Financial ST Analysis

6-1
Chapter 6
Financial Statement
Analysis
6-2
Financial
Statement Analysis
Financial
A
Statements
Possible Framework for Analysis
Common-Size
Ratio
Analysis
Trend
6-3
and Index Analysis
Analysis
Financial Statements
6-4
Balance Sheet.
Income Statement
Statement of
Changes in
Equity
Cash Flow
Statement
Notes to the
Accounts
The Balance Sheet

describes a
companys
financial position
on a particular day
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
J. Scott, Capital, Dec. 1, 2004
Plus: Investment by owner
Net income
Less: Withdrawals
J. Scott, Capital, Dec. 31, 2004
Scott Company
Balance Sheet
December 31, 2004
Assets
$
Cash
Supplies
Equipment
Total assets
6-5
9,700
1,200
16,000
26,900
Liabilities & Equity

Accounts payable
$
Notes payable
Total liabilities
J. Scott, Capital
Total liabilities and equity $
1,200
4,000
5,200
21,700
26,900
20,000
2,200
500
21,700
Scott Company
Income Statement
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
3,000
800
2,200
Net income is the

difference
between
Revenues and
Expenses.
The Income Statement describes a

companys revenues and expenses along
with the resulting net income or loss over
a period of time due to operating
activities.
6-6
Scott Company
Income Statement
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
The Statement of
Changes in
Equity explains
changes in equity
from net income
(or net loss) and
equity injected by
the owner in
business and
drawings for a
6-7
period of time.
3,000
800
2,200
The net income

of $2,200
increases
Scotts capital
by $2,200.
Scott Company
Statement of Owner's Equity
J. Scott, Capital, Dec. 1, 2004 $
Plus: Investment by owner
Net income
Less: Withdrawals
J. Scott, Capital, Dec. 31, 2004 $
20,000
2,200
500
21,700
Scott Company
Statement of Cash Flows
Cash flows from operating activities:
Cash received from clients
$ 3,000
Purchase of supplies
(1,000)
Cash paid to employees
(800)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
(15,000)
Net cash used in investing activities
Cash flows from financing activities:
Investment by owner
20,000
Borrowed at bank
4,000
Withdrawal by owner
(500)
Net cash provided by financing activities
Net increase in cash
Cash balance, December 1, 2004
Cash balance, December 31, 2004
1,200
(15,000)
$
$
23,500
9,700
9,700
The Statement of Cash Flows identifies cash

6-8 inflows and cash outflows over a period of time.
Cash flow Statement

What
you need to prepare Cash

flow Statement?
Current
years Balance Sheet

and Income Statement and ;
Previous
6-9
years Balance Sheet
Notes to the Accounts

It tells us
about the
polices and
practices of
the company.
Historical
Going
costconcern
cost
6-10
It is the key to prepare

the Financial Statements
Depreciation
SLMnnn
or DBM
Examples of External Uses

of Statement Analysis
Trade
Creditors -- Focus on the

liquidity of the firm.
Bondholders
-- Focus on the short

and long-term cash flow of the firm.
Shareholders
-- Focus on the
profitability and long-term health of
the firm.
6-11
Examples of External Uses of

Statement Analysis cont--Government
-- Focuses on the pretax profit for taxation purpose.
Supplires
of funds -- Focus on the

operating profit and long-term cash
flows of the firm.
Employees
-- Focus on the longterm health of the firm.
6-12
Examples of Internal Uses

of Statement Analysis
Plan
-- Focus on assessing the current

financial position and evaluating
potential firm opportunities.
Control
-- Focus on return on investment

for various assets and asset efficiency.
Understand
-- Focus on understanding
how suppliers of funds analyze the firm.
6-13
Framework for
Financial Analysis
Trend / Seasonal Component
How much funding will be
required in the future?
1. Analysis of the funds
needs of the firm.
Is there a seasonal
component?
Analytical Tools Used

Statement of Cash Flows
Cash Budgets
6-14
Framework for
Financial Analysis
Health of a Firm
needs of the firm.
2. Analysis of the financial
condition and profitability
of the firm.
6-15
Financial Ratios
1.
2.
3.
4.
Individually
Over time
In combination
In comparison
Framework for
Financial Analysis

needs of the firm.
of the firm.
3. Analysis of the business
risk of the firm.
Business risk relates to

the risk inherent in the
operations of the firm.
Examples:
Volatility in sales
Volatility in costs
Proximity to break-even
point
6-16
Framework for
Financial Analysis

needs of the firm.
of the firm.
risk of the firm.
6-17
Determining
the
financing
needs of
the firm.
A Financial
Manager
must
consider all
three jointly
when
determining
the
financing
needs of the
firm.
Framework for
Financial Analysis

needs of the firm.
of the firm.
risk of the firm.
6-18
Determining
the
financing
needs of
the firm.
Negotiations
with
suppliers of
capital.
Financial Statement Analysis
STEPS
Reading Regular Figures

Converting into %age
Ratio Analysis
6-19
Reading the Regular Figures
6-20
Basket Wonders Balance

Sheet (Asset Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2010a
Cash and C.E.

$ 90
Acct. Rec.c
394
Inventories
696
Prepaid Exp d
5
Accum Tax Prepay
10
Current Assetse $1,195
Fixed Assets (@Cost)f 1030
Less: Acc. Depr. g
(329)
Net Fix. Assets $ 701
Investment, LT
50
Other Assets, LT
223
Total Assets b $2,169
6-21
a. How the firm stands on

a specific date.
b. What BW owned.
c. Amounts owed by
customers.
d. Future expense items
already paid.
e. Cash/likely convertible
to cash within 1 year.
f. Original amount paid.
g. Acc. deductions for
wear and tear.
Basket Wonders Balance

Sheet (Liability Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2010
Notes Payable
Acct. Payablec
Accrued Taxes d
Other Accrued Liab. d
Current Liab. e
Long-Term Debt f
Shareholders Equity
Com. Stock ($1 par) g
Add Pd in Capital g
Retained Earnings h
Total Equity
a,b
6-22 Total Liab/Equity
$ 290
94
16
100
$ 500
530
a. Note, Assets =
Liabilities + Equity.
b. What BW owed and
ownership position.
c. Owed to suppliers for
goods and services.
d. Unpaid wages,
200
salaries, etc.
729 e. Debts payable < 1 year.
210 f. Debts payable > 1 year.
$1,139 g. Original investment.
$2,169 h. Earnings reinvested.
Basket Wonders
Income Statement
Basket Wonders Statement of Earnings (in thousands)
for Year Ending December 31, 2010a
Net Sales
$ 2,211
Cost of Goods Sold b 1,599
Gross Profit $
612
SG&A Expenses c
402
EBITd
$
210
Interest Expensee
59
EBT f
$
151
Income Taxes
60
EATg
$
91
Cash Dividends
38
Increase in RE
$
53
6-23
a. Measures profitability
over a time period.
b. Received, or receivable,
from customers.
c. Sales comm., adv.,
officers salaries, etc.
d. Operating income.
e. Cost of borrowed funds.
f. Taxable income.
g. Amount earned for
shareholders.
Financial Statement
Analysis
Step 2
Converting into percentages
6-24
Common-size Analysis
An analysis of percentage
financial statements where all
balance sheet items are divided
by total assets and all income
statement items are divided by
net sales or revenues.
6-25
Basket Wonders Common

Size Balance Sheets
Regular (thousands of $)
Assets
2009
2010
2008
2009
2010
Cash
AR
Inv
Other CA
148
283
322
10
100
410
616
14
90
394
696
15
12.10
23.14
26.33
0.82
4.89
20.06
30.14
0.68
4.15
18.17
32.09
0.69
Tot CA
Net FA
LT Inv
Other LT
763
349
0
111
1,140
631
50
223
1,195
701
50
223
62.39
28.54
0.00
9.08
55.77
30.87
2.45
10.91
55.09
32.32
2.31
10.28
1,223
2,044
2,169
100.0
100.0
100.0
Tot Assets
6-26
2008
Common-Size (%)

Size Balance Sheets
Liab+Equity
6-27
2008
2009
2010
Common-Size (%)
2008
2009
2010
Note Pay
Acct Pay
Accr Tax
Other Accr
290
81
13
15
295
94
16
100
290
94
16
100
23.71
6.62
1.06
1.23
14.43
4.60
0.78
4.89
13.37
4.33
0.74
4.61
Tot CL
LT Debt
Equity
399
150
674
505
453
1,086
500
530
1,139
32.62
12.26
55.11
24.71
22.16
53.13
23.05
24.44
52.51
Tot L+E
1,223
2,044
2,169
100.0
100.0
100.0

Size Income Statements
2008
Net Sales
COGS
6-28
2009
2010
Common-Size (%)
2008
2009
2010
1,235
849
2,106
1,501
2,211
1,599
100.0
68.7
100.0
71.3
100.0
72.3
Gross Profit
Adm.
386
180
605
383
612
402
31.3
14.6
28.7
18.2
27.7
18.2
EBIT
Int Exp
206
20
222
51
210
59
16.7
1.6
10.5
2.4
9.5
2.7
EBT
186
171
151
15.1
8.1
6.8
EAT
112
103
91
9.1
4.9
4.1
Cash Div
50
50
50
4.0
2.4
2.3
Index Analyses
An analysis of percentage financial
statements where all balance sheet
or income statement figures for a
base year equal 100.0 (percent) and
subsequent financial statement
items are expressed as percentages
of their values in the base year.
6-29
Basket Wonders
Indexed Balance Sheets
Assets
2009
2010
2008
2009
2010
Cash
AR
Inv
Other CA
148
283
322
10
100
410
616
14
90
394
696
15
100.0
100.0
100.0
100.0
67.6
144.9
191.3
140.0
60.8
139.2
216.1
150.0
Tot CA
Net FA
LT Inv
Other LT
763
349
0
111
1,140
631
50
223
1,195
701
50
223
100.0
100.0
100.0
100.0
149.4
180.8
inf.
200.9
156.6
200.9
inf.
200.9
1,223
2,044
2,169
100.0
167.1
177.4
Tot Assets
6-30
2008
Indexed (%)
Basket Wonders
Indexed Balance Sheets
Liab+Equity
6-31
2008
2009
2010
Indexed (%)
2008
2009
2010
Note Pay
Acct Pay
Accr Tax
Other Accr
290
81
13
15
295
94
16
100
290
94
16
100
100.0
100.0
100.0
100.0
101.7
116.0
123.1
666.7
100.0
116.0
123.1
666.7
Tot CL
LT Debt
Equity
399
150
674
505
453
1,086
500
530
1,139
100.0
100.0
100.0
126.6
302.0
161.1
125.3
353.3
169.0
Tot L+E
1,223
2,044
2,169
100.0
167.1
177.4
Basket Wonders Indexed

Income Statements
2008
Net Sales
COGS
6-32
2009
2010
Indexed (%)
2008
2009
2010
1,235
849
2,106
1,501
2,211
1,599
100.0
100.0
170.5
176.8
179.0
188.3
Gross Profit
Adm.
386
180
605
383
612
402
100.0
100.0
156.7
212.8
158.5
223.3
EBIT
Int Exp
206
20
222
51
210
59
100.0
100.0
107.8
255.0
101.9
295.0
EBT
186
171
151
100.0
91.9
81.2
EAT
112
103
91
100.0
92.0
81.3
Cash Div
50
50
50
100.0
100.0
100.0
The most
important tool of all
STEP 3
The Ratio Analysis.
6-33
What are Financial Ratios?

A Financial Ratio is
an index that relates
two accounting
numbers and is
obtained by dividing
one number by the
other.
6-34
Types of
Comparisons
Internal
Comparisons
External
Comparisons
External Comparisons and

Sources of Industry Ratios
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.
6-35
Examples:
Robert Morris
Associates
Dun & Bradstreet
Standard and
Poors (S&P)
Credit Rating Agencies

International
Credit Rating Agencies:

Standard & Poor's (S&P)
Moody Investors service
Fitch Ratings
Dun & Bradstreet
6-36
Credit rating agencies in

Pakistan
Pakistan Credit Rating Agency (PACRA)
Japan Credit Rating vital information service

(JCR- VIS)
6-37
Net Working Capital

or Circulating Capital
Net working capital = Current assets
Current liabilities
$1,195 $500 = $695
Net working capital is the excess of current

assets Over the current liabilities.
6-38
Net working capital

Comparisons
Net working capital
Year
BW
Industry
2010
$695
$625
2009
687
608
2008
555
585
The NWC is more than the industry .

6-39
Liquidity Ratios
Balance Sheet Ratios
Liquidity Ratios
Shows a firms
ability to cover its
current liabilities
with its current
assets.
6-40
Current Ratio
Current Assets
Current Liabilities
For Basket Wonders
December 31, 2010
$1,195 = 2.39:1
$500
Liquidity Ratio
Comparisons
Current Ratio
Year
BW
Industry
2010
2.39
2.15
2009
2.26
2.09
2008
1.91
2.01
Ratio is stronger than the industry average.

6-41
Current Ratio -- Trend

Analysis Comparison
Trend Analysis of Current Ratio
Ratio Value
2.5
2.3
2.1
1.9
1.7
1.5
2008
6-42
BW
Industry
2009
Analysis Year
2010
Liquidity Ratios
Liquidity Ratios
Shows a firms
ability to meet
current liabilities
with its most liquid
assets.
6-43
Acid-Test (Quick)
Current Assets - Inv
Current Liabilities
For Basket Wonders
December 31, 2010
$1,195 - $696 = 1 : 1
$500
Liquidity Ratio
Comparisons
Acid-Test Ratio
Year
BW
Industry
2010
1.00
1.25
2009
1.04
1.23
2008
1.11
1.25
Ratio is weaker than the industry average.

6-44
Acid-Test Ratio -- Trend

Analysis Comparison
Trend Analysis of Acid-Test Ratio
Ratio Value
1.5
1.3
0.8
0.5
2008
6-45
BW
Industry
1.0
2009
Analysis Year
2010
Summary of the Liquidity

Ratio Comparisons
Ratio
Current
Acid-Test
BW
2.39
1.00
Industry
2.15
1.25
Strong current ratio and weak acid-test

ratio indicates a potential problem in the
inventories account.
Note that this industry has a relatively

high level of inventories.
6-46
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 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.
6-47
Financial Leverage Ratios

Financial Leverage
Ratios
Shows the extent to

which the firm is
financed by debt.
6-48
Debt-to-Equity
Total Debt
Shareholders Equity
For Basket Wonders
December 31, 2010
$1,030 = 0.90:1
$1,139
Financial Leverage
Ratio Comparisons
Debt-to-Equity Ratio
6-49
Year
BW
Industry
2010
.90
.90
2009
.88
.90
2008
.81
.89
BW has average debt utilization

relative to the industry average.

Financial Leverage
Ratios
Shows the percentage

of the firms assets
that are supported by
debt financing.
6-50
Debt-to-Total-Assets
Total Debt
Total Assets
For Basket Wonders
December 31, 2010
$1,030 = 0 .47 : 1
$2,169
Financial Leverage
Ratio Comparisons
Debt-to-Total-Asset Ratio
6-51
Year
BW
Industry
2010
.47
.47
2009
.47
.47
2008
.45
.47
BW has average debt utilization


Financial Leverage
Ratios
Shows the relative
importance of long-term
debt to the long-term
financing of the firm.
6-52
Total Capitalization
(i.e., LT-Debt + Equity)
Total Debt
Total Capitalization
For Basket Wonders
December 31, 2010
$1,030 = .62:1
$1,669
Financial Leverage
Ratio Comparisons
Total Capitalization Ratio
Year
BW
Industry
2010
.62
.60
2009
.62
.61
2008
.67
.62
BW has average long-term debt utilization

6-53
Coverage Ratios
Income Statement
Ratios
Coverage Ratios
Indicates a firms
ability to cover
interest charges.
6-54
Interest Coverage
EBIT
Interest Charges
For Basket Wonders
December 31, 2010
$210 = 3.56 times
$59
Coverage
Ratio Comparisons
Interest Coverage Ratio
Year
BW
Industry
2010
3.56
5.19
2009
4.35
5.02
2008
10.30
4.66
BW has below average interest coverage

6-55
Coverage Ratio -- Trend

Analysis Comparison
6-56
Summary of the Coverage

Trend Analysis
The interest coverage ratio for BW has

been falling since 2008. It has been
below industry averages for the past
two years.
This indicates that low earnings (EBIT)

may be a potential problem for BW.
Note, we know that debt levels are in

line with the industry averages.
6-57
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates quality of
receivables and how
successful the firm is in
its collections.
6-58
Receivable Turnover
(Assume all sales are credit sales.)
Annual Net Credit Sales

Closing Receivables
For Basket Wonders
December 31, 2010
$2,211 = 5.61 Times
$394
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Average number of days
that receivables are
outstanding.
(or RT in days)
6-59
Avg Collection Period

Days in the Year
Receivable Turnover
For Basket Wonders
December 31, 2010
365
5.61
= 65 days
Activity
Ratio Comparisons
Average Collection Period in days
6-60
Year
BW
Industry
2010
65.0
65.7
2009
71.1
66.3
2008
83.6
69.2
BW has improved the average collection

period to that of the industry average.
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates the
promptness of payment
to suppliers by the firm.
6-61
Payable Turnover (PT)

(Assume annual credit
purchases = $1,551.)
Annual Credit Purchases

Closing Payable
For Basket Wonders
December 31, 2010
$1551
= 16.5 Times
$94
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
that payables are
outstanding.
6-62
PT in Days
Days in the Year
Payable Turnover
For Basket Wonders
December 31, 2010
365
16.5
= 22.1 days
Activity
Ratio Comparisons
Payable Turnover in Days
Year
BW
Industry
2010
22.1
46.7
2009
25.4
51.1
2008
43.5
48.5
BW has improved the PT in Days.

6-63
Is this good?
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates the
effectiveness of the
inventory management
practices of the firm.
6-64
Inventory Turnover
Cost of Goods Sold
Closing Inventory
For Basket Wonders
December 31, 2010
$1,599 = 2.30 Times
$696
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
that payables are
outstanding.
6-65
Inventory T/O in Days

Days in the Year
Inventory Turnover
For Basket Wonders
December 31, 2010
365
2.30
= 158.69 days
Activity
Ratio Comparisons
Inventory Turnover in Days
Year
BW
Industry
2010
2009
158.69
149.59
111.59
97.07
2008
138.25
98.91
BW has improved the PT in Days.

6-66
Is this good?
Inventory Turnover Ratio -Trend Analysis Comparison
6-67
Activity Ratios
Income Statement /
Balance Sheet
Ratios
Activity Ratios
Indicates the overall
effectiveness of the firm
in utilizing its assets to
generate sales.
6-68
Total Asset Turnover

Net Sales
Total Assets
For Basket Wonders
December 31, 2010
$2,211 = 1.02:1
$2,169
Activity
Ratio Comparisons
Total Asset Turnover Ratio
Year
BW
Industry
2010
1.02
1.17
2009
1.03
1.14
2008
1.01
1.13
BW has a weak total asset turnover ratio.

6-69
Why is this ratio considered weak?
Profitability Ratios
Income Statement /
Balance Sheet
Ratios
Indicates the efficiency
of operations and firm
pricing policies.
6-70
Gross Profit Margin

Gross Profit
x100
Net Sales
For Basket Wonders
December 31, 2010
$612 X100= 27.67%
$2,211
Profitability
Ratio Comparisons
Gross Profit Margin
Year
BW
Industry
2010
27.7%
31.1%
2009
28.7
30.8
2008
31.3
27.6
BW has a weak Gross Profit Margin.

6-71
Gross Profit Margin -Trend Analysis Comparison

Trend Analysis of Gross Profit Margin
Ratio Value (%)
35.0
32.5
BW
Industry
30.0
27.5
25.0
2008
2009
Analysis Year
6-72
20010
Income Statement /
Balance Sheet
Ratios
Indicates the firms
profitability after taking
account of all expenses
and income taxes.
6-73
Net Profit Margin

Net Profit after Taxes
Net Sales
For Basket Wonders
December 31, 2010
$91
$2,211
X 100
= 4.1%
Profitability
Ratio Comparisons
Net Profit Margin
Year
BW
Industry
2010
4.1%
8.2%
2009
4.9
8.1
2008
9.0
7.6
BW has a poor Net Profit Margin.

6-74
Net Profit Margin -Trend Analysis Comparison

Trend Analysis of Net Profit Margin
Ratio Value (%)
10
9
8
BW
Industry
7
6
5
4
2008
2009
Analysis Year
6-75
2010
Income Statement /
Balance Sheet
Ratios
Indicates the
profitability on the
assets of the firm (after
all expenses and taxes).
6-76
Return on Investment
Total Assets
For Basket Wonders
December 31, 2010
$91 X100 = 4.2%
$2,160
Profitability
Ratio Comparisons
Year
BW
Industry
2010
4.2%
9.8%
2009
5.0
9.1
2008
9.1
10.8
BW has a poor Return on Investment.

6-77
Trend Analysis Comparison
Trend Analysis of Return on Investment
Ratio Value (%)
12
10
BW
Industry
8
6
4
2008
2009
Analysis Year
6-78
2010
Income Statement /
Balance Sheet
Ratios
Indicates the profitability
to the shareholders of
the firm (after all
expenses and taxes).
6-79
Return on Equity
Shareholders Equity
For Basket Wonders
December 31, 2010
$91 X100 = 8%
$1,139
Profitability
Ratio Comparisons
Return on Equity
Year
BW
Industry
2010
8.0%
17.9%
2009
9.4
17.2
2008
16.6
20.4
BW has a poor Return on Equity.

6-80
Return on Equity -Trend Analysis Comparison

Trend Analysis of Return on Equity
Ratio Value (%)
21.0
17.5
BW
Industry
14.0
10.5
7.0
2008
2009
Analysis Year
6-81
2010
Return on Investment and

the Du Pont Approach
Earning Power = Sales profitability X
Asset efficiency
ROI = Net profit margin X
Total asset turnover
ROI2010
= .041 x 1.02 = .042 or 4.2%
ROIIndustry = .082 x 1.17 = .098 or 9.8%

6-82
Return on Equity and

the Du Pont Approach
Return On Equity = Net profit margin X
Total asset turnover X
Equity Multiplier
Total Assets
Equity Multiplier =
Shareholders Equity
ROE2010
= .041 x 1.02 x 1.90 = .080
ROEIndustry = .082 x 1.17 x 1.88 = .179

6-83
Summary of the Profitability

Trend Analyses
The profitability ratios for BW have ALL

been falling since 2008. Each has been
below the industry averages for the past
three years.
This indicates that COGS and

administrative costs may both be too
high and a potential problem for BW.
Note, this result is consistent with the low

interest coverage ratio.
6-84
Summary of Ratio Analyses
6-85
Inventories are too high.
May be paying off creditors

(accounts payable) too soon.
COGS may be too high.
Selling, general, and

administrative costs may be too
high.
Market Ratios
6-86
Earning per share (EPS)
Dividend per share (DPS)
Dividend payout ratio
Dividend yield ratio
Price earning ratio (P/E ratio)
Market to Book value per share

ratio
Quick Quiz
6-87
What includes the Financial

Statements?
What is meant by Financial

Statements analysis?
Name different parties, interested in

Financial Statements analysis and
why?
Quick Quiz
6-88
Why it is essential to have some

framework in mind, for the purpose of
Financial Statements analysis?
A numerical exercise regarding

Common Size and Index Statements
and their analyses.
A numerical exercise regarding

Financial or Accounting ratios and
their analyses.
6-89

Financial ST Analysis

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Financial ST Analysis

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6-1

Possible Framework for Analysis

and Index Analysis

The Balance Sheet

Liabilities & Equity

Net income is the

The Income Statement describes a

The net income

The Statement of Cash Flows identifies cash

Cash flow Statement

you need to prepare Cash

years Balance Sheet

years Balance Sheet

Notes to the Accounts

It is the key to prepare

Examples of External Uses

Creditors -- Focus on the

-- Focus on the short

Examples of External Uses of

-- Focuses on the pretax profit for taxation purpose.

of funds -- Focus on the

-- Focus on the longterm health of the firm.

Examples of Internal Uses

-- Focus on assessing the current

-- Focus on return on investment

Analytical Tools Used

1. Analysis of the funds

Business risk relates to

1. Analysis of the funds

1. Analysis of the funds

Financial Statement Analysis

Reading Regular Figures

Reading the Regular Figures

Basket Wonders Balance

Cash and C.E.

a. How the firm stands on

Basket Wonders Balance

Converting into percentages

Basket Wonders Common

Basket Wonders Common

Basket Wonders Common

Basket Wonders Indexed

What are Financial Ratios?

External Comparisons and

Credit Rating Agencies

Credit Rating Agencies:

Credit rating agencies in

Japan Credit Rating vital information service

Net Working Capital

Net working capital is the excess of current

Net working capital

The NWC is more than the industry .

Ratio is stronger than the industry average.

Current Ratio -- Trend

Ratio is weaker than the industry average.

Acid-Test Ratio -- Trend

Summary of the Liquidity

Strong current ratio and weak acid-test

Note that this industry has a relatively

Summary of the Liquidity

The current ratio for BW has been rising

The current ratio for the industry has

This indicates that inventories are a