FM CHAPTER 2: FINANCIAL STATEMENT ANALYSIS
STATEMENT OF COMMON-SIZE AND COMPARATIVE FORM
ANALYSIS COMPONENTS/FORMULA PURPOSE
Vertical Analysis In Balance Sheet - percentage of total Each financial statement item is
assets expressed in percentages.
In Income Statement - percentage of
sales/base & expressed in 100%
Horizontal Analysis Peso Change = Changes between years in financial
Current Year - Base Year data in both peso and percentage
form.
- Side by side comparison
Trend Analysis Shows several years’ financial data in
terms of a base year, which equals to
100%.
FINANCIAL RATIOS
LIQUIDITY RATIOS
Working Capital Working Capital = Excess of current assets over current
Current Assets - Current Liabilities liabilities
Current Ratio Measures a company’s short-term
debt paying ability
Acid-Test (Quick) Ratio Measures a company’s ability to meet
obligations without having to
liquidate inventory.
Quick assets: cash, marketable
securities, A/R, and current notes
receivable
Cash Ratio
Includes: Cash & Marketable
Securities
ASSET MANAGEMENT RATIOS
Inventory Turnover (Inv. TO) and Measures how many times a
Average Selling Period (ASP) company’s inventory has been sold
and replaced during the year
Measures how many days, on
average, it takes to sell the entire
inventory.
Accounts Receivable Turnover (ARTO) Measures how many times a
and Average Collection Period (ACP) company converts its receivable into
cash each year
Measures how many days, on
average, it takes to collect an
accounts receivable.
Operating Cycle (OC) OC = ASP + ACP Measures the elapsed time from
when the inventory is received from
suppliers to when cash is received
from customers.
Fixed Asset Turnover (FATO) Measures how efficiently a
company’s assets are being used to
generate sales.
Total Asset Turnover (TATO) Expands beyond current assets to
include non-current assets.
DEBT MANAGEMENT RATIOS
Accounts Payable Turnover (APTO) Measures how many times a
and Average Payment Period (APP) company settles its accounts payable
each year.
Measures how many days, on
average, it takes to pay accounts
payable.
Cash Conversion Cycle (CCC) CCC = ASP + ACP - APP Measures the elapsed time from
when the cash is paid to suppliers to
when cash is received from
customers.
Debt to Asset Ratio (DTA)
Debt to Equity Ratio (DTE) Indicates the relative proportions of
debt to equity on a company's
balance sheet.
Equity Multiplier (EM) Indicates the portion of a company’s
assets that are funded by equity.
- Average amount in a year
Stockholders’ Equity: Common Stock
+ APIC + RE
Times-Interest Earned Ratio (TIER) Measures company’s ability to
provide protection for its long term
creditors.
Less than 1.0 ratio = Inadequate
Fixed Charge Coverage Ratio (FCCR)
PROFITABILITY RATIOS
MARGINS
Gross Profit Margin (GP Margin) Indicates how much of each sales
peso is left after deducting the cost of
goods sold to cover expenses and
provide profit.
Operating profit Margin (OP Margin)
Profit Margin Indicates how selling ad expenses,
interest exp, and income tax exp.
Influence performance.
RETURNS
Return on Sales (ROS)
Return on Assets (ROA)
Return on Equity (ROE) Indicates how well the company used
the owner's investments to earn
income.
PER SHARE
Earnings Per Share (EPS) Whenever a ratio divides an income
statement balance by balance sheet
balance, the average for the year is
used in the denominator.
Earnings from the basis for dividend
payments and future increases in the
value of shares of stock.
Dividends Per Share (DPS) Indicates how much income will be
distributed for each share of common
stock outstanding.
Dividend Pay-out Ratio (DPOR) Indicates the portion of current
earnings being paid out in dividends.
MARKET RATIOS
Price Earnings Ratio (PER) Indicates whether the investors are
willing to pay a premium for a
company’s stock because of
optimistic future growth prospects.
Market Book Ratio (MBR) Measures the amount that would be
distributed to holders of each share
of common stock if all assets were
sold at their balance sheet carrying
amounts after all creditors were paid
off.
Market Price - reflects expectations
about future earnings and dividends.
Book Value per Share - based on
historical cost.
Dividend Yield Ratio (DYR) Identifies the return, in terms of cash
dividends, on the current market
price of the stock.
