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Financial Statements &

Analysis

Annual Report
a report issued annually by a corporation to its
stockholders.
managements opinion of the past years operations
and the firms future prospects.

Annual Report
basic financial statements

income statement
balance sheet
statement of retained earnings
statement of cash flows

It is an evaluation of both firms past financial


performance & its prospects for the future. A
financial analyst use the ratios to make two
types of comparison:
1. Industry Comparison (Dun & Bradstreet,
Robert Morris & Associates).
2. Trend Analysis.

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Horizontal Analysis: To evaluate the trend in the


accounts over the years.
Vertical Analysis: A significant item on a
financial statement is used as a base value, & all
the other items on the financial statement are
compared to it.
Ratio Analysis: To compare figures from different
categories.

Present & prospective shareholders.


Creditors.
Firms own management.
Regulatory Bodies.
Others.

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Liquidity Ratios,
Activity/Turnover/Asset Management
Ratios,
Leverage/Solvency Ratios,
Profitability Ratios, &
Market Ratios.

It measures the companys ability to meet its maturing


short-term debt obligations. The two types of liquidity
ratios are:

a) Current Ratio = Current Assets / Current


Liabilities.
b) Quick Ratio or Acid Test = [Current Assets Inventory] / Current Liabilities.

Measures the speed with which various accounts


are converted into sales or cash inflows or
outflows. The ratios are:
a) Accounts Receivables Turnover = Net Credit Sales /
Average Accounts receivables.
b) Average Collection Period = 365 / Accounts Receivables
Turnover.
c) Inventory Turnover = Cost of Goods Sold / Inventory.
d) Total Asset Turnover = Sales / Total Assets.
e) Fixed Asset Turnover = Sales / Fixed Assets.

It measures the companys ability to meet its


long-term obligations as they become due. The
ratios are:
a) Debt Ratio = Total Liabilities / Total Assets
b) Debt- Equity Ratio = Total Liabilities / Stockholders
Equity
c) Times Interest Earned = EBIT / Interest Expenses.
d) Fixed-payment CoverageEBIT
=
Lease payments
Interest Lease Sinking fund payments

1 Tax rate

Charges payments

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An indication of good financial health & how effectively


the firm is being managed is the companys ability to earn
satisfactory profit & return on investment. The ratios are:
a) Profit Margin = Net Income After Tax / Net Sales.
b) Return on Assets (ROA) = Net Income After Tax / Total
Assets.
or, ROA = Profit Margin X Total Asset Turnover
c) Return on Equity (ROE) = Net Income After Tax /
Stockholders Equity.
or, ROE = ROA X Equity Multiplier.
## equity multiplier = total assets / stockholders equity

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Relate a firms market value, as measured by its current


share price, to certain accounting values. The ratios are:
a) Earnings Per Share (EPS) = Net Income after Tax / No. of
common stock
outstanding.
b) Price/Earnings (P/E) Ratio = Market Price Per Share / EPS
c) Dividend Per Share (DPS) = Cash Dividend / No. of
common stock outstanding.
d) Dividend Yield = DPS / Market Price Per Share.
e) Dividend Payout = DPS / EPS.

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Comparison with industry averages is difficult if


the firm operates many different divisions.
Average performance is not necessarily good.
Seasonal factors can distort ratios.
Window dressing techniques can make
statements and ratios look better.
Different accounting and operating practices can
distort comparisons.
Sometimes it is difficult to tell if a ratio value is
good or bad.
Often, different ratios give different signals, so it
is difficult to tell, on balance, whether a company
is in a strong or weak financial condition.
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DuPont analysis is an expression which


breaks ROE (Return On Equity) into three parts.
This analysis enables the analyst to understand
the source of superior (or inferior) return by
comparison with companies in similar industries
(or between industries).
Basic formula
ROE
=
(Profit
margin)*(Asset
turnover)*(Equity multiplier)

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