ANALYSIS

OF
FINANCIAL
STATEMEN
TS
 Financial Statement Analysis
-Is the process of extracting information from financial
statements to better understand a company’s current
and future performance and financial condition.
Analyzing the broader business environment
• Life cycle
• Outputs
• Buyers
• Inputs
• Competition
• Financing
• Labor
• Governance
• Risk
 BASICS OF PROFITABILITY ANALYSIS

Financial Analysis involves:

 Comparing the firm’s performance to that
of other firms in the same industry, and
 Evaluating trends in the firm’s financial
position over time.
Limitations of Financial Statement Analysis
1. Information derived by the analysis are not
absolute measures of performance in any and all
of the areas of business operations.
2. Limitations inherent in the accounting data the
analyst works with.
3. Limitations of the performance measures or tools
and techniques used in the analysis.
4. Analyst should be alert to potential for
management to influence the outcome of financial
statements in order to appeal to creditors,
investors and others.
Financial Ratio Analysis
Financial ratio is a comparison in fraction,
proportion, decimal or percentage of two
significant figures taken from financial
statements.
Financial Ratio Analysis
The ratio can be categorized as follows:
1. Liquidity ratios.
2. Asset management ratios
3. Debt management ratios
4. Profitability
5. Market book ratios
 EBC Enterprises, Inc.
Statement of Financial Position at December 31, 2011 and 2010
(in thousands)

Assets 2011 2010

Current Assets
Cash P2,030.5P1,191.0
Marketable securities 2,636.0 4,002.0
Accounts receivable 4,704.0 4,383.5
Allow. for doubtful accounts (224.0) (208.5)
Inventories 23,520.5 18,384.5
Prepaid expenses 256.0 379.5
Total current assets P32,923.0 P28,132.0
Property, Plant and Equipment
Land 405.5 405.5
Bldg. and leasehold improvements 9,136.5 5,964.0
Equipment 10,761.5 6,884.0
20,303.5 13,253.5
Less: Accum. Dep’n and Amor. (5,764.0)(3,765.0)
Net property, plant and equip. 14,539.5 9,488.5
Other assets 186.5 334.0
Total assets P47,649.0 P37,954.5
 EBC Enterprises, Inc.
Statement of Financial Position at December 31, 2011 and 2010
(in thousands)

Liabilities and Equity 2011 2010

Current Liabilities
Accounts payable P7,147.0P3,795.5
Notes payable-banks 2,807.0 3,006.0
Current maturities of long-term debt 942.0 758.0
Accrued Liabilities 2,834.5 2,656.5
Total current liabilities P13,730.5 P10,216.0
Deferred Income Taxes 421.5 317.5
Long-term Debt 10,529.5 8,487.5
Total Liabilities 24,681.5 19,021.0
Equity
Ordinary shares P 2,401.5 P 2,297.0
Additional paid-in capital 478.5 455.0
Retained Earnings 20,087.5 16,181.5
Total Equity 22,967.5 18,933.5

Total Liabilities and Equity P47,649.0 P37,954.5

I. Analysis of Liquidity or Short-Term Solvency
CURRENT RATIO
Formula: Current Asset
Current Liabilities

2011: 32,923.0 = 2.40x

13,730.5

2010: 28,132 = 2.75x

10,216
I. Analysis of Liquidity or Short-Term Solvency
Quick or Acid test ratio
Formula: Quick Assets
Current Liabilities

2011: (2,030.5+2,636.0+4,704.0-224.0) = 0.67x

13,730.5

2010: (1,191.0+4,002+4,383.5-208.5) = 0.92x

10,216
I. Analysis of Liquidity or Short-Term Solvency
Cash-Flow Liquidity Ratio
Formula: Cash+Marketable Sec.+Cash flow from OA
Current Liabilities

2011: 2,030.5+2,636+5,012 = 0.70x

13,730.5

2010: 1,191+4,002+(1,883.5) = 0.32x

10,216
II. Analysis of Asset Liquidity and Asset Management Efficiency

Accounts Receivable Turnover

Formula: Net Sales___________
Ave. Accounts Receivable Balance

2011: 107,800___ = 24.90x

4,480+4,175
2

2010: 76,500 = 18.32x

4,175
II. Analysis of Asset Liquidity and Asset Management Efficiency

Average Collection Period

Formula: 365 days___________
Accounts Receivable Turnover

2011: 365 = 14.6days or 15 days

24.9

2010: 365 = 19.9 days or 20 days

18.32
II. Analysis of Asset Liquidity and Asset Management Efficiency

Inventory Turnover
Formula: Cost of good sold
Ave. Invty. Bal.

2011: 64,682_ __ = 3.09x

23,520.5+18,384.5
2

2010: 45,939.5 = 2.50x

18,384.5
II. Analysis of Asset Liquidity and Asset Management Efficiency

Average Collection Period

Formula: 365 days____
Inventory Turnover

2011: 365 = 118 days

3.09

2010: 365 = 146 days

2.5
II. Analysis of Asset Liquidity and Asset Management Efficiency

Fixed Asset Turnover

Formula: Net Sales___
Ave. net PPE

2011: 107,800_ _ = 8.97x

14,539.5+9,488.5
2

2010: 76,500 = 8.06x

9,488.5
II. Analysis of Asset Liquidity and Asset Management Efficiency

Total Asset Turnover

Formula: Net Sales___
Ave. Total Assets

2011: 107,800_ _ = 2.52x

47,649+37,954.5
2

2010: 76,500 = 2.02x

37,954.5
III. Analysis of Leverage: Debt Financing and Coverage
Debt Ratio
Formula: Total Liabilities
Total Assets

2011: 24,681.5 = 51.8%

47,649

2010: 19,021 = 50.1%

37,954.5
III. Analysis of Leverage: Debt Financing and Coverage
Debt to Equity Ratio
Formula: Total Liabilities
Total Equity

2011: 24,681.5 = 107.46%

22,967.5

2010: 19,021 = 100.46%

18,933.5
III. Analysis of Leverage: Debt Financing and Coverage
Times Interest Earned
Formula: Operating Profit
Interest Expense

2011: 9,621.5 = 7.44x

1,292.5

2010: 5,903 = 5.18x

1,138.5
III. Analysis of Leverage: Debt Financing and Coverage
Fixed Charge Coverage
Formula: Operating Profit + Lease Payments
Interest Expense+Lease Payments

2011: 9,621.5 + 6,529 = 2.06x

1,292.5 + 6,529

2010: 5,903 + 3,555.5 = 2x

1,138.5+ 3,555,5
 IV. Operating Efficiency and Profitability
Gross Profit Margin
Formula: Gross Profit
Net Sales

2011: 43,118 = 40%

107,800

2010: 30,560.5 = 39.95%

76,500
 IV. Operating Efficiency and Profitability
Operating Profit Margin
Formula: Operating Profit
Net Sales

2011: 9,621.5 = 8.9%

107,800

2010: 5,903 = 7.7%

76,500
 IV. Operating Efficiency and Profitability
Net Profit Margin
Formula: Net Income
Net Sales

2011: 4,697 = 4.36%

107,800

2010: 2,955 = 3.87%

76,500
 IV. Operating Efficiency and Profitability
Cash Flow Margin
Formula: Cash flow from OA
Net Sales

2011: 5,012 = 4.65%

107,800

2010: (1,883.5) = (2.5%)

76,500
 IV. Operating Efficiency and Profitability
Return on Investment on Assets (ROA)
Formula: Net Income
Ave. Total Assets
or
Net Profit Margin x Total Asset Turnover
 IV. Operating Efficiency and Profitability
Return on Investment on Assets (ROA)
If the firm has interest-bearing debt, ROA is computed using
the following formula:

Net Income + [Interest (1-Tax rate)]

Average Total Assets

2011: 4,697 + [1,292.5 (1 - 45%)] = 12.63%

42,802

2010: 2,955 + [1,138.5 (1 – 43%)] = 9.02%

39,955
 IV. Operating Efficiency and Profitability
Return on Equity (ROE)
Formula: Net Income___
Ave. SHE
or
Return on Assets x Financial Leverage or Equity Multiplier
Equity Multiplier = 1 _
Equity Ratio

2011: 4,697 = 22.42%

22,967.5+18,933.5
2

2010: 2,955 = 15.60%

18,933.5
 IV. Operating Efficiency and Profitability
The Financial Leverage Index (FLI) is computed as follows:

Return on Equity
Return on Assets

2011: 22.42% = 2.06

10.88%

2010: 15.60% = 1.73

9.02%
Other Ratios used to Measure Returns to Investors
a) Earnings per share (EPS)
Formula:
Basic EPS = Net Income _
Weighted Ave. number of OSO
Diluted EPS= Net Income _
Weighted Ave. number of OSO
and potential diluters

2011: 4,697,000 = P2.00

2,401,500+2,297,000
2

2010: 2,955,000 = P1.29

2,297,000
Other Ratios used to Measure Returns to Investors
b) Price Earnings Ratio (P/E)
Formula:
Basic EPS = Market Price of Ordinary Shares_
Earnings per share

2011: 30 = 15
2

2010: 17 = 13.39
1.27
Other Ratios used to Measure Returns to Investors
c) Dividend payout ratio
Formula:
Basic EPS = Dividends per share_
Earnings per share

2011: 0.33 = 16.5%

2

2010: 0.41 = 31.78%

1.29
Other Ratios used to Measure Returns to Investors
d) Dividend payout ratio
Formula:
Basic EPS = Dividends per share_
Earnings per share

2011: 0.33 = 1.1%

30

2010: 0.41 = 2.41%

17
 The DuPont Disaggregation Analysis
Average
ROE = Net Income = NI _ x Sales _ x Tot. Assets
Ave. SHE Sales Average Average
total SHE
assets

Profit Asset Financial

Margin Turnover Leverage
 The DuPont Disaggregation Analysis

ROA = Net Income = NI _ x Sales _

Ave. Tot. A. Sales Average
total
assets

Profit Asset
Margin Turnover