CLDH-EI

MONEY MATTERS IN

BUSINESS
ENTREPRENEURIAL MIND
 Meet our Team

CUARESMA, Thea Alexis R

RAMOS, Gessa May A. FELICITAS, Blessa Mae Joy F.

IBAÑEZ, Alma U.
 Requirements for
Conducting Financial
Analysis
A financial analysis helps business owners determine their
company's performance, sustainability, and growth by reviewing
various financial statements like their income statement, balance
sheet, and cash flow statement.
 The Framework of a
Financial Analysis
1. INCOME STATEMENT

An income statement reports the company's financial performance over

a given period of time and showcases a business's profitability. It can be
used to predict future performance and assess the capability of future
cash flow. You might also hear people refer to this as the profit and loss
statement (P&L), statement of operations, or statement of earnings.
 The Framework of a Financial Analysis
Important analysis ratios to compute when reviewing your income
statement:

GROSS PROFIT MARGIN is the percentage of revenue remaining after deducting your cost of goods
sold. This is calculated by dividing gross profit by revenue from sales.

Gross Profit Margin = Gross Profit ÷ Revenue from Sales

OPERATING PROFIT MARGIN indicates the amount of revenue left after COGS and operating
expenses are considered. The formula for calculating operating margin is operating earnings divided
by revenue.

Operating Profit Margin = Operating Earnings ÷ Revenue

The Framework of a Financial Analysis
Important analysis ratios to compute when reviewing your income
statement:
NET PROFIT MARGIN is the percentage of revenue after all expenses have been
deducted from sales, and it indicates how much profit a business can make from its
total sales. Net profit divided by revenue gives you the net profit margin.

Net Profit Margin = Net Profit ÷ Revenue

REVENUE GROWTH is the percentage of growth during a given time period. To

calculate this, subtract last period's revenue from the revenue this period, and then
divide by last period's revenue.

Revenue Growth (%) = (Revenue from Current Period - Revenue from Previous
Period)÷Revenue from Previous Period.
The Framework of a Financial Analysis
Important analysis ratios to compute when reviewing your income
statement:

REVENUE CONCENTRATION tells you which clients are generating the most revenue.
Take the revenue from a single client divided by total revenue. To mitigate risk, a single
client shouldn't generate the bulk of your revenue.

Revenue Concentration (%)= Revenue from one client ÷ Total Revenue

REVENUE PER EMPLOYEE can measure business productivity and determine the
optimal amount of employees you need. Take your revenue divided by the number of
employees to gauge how much revenue a single employee is bringing in.

Revenue per Employee= Revenue ÷ Number of Employees

The Framework of a Financial Analysis
2. BALANCE SHEET

A balance sheet reports the company's assets, liabilities, and

shareholder equity at a specific point in time. In every balance sheet,
assets must equal the total of your liabilities and equity, meaning the
dollar amount must zero out.

Assets = (Liabilities + Equity)

Your balance sheet can help you determine how efficiently you're
generating revenue and how quickly you're selling inventory.
The Framework of a Financial Analysis
Threee types of ratios that can be computed from your balance sheet:

LIQUIDITY RATIOS are portions of the company's assets and current liabilities. They
are used to measure a business's ability to pay short-term debts. A few liquidity ratios
include:

CURRENT RATIO measures the ability to cover short-term liabilities with a business's
current assets. A value of less than one means your business doesn't have sufficient
liquid resources. Current Ratio = Current Assets Current Liabilities

QUICK RATIO refines current ratio by measuring the level of the most liquid current
assets available to cover liabilities.

Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable)÷

current Liabilities
The Framework of a Financial Analysis
INTEREST COVERAGE measures the ability to pay interest expense from the cash you
generate. A value less than 1.5 usually concerns lenders.

NET WORKING CAPITAL is the aggregate amount of all your current assets and
liabilities and is calculated by subtracting current liabilities from current assets.

Net Working Capital = Current Assets - Current Liabilities

LEVERAGE RATIOS look at how much capital comes in the form of a debt (or loan). Too
much debt can be dangerous for a business and turn off investors.
 The Framework of a Financial Analysis
Leverage ratios you can use include:

DEBT TO EQUITY measures the proportion of shareholder equity and debt used to finance a
business's assets. High debt to equity indicates that a company might not be generating
enough cash for its debt obligations. It's calculated by dividing total liabilities by shareholder
equity.

Debt to Equity Ratio = Total Liabilities ÷ Shareholder Equity

DEBT TO CAPITAL assesses the ratio of all short-term and long-term debts against total capital.
To calculate this, take the company's debt divided by its total capital.

Debt to Capital Ratio = Company's Debt ÷ Total Capital

The Framework of a Financial Analysis
Leverage ratios you can use include:

DEBT TO EBITDA (earnings before taxes, interest, depreciation, and amortization) is used to
determine a business's ability to pay debt. Debts include both short-term and longer-term
debts. The EBITDA is the company's total earnings before interest, taxes, and depreciation.
Calculate this by taking your business's interest- bearing liabilities minus cash equivalents,
divided by EBITDA.

Debt to EBITDA Ratio = (Interest-Bearing Liabilities - Cash Equivalents) ÷ EBITDA

 The Framework of a Financial Analysis
Interest coverage showcases the ability of a business to pay its interest expenses on an
outstanding debt. A higher ratio indicates better financial health since it shows the business is
able to meet interest obligations from operating earnings. Calculate this ratio by dividing
earnings before interest and taxes (EBIT) by your business's interest expenses for the same
period.

Interest Coverage = EBIT ÷ Interest Expenses

FIXED CHARGE COVERAGE measures a business's ability to meet its fixed-charge obligations,
which could be fixed costs like insurance, salaries, auto loans, utilities, property taxes, or
mortgages. Calculate it by taking (earnings before interest, depreciation, and amortization
minus unfunded capital expenditures and distributions) divided by total debt service (annual
principal and interest payments).

Fixed Charge Coverage = ([Earnings Before Interest + Depreciation + Amortization] - Unfunded

Capital Expenditures and Distributions) ÷ Total Debt Service.
 The Framework of a Financial Analysis
EFFICIENCY RATIOS measure a company's ability to use its assets and manage liabilities to
generate income. An efficiency ratio can help determine the following:

INVENTORY TURNOVER measures how many times a business sold its total inventory over the
past year, in dollar amount. A high ratio implies strong sales while a low turnover ratio implies
weak sales and excess inventory. Take your cost of goods sold divided by average inventory to
determine your turnover.

Inventory Turnover COGS ÷ Average Inventory

ACCOUNT RECEIVABLE DAYS measures how efficiently a firm uses assets and is calculated by
dividing the net value of credit sales by the average accounts receivable.

Account Receivable Days = Net Value of Credit Sales ÷ Average Accounts Receivable
The Framework of a Financial Analysis
TOTAL ASSET TURNOVER showcases the business's ability to generate sales from its assets.
You can determine this by dividing the net sales by the average total assets.

Total Asset Turnover = Net Sales ÷ Average Total Assets

NET ASSET TURNOVER compares the value of a business' sales relative to the value of its
assets. Calculate your net asset turnover by taking your sales divided by your average total
assets

Net Asset Turnover = Sales ÷ Average Total Assets

The Framework of a Financial Analysis
3. CASH FLOW STATEMENT
A cash flow statement reports the amount of cash generated during a given period of time. It's
intended to provide information on a business's current liquidity and solvency as well as its ability to
change cash flows in the future.

The three main components of a cash flow statement are:

CASH FROM OPERATIONS refers to all cash flows regarding business operations. Operating activities
can include production, sales, delivery of a business's product, and payments from customers. It can
also include purchasing materials, inventory costs, advertising, and shipping.

CASH FROM INVESTING arises from actions where money is being put into something with the
expectation of a gain over a long period of time.

CASH FROM FINANCING results from borrowing, repaying, or raising money for the business.

These three sections highlight a company's sources of cash and how that cash is being used. Many
investors consider the cash flow statement to be the most important indicator of a business's
performance.
The Framework of a Financial Analysis
There are a variety of ratios you can pull in your cash flow statement. Here are a few to help
you start measuring the quality of your cash flow and create a cash flow analysis:

Operating cash flow to net sales tells you how many dollars in cash are generated for dollars of
sales. It's a percentage of a business's operating cash flow to its net sales from the income
statement.
Operating Cash Flow to Net Sales (%) = Operating Cash Flow ÷ Net Sales

Free cash flow measures how efficient a company is at generating cash. To calculate free cash
flow, find the net cash from operating activities and subtract capital expenditures required for
current operations.
Free Cash Flow = Cash from Operating Activities - Capital

Expenditures for Current Operations This is a general overview of what goes into a financial
analysis. If you want to put together one for your business, don't hesitate to contact a
professional to get their advice and expertise.
 FINANCIAL
RATIO ANALYSIS
Financial Ratio Analysis

Financial ratio analysis is the

technique of comparing the
relationship (or ratio) between
two or more items of financial
data from a company’s financial
statements.
Financial ratio analysis
and interpretation
Financial ratio analysis is generally used in six main
areas. These are:
liquidity
coverage
solvency
profitability
efficiency
market prospects
An overview of key
financial ratio analysis
Liquidity
Liquidity analysis is used to analyses a company’s abilities to meet its immediate debt
obligations out of its current assets. The two key financial ratios used to analyses liquidity
are:

Current ratio = current assets divided by current

liabilities
Quick ratio = (current assets minus inventory) divided
by current liabilities

The current ratio is also known as the working capital

ratio and the quick ratio is also known as the acid test
ratio.
Coverage
Coverage analysis is used to analyze a company’s ability to pay interest, fees and
charges on its debts but not the underlying capital obligations. The two key financial
ratios used to analyze solvency are:

Times-interest-earned ratio = earnings before

interest and taxes divided by interest expense
Debt-service-coverage ratio = net operating
income divided by total debt service charges
Solvency
Solvency analysis is used to analyze a company’s ability to pay off all the debt it
currently holds with its income, assets and divided by or equity. The two key financial
ratios used to analyze solvency are:

Total - debt ratio = total liabilities divided by

total assets
Debt-to-equity ratio = total liabilities divided
by (total assets minus total liabilities)
Profitability
Profitability analysis is used to analyze a company’s ability to make money from its
goods and divided by or services. The four key financial ratios used to analyze
profitability are:

Net profit margin = net income divided by sales

Return on total assets = net income divided by
assets
Basic earning power = EBIT divided by total
assets
Return on equity = net income divided by
common equity
Efficiency
Efficiency analysis is used to analyze how hard a business is working its assets on
behalf of its owners. The four key financial ratios used to analyze efficiency are:

Inventory-turnover ratio = sales divided by

inventory
Days-sales outstanding = accounts receivable
divided by average sales per day
Fixed-assets-turnover ratio = sales divided by
net fixed assets
Total-assets-turnover ratio = sales divided by
total assets
Market prospects
Market prospects analysis is generally only
undertaken for publicly traded companies. It is
generally used to determine the likely prospects
of different investment options. There are
numerous financial ratios used to calculate
market prospects. Key ones include:
Price-earnings ratio = stock price per share
divided by earnings per share
Price-cash-flow ratio = stock price divided by
cash flow per share
Market-book ratio = stock price divided by book
value per share
Dividend yield = dividend divided by share price
Earnings-per-share = profit divided by number
of outstanding shares
Dividend-payout ratio = dividend per share
divided by earnings per share or dividends
divided by net income
Limitations of financial
ratio analysis

Financial ratio analysis is quantitative rather than

qualitative. It, therefore, does not address certain
factors which can play a huge role in determining
a company’s prospects.