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Chapter
Financial Analysis
McGraw-Hill/Irwin
Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Outline
Ratio analysis and its importance Use of ratio for measurements The DuPont system of analysis Trend analysis Evaluation of reported income to identify distortion
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Ratio Analysis
Financial ratios
Used to weigh and evaluate the operating performance of a firm Used to compare performance record as against similar firms in the industry Analyzing ratios and numerical calculations Such data is provided by various organizations
3-3
B.
4. 5. 6. 7. 8.
D.
3-5
Types of Ratios
Profitability ratios
Measurement of the firms ability to earn an adequate return on:
Sales Assets Invested capital
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3-8
Profitability Ratios
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DuPont Analysis
3-12
Return of Wal-Mart versus Macys using the Du Pont method of analysis, 2007
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3-14
3-15
Liquidity Ratios
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3-17
3-18
Ratio Analysis
3-19
Trend Analysis
3-20
Solvency
Total Liabilities Debt Ratio = Total Assets Equity Equity Ratio = Total Assets Total Liabilities Debt - to - Equity = Total Equity Interest Expense Times Interest Earned= EBIT
3-22
Profitability
Net Income Profit Margin Ratio = Sales Gross Profit Gross Margin Ratio = Sales Net Income Return on Total Assets = Sales NetIncome Return on Equity = Stockholders' Equity Net Income Earnings Per Share = Number of Shares Outstanding Common Stocks
3-23
Market Prospects
Market Price Per Share Price Earnings Ratio = Earnings Per Share Dividend Per Share Dividend Yield = Market Price Per Share Total Dividends Dividend Payout = Income
3-24
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Exercises
Pages: 84 and 85 Numbers: 33 and 34
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3-30
Deflation
Actual reduction of prices affecting everybody due to bankruptcies and declining profits
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3-32
Income Statements
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3-34
Net income
Use of different methods of financial reporting
3-35