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accounting numbers and is obtained by dividing
one number by the other.
Types of Comparisons
Internal Comparisons External
Comparisons
External Comparisons and Sources of Industry Ratios
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a
Cash and C.E.
$
a. How the firm stands on
90 Acct. Rec.c
a specific date.
394 Inventories
b. What BW owned.
Note that this industry has a relatively high level of inventories.
Summary of the Liquidity Trend Analyses
The current ratio for BW has been rising at the same time the acid-test ratio has been declining.
the firm.
Shareholders -- Focus on the profitability and long-
term health of the firm.
Examples of Internal Uses of Statement Analysis
Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for
shareholders.
Ⅱ.Framework for Financial Analysis
2.Financial Leverage Ratios
Balance Sheet Ratios
Financial Leverage Ratios
Shows the extent to which the firm is financed by debt.
(1)Debt-to-Equity
Total Debt Shareholders’ Equity For Basket Wonders December 31, 2007
402
EBITd
$ 210
Interest
Income Taxes
60
EATg
$ 91
Cash Dividends
38
Increase in RE
$ 53
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
210
Total Equity $1,139
Total Liab/Equitya,b $2,169
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
This involves comparing the ratios of one firm with those
of similar firms or with industry averages.
Similarity is important as one should compare “apples to apples.”
16
Other Accrued Liab. d 100
Current Liab. e $ 500
Long-Term Debt f
530
Shareholders’ Equity
Com. Stock ($1 par) g
200
Add Pd in Capital g
729
Retained Earnings h
Determining the
financing needs of the firm.
Negotiations with
suppliers of capital.
Ⅲ.Use of Financial Ratios
A Financial Ratio is an index that relates two
Ⅰ.Primary Types of Financial Statements
Balance Sheet
A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested.
Basket Wonders’ Income Statement
Chapter 6
Financial Statement Analysis
© Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e
Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI
Examples of External Uses of Statement Analysis
Trade Creditors -- Focus on the liquidity of the firm. Bondholders -- Focus on the long-term cash flow of
Less: Acc. Depr. g
(329) to cash within 1 year.
Net Fix. Assets Investment, LT Other Assets, LT 223 Total Assetsb
$ 701 50
$2,169
f. Original amount paid.
g. Acc. deductions for wear and tear.
Income Statement
A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.
Basket Wonders’ Balance Sheet (Asset Side)
Examples:
Risk Management Association
Dun & Bradstreet
Almanac of Business and Industrial
Financial Ratios
1.Liquidity Ratios
Balance Sheet Ratios
Liquidity Ratios
696 Prepaid Exp c. Amounts owed by
d
5 Accum Tax customers.
Prepay
10
d. Future expense items
Current Assetse $1,195 already paid.
Fixed Assets (@Cost)f 1030 e. Cash/likely convertible
Basket Wonders’ Balance Sheet (Liability Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
Notes Payable
$ 290
Acct. Payablec
94
Accrued Taxes d
Ratio
BW
Current
2.39
Acid-Test 1.00
Industry 2.15
1.25
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
(2)Acid-Test (Quick)
Current Assets - Inv Current Liabilities
For Basket Wonders December 31, 2007
$1,195 - $696 = 1.00 $500
Summary of the Liquidity Ratio Comparisons
The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventories are a significant problem for BW.
Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007a
Net Sales
$ 2,211
Cost of Goods Sold b 1,599
Gross Profit $ 612
SG&A Expenses c
Financial Statement Analysis
Financial Statements A Possible Framework for Analysis Balance Sheet Ratios Income Statement and Income
Statement/Balance Sheet Ratios Trend Analysis Common-Size and Index Analysis
$1,195 = 2.39 $500
Liquidity Ratios
Balance Sheet Ratios
Liquidity Ratios Shows a firm’s ability to meet current liabilities
with its most liquid assets.
Control -- Focus on return on investment for various assets and asset efficiency.
Understand -- Focus on understanding how suppliers of funds analyze the firm.
1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm.
3. Analysis of the business risk of the firm.
Shows a firm’s ability to cover its current
liabilities with its current assets.
(1)Current
Current Assets Current Liabilities For Basket Wonders December 31, 2007
one number by the other.
Types of Comparisons
Internal Comparisons External
Comparisons
External Comparisons and Sources of Industry Ratios
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007a
Cash and C.E.
$
a. How the firm stands on
90 Acct. Rec.c
a specific date.
394 Inventories
b. What BW owned.
Note that this industry has a relatively high level of inventories.
Summary of the Liquidity Trend Analyses
The current ratio for BW has been rising at the same time the acid-test ratio has been declining.
the firm.
Shareholders -- Focus on the profitability and long-
term health of the firm.
Examples of Internal Uses of Statement Analysis
Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities.
c. Sales comm., adv., officers’ salaries, etc.
d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for
shareholders.
Ⅱ.Framework for Financial Analysis
2.Financial Leverage Ratios
Balance Sheet Ratios
Financial Leverage Ratios
Shows the extent to which the firm is financed by debt.
(1)Debt-to-Equity
Total Debt Shareholders’ Equity For Basket Wonders December 31, 2007
402
EBITd
$ 210
Interest
Income Taxes
60
EATg
$ 91
Cash Dividends
38
Increase in RE
$ 53
a. Measures profitability over a time period.
b. Received, or receivable, from customers.
210
Total Equity $1,139
Total Liab/Equitya,b $2,169
a. Note, Assets = Liabilities + Equity.
b. What BW owed and ownership position.
c. Owed to suppliers for goods and services.
This involves comparing the ratios of one firm with those
of similar firms or with industry averages.
Similarity is important as one should compare “apples to apples.”
16
Other Accrued Liab. d 100
Current Liab. e $ 500
Long-Term Debt f
530
Shareholders’ Equity
Com. Stock ($1 par) g
200
Add Pd in Capital g
729
Retained Earnings h
Determining the
financing needs of the firm.
Negotiations with
suppliers of capital.
Ⅲ.Use of Financial Ratios
A Financial Ratio is an index that relates two
Ⅰ.Primary Types of Financial Statements
Balance Sheet
A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity.
d. Unpaid wages, salaries, etc.
e. Debts payable < 1 year. f. Debts payable > 1 year. g. Original investment. h. Earnings reinvested.
Basket Wonders’ Income Statement
Chapter 6
Financial Statement Analysis
© Pearson Education Limited 2004 Fundamentals of Financial Management, 12/e
Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI
Examples of External Uses of Statement Analysis
Trade Creditors -- Focus on the liquidity of the firm. Bondholders -- Focus on the long-term cash flow of
Less: Acc. Depr. g
(329) to cash within 1 year.
Net Fix. Assets Investment, LT Other Assets, LT 223 Total Assetsb
$ 701 50
$2,169
f. Original amount paid.
g. Acc. deductions for wear and tear.
Income Statement
A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period.
Basket Wonders’ Balance Sheet (Asset Side)
Examples:
Risk Management Association
Dun & Bradstreet
Almanac of Business and Industrial
Financial Ratios
1.Liquidity Ratios
Balance Sheet Ratios
Liquidity Ratios
696 Prepaid Exp c. Amounts owed by
d
5 Accum Tax customers.
Prepay
10
d. Future expense items
Current Assetse $1,195 already paid.
Fixed Assets (@Cost)f 1030 e. Cash/likely convertible
Basket Wonders’ Balance Sheet (Liability Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2007
Notes Payable
$ 290
Acct. Payablec
94
Accrued Taxes d
Ratio
BW
Current
2.39
Acid-Test 1.00
Industry 2.15
1.25
Strong current ratio and weak acid-test ratio indicates a potential problem in the inventories account.
(2)Acid-Test (Quick)
Current Assets - Inv Current Liabilities
For Basket Wonders December 31, 2007
$1,195 - $696 = 1.00 $500
Summary of the Liquidity Ratio Comparisons
The current ratio for the industry has been rising slowly at the same time the acid-test ratio has been relatively stable.
This indicates that inventories are a significant problem for BW.
Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 2007a
Net Sales
$ 2,211
Cost of Goods Sold b 1,599
Gross Profit $ 612
SG&A Expenses c
Financial Statement Analysis
Financial Statements A Possible Framework for Analysis Balance Sheet Ratios Income Statement and Income
Statement/Balance Sheet Ratios Trend Analysis Common-Size and Index Analysis
$1,195 = 2.39 $500
Liquidity Ratios
Balance Sheet Ratios
Liquidity Ratios Shows a firm’s ability to meet current liabilities
with its most liquid assets.
Control -- Focus on return on investment for various assets and asset efficiency.
Understand -- Focus on understanding how suppliers of funds analyze the firm.
1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm.
3. Analysis of the business risk of the firm.
Shows a firm’s ability to cover its current
liabilities with its current assets.
(1)Current
Current Assets Current Liabilities For Basket Wonders December 31, 2007