Financial Analysis

Chapter 4

Ms. Nica Mae Padilla, MBA

 Analysis of Financial
Information

One final step in understanding business

finance is the analysis of financial
information. The prerequisite to this analysis
is knowing and understanding available
information and drawing logical conclusions.

Information must be Information must be Information

understood by the organized. measurement.
user.
The data can never be Before analysis can be Once we have understood and
analyze unless it is fully made, information must be reorganized the financial data needed,
understood. sorted out. then measurement can be done using
applied common sense and analysis by
means of financial ratios
 Managerial and
Financial Accounting Financial Accounting

Internal users may require different types of data

Accounting and reports generated by the accounting staff or
- the process of collecting, reporting, and analyzing the firm’s accountant.
the costs associated with operating a business.

External
Managerial Accounting

The information provided in the accounting

reports, will be a major financial management tool
to use in order to make future decisions.

For tax liability purposes For annual reporting

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The Basic Financial Statements
1. Balance Sheet
That presents all the assets of, and claims against, or
the liabilities and equity, of the firm at a particular Liabilities + Owners’ Equity
period of time.
2. Income Statement

Measures the profit or loss that an organization has

made over a set of period of time, quarterly or a year. Revenue - Expense
The bottom line of the statement is either a net
income or net loss.
3. Cash Flow Statement
The overview of the company’s financial health. Describes the sources and uses of cash

4. Statement of Changes in financial condition

Also known as the statement of owners’ equity or Effect of operations and financing
statement of stockholders’ equity. decisions to the change in owners’ equity.

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The balance sheet as summary of all the amounts and kinds of assets that the
firm’s possesses, as well as the claims made against those assets by investors and
creditors, including the following accounts concepts
• The total of the firm’s assets must equal the total value of
the claims against the firm.
• Current assets is the one that can be converted into cash
in normal operation of the firm within one year.
• Fixed assets are permanent assets that will not normally
be converted into cash. On the balance sheet, fixed assets
are shown at historical cost, which is the amount actually
paid for the asset.
• Market value the asset is the price the asset could
command in the market, and the replacement cost is the
price that would be required to replace the asset if it had to
be acquired today.
• The value of assets shown on the financial reports and the
books of the company, the book value, may differ from the
market value of the assets. Assets that have become
obsolete typically have market values below their book
values, while the opposite condition holds for assets, such
as land, that have appreciated in value.
• Current liabilities are those that the firm reasonably
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expects to pay within the next year.
• Accounts payable are obligations that the firm has
for goods it has received from others.
• Notes payables are short-term debt that the firm
must pay off within the next year.
• Accruals are debts the firm owes because payment
has not yet been made, such as salaries owed to
employees.
• Taxes payable are taxes that are owned, but that
have not yet been paid.
• Long-term liabilities are continuing obligations that
will not be completely repaid during the next year,
such as long-term debt and long-term leases.
• The common stock account reflects capital that
were contributed by the equity holders of the firm.
• The retained earnings account shows the amount of
earning the firm has accumulated since its
inception. Retained earnings are net income that
the firm has not paid out in dividends to its
shareholders.
“ Income Statement
Presents the record of the firm’s sales and
expenses over a particular period, identifying the
income derived from its operations, and all of the
charges incurred to generate the income, include
the following accounts concepts:
• cost-of-goods sold
• Earnings before tax
• Earnings after tax or net income
• Accrual method
• Cashflow
Sources and uses of funds:

a. Sources of Funds
o Increase in a liability account
o Increase in a net worth account
o Decrease in an asset account

b. Uses of funds
o Decrease in a liability account
o Decrease in a net worth account
o Increase in an asset account

Working capital
Networking capital
Major Corporate Cash flow

SALES CAPITAL INVESTED BY

STOCKHOLDERS

DEBT FUNDS RAISED

FROM CREDITORS
VERTICAL AND HORIZONTAL ANALYSIS OF
FINANCIAL STATEMENTS

VERTICAL ANALYSIS RATIO ANALYSIS

Process of analyzing the entries on a financial Describes the situation that exists.
statement, in relation to the industry standard
HORIZONTAL ANALYSIS

Allows us to analyze changes overtime but in order to

do, needing two periods of data.

Value in new time period – value in old time period

X 100 = change
Value in old time period
Financial Ratios

Primary Ratio
Secondary Ratios
Tertiary Ratios
Financial Status Ratios
- Liquidity ratios
- Stock turnover
- Collection
- Payment ratio

Solvency Ratios
Investment Ratios
COMMONLY CALCULATED RATIOS

Liquidity Ratios
current assets
Current ratio =
current liabilities

Quick ratio
current assets - inventory
Quick ratio =
current liabilities
 ACTIVITY RATIOS

Inventory turnover

sales
Inventory turnover =
average inventory

inventory
Days of sales in inventory =
sales per day
LEVERAGE RATIOS

Debt equity ratio

debt
Debt to equity ratio =
equity
PROFITABILITY RATIOS

Gross profit margin

Revenues – cost of goods sold
Gross profit margin =
sales
MARKET VALUES

BOOK VALUE
Basis for fairly determining the worth of the assets in relation to a holder’s
share, upon liquidation of the firm

Total assets
Book Value =
number of shares outstanding
Earnings per share

Net income-preferred dividends

Earnings per share =
Number of shares outstanding

Market price of the stock

Price-earnings ratio =

Earnings per share

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