’s ability to cover the interest expense on its liability with its
operating income
d) Current Ratio
 measures the sufficiency of current assets to cover current liabilities
e) Quick Ratio
 measures the sufficiency of quick assets to cover current liabilities

Name of Ratio Formula 2015 DC Trades Ratio

SOLVENCY RATIOS
Debt to Equity Ratio Total Debt 1,850.63
Equity 6,762.32
Debt Ratio Total Debt 1,850.62
Total Asset 8,612.95
Interest Coverage Ratio Operating Income 604.61
Interest Expense 11.82
LIQUIDITY RATIOS
Current Ratio Current Assets 1,957.22
Current Liabilities 1,273.05
Quick Ratio Quick Assets 1,130.42
Current Liabilities 1,273.05
Some of the uses of Financial Ratios:

 Benchmarking refers to comparing the company’s growth performance, common-size financial

statements and financial ratios against industry average, another company, its historical
performance and stablished forecast or targets.
 Results of financial analysis can also be used for preparing forecasted financial statements

Some Limitations of Financial Statement Analysis

 Historical performance may provide an indication but will not ensure future performance
 A good financial analysis will be worthless if the financial statements are erroneous and
fraudulent
 Financial statements of companies may not be directly comparable if there are differences in
the accounting treatment of like transactions.
 Financial analysis deals only with quantitative data.
 Management can take short-run actions to influence ratios.
 Different companies may use different accounting principles though they came from the same
industry.
 Different formulas can be used in computing financial ratios