FINANCIAL ANALYSIS

-a process of selecting, evaluating, and interpreting financial data, along with other pertinent information, in
order to formulate an assessment of a company’s present and future financial condition and performance.
-After the accounting process, - recording, classify, summarize - output is the financial statements
Interpreting:

Financial Statement Analysis <3

-2 ways to analyze financial statements
1. Horizontal analysis - compare from this year from past years
2. Vertical analysis – line analysis. Total asset ilan yung current at non-current asset

RATIO ANALYSIS
Financial ratios
Ratios were developed to standardize a company’s results. They allow analyst to quickly look through a
company’s financial statements and identify trends and anomalies.
Ratio analysis is a method of financial evaluation whereby certain relationships between various financial
statement items are highlighted by computing certain ratios and evaluating them in relation to other
information about the company, the industry and the economy.
LIQUIDITY RATIOS
- Measurements of the ability to pay obligations when they fall due.
o Current ratio – is a measure of the ability of a firm to meet its short-term obligations

Current ratio = Current asset/current liability

 Too small a ratio indicates that there is some potential difficulty in covering
obligations
 A high ratio indicate that the firm has too many assets tied up in current assets
and is not making efficient use to them.
 Benchymark: At least 2:1 and should not be above 4 (2:3 is okay and accepted.

o Quick ratio - the quick (or acid-test) ratio is a more stringent measure of liquidity. Only liquid
assets are taken into account. Inventory and other assets are excluded, as they may be difficult
to dispose of. (Excluedde: invesntories and prepaid expenses)
 *Quick assets include all current assets except inventories and prepaid expenses.
 Quick ratio = Quick Assets/Current Liabilities
  Ilang portion ang pwedeng ipamnayad sa

o Working capital ratio – the evaluation of short-term solvency centers on working capital.
Working capital is the excess of current assets over current liabilities. Current assets are
sometimes referred to as working capital or assets used in the normal operations of the
business. In this case, the excess is called net working capital. If current liabilities exceed
current assets, the difference is referred to as working capital deficit.
 Working capital ratio= Current Asset-current Liability
PROFABILITY RATIOS
-measurements of degree of success (or failure of profit directed activities of firm. Indicate how well the
business operated during the period.
- Gross profit Margin - amount of gross profit generated per peso of sales.
Gross profit Margin = gross profit/ net sales
Benchmark: Industry Average

- Net Profit Margin – amount of after tax profit per peso per sale

Gross profit margin = net profit/ net sales

Benchmark: Industry average

Sales
Less: sales return and allowances
Net sales
Less: cost of goods sold/cost of sales
Gross profit
Less: Operating expenses
EBIT
Less: Interest
Less: taxes
Net profit

- Return on Investment- this is a measure of management’s overall performance in generating profit

o Return on Investment = Net income/Ave. total Assets
- Return on equity – return on equity on stock holder’s investment in the firm; measure of management
performance in generating profit for the owners.
o Return on equity = Net income/ Ave. Equity
ACTIVITY RATIOS
Measurements of the effectiveness of asset used.
 Receivables Turnover ratio –This ratio provides an indicator of the effectiveness of a company’s credit
policy.
o The high receivable turnover will indicate that the company collects its dues fro its customers
quickly. If this ratio is too high compared to the industry, this may indicate that the company
does not offer its clients a long enough credit a facility, and as a result may be losing sales.
o A decreasing receive-turnover ratio may indicate that the company is having difficulties
collecting cash from customers, and may be a sign that sales are perhaps overstated.
o Receivable turnover = Net annual Sales/ Ave. Receivables
 Where:
 Ave. receivables = (previously reported account receivables + current
account receivables)/2
 Average Collection Period – Average number sof days Receivables outstanding (Ave. Collection
Period) –this ratio provides the same information as receivables turnover that it indicates it as
receivable turnover except that it indicates it as number of days.
o Ave. Collection period = 365 days/Receivables turnover
 Inventory Turnover Ratio – this ratio provides an indication of how efficiently the company’s
inventory is utilized by management.
o A high inventory ratio is an indicator that the company sells its inventory rapidly and that the
inventory does not languish, which may seem there is less risk that the inventory reported has
decreased in value.
o Too high ratio could indicate a level of inventory that is too low, perhaps resulting in frequent
shortages of stock and the potential of losing customers. It could also indicate inadequate
production levels for meeting customer demand. (mabilis maubos yung mga inventory at baka
kulang iyon)
o Mababa yung turn-over – hindi mo nabebenta yung goods mo.
o Inventory turnover = cogs/ ave. inventory
 Ave. Number of days in Stock (Number of days’ sales in inventory)
o This ratio provides the same information as inventory turnover except that it indicates it as
number of days.
o This refers to the average number of days from the time inventory is acquired to the time
inventory is sold.
o Ave. number of days in stock = 365/ inventory turnover
 Payable Turnover Ratio – this ratio will indicate how much credit the company uses from its
suppliers. Note that this ratio is very useful in credit checks of firms applying for credit. Payable
turnover that is too small may negatively affect a company’s credit rating.
o Payable Turnover = Annual Purchases/ Average payables
 Ave. number of days Payables outstanding (Ave. Age of Payables)
o This ratio provides the same information as payable turnover except that it indicates it by
number of days.
o Ave. number of days payables outstanding = 365/payable turnover
 Total Asset turnover - this ratio measures a company’s ability to generate sales given its investment in
total assets. A ratio of 3 will mean that for every peso invested in total assets, the company will
 generate 3 peso in revenue. Capital-intensive businesses will have a lower total asset turnover than
non-capital-intensive businesses.
o Total asset turnover = net sales/ ave. total assets
 Fixed-Asset turnover – this ratio is similar to total asset turnover; the difference is that only fixed
assets are taken into account.
o Fixed-asset turnover = net sales/ ave. net fixed assets
DEBT RATIO
 Debt to Asset – extent to which funds are provided by creditors.
o Debt to asset = total liab/ total asset
 Lont-term Debt to equity – Extent to which funds are provided on a long term basis by creditors versus
owners.
o Long-term debt to Equity = long-term debt/ total equity
MARKET RATIOS
 Earnings per share – net income available to each share of stocks
o Earnings per share = net income less preference dividends/ ave. ordinary shares
outstanding
 Dividend payout – percentage of net earnings paid out to common stockholders.
o Dividend payout = dividends per share/ earnings per share
 Dividend Yield - the rate earned by shareholders from dividends relative to current price of stock.
o Dividend yield = annual dividends per share / market value per share (current
value of share)
 Price/earnings ratio
o Measure relationship between price of ordinary shares in the open market and profit earned on
a per share basis.
o Price/earnings ratio = Market value per share / earnings per share
 Book Value per share - indicates amount per common share available to stockholders if the firm’s
assets are sold and liabilities are paid of.
o Book Value per share = ordinary shareholders’ equity/ ordinary shares
outstanding-