FINANCIAL STATEMENT

ANALYSIS
DEFINITION

It involves careful selection of data

from financial statements for the
purpose of forecasting the financial
health of the company.
Steps in Financial Statement Analysis

1. Establish objectives of the analysis

2. Study the industry in which firm operates and
relate industry climate to current and projected
economic development.
3. Develop knowledge of the firm and the quality of
management
Steps in Financial Statement Analysis

4. Evaluate financial statement using any of the

techniques below
a. Horizontal Analysis of Comparative Statements
b. Trend Percentages
c. Common size financial statements
d. Financial ratios
Steps in Financial Statement Analysis

The major areas that may be covered in the analysis are:

a. Short-term solvency
b. Capital structure and long term solvency
c. Operating efficiency
d. Segmented Analysis
5. Summarize findings based on analysis and reach
conclusions about firm relevant to the established
objectives.
Horizontal Analysis of Comparative Statement(
Increase-Decrease Method)

1. Compute the peso amount of the change from the

base (earlier ) period to the later period
2. Divide the peso amount of the change by the base-
period amount. This is not however, if the base year
figure is negative or zero.
 Example :EXAMPLE.xlsx
Required: Evaluate the company’s financial position and
results of operations using Comparative Statement Analysis
Answer:

Short term solvency

As shown on the statement of financial position, the percentage of
increase in total current assets (10.1%) was lower than the
percentage of the increase in total current liabilities (15%). It can be
observed that accounts payable and bank loans increased
significantly. Accounts Receivable and inventory increased at a
much higher percentage than the percentage of increase in Sales
Revenue( 11%) . This indicates slower conversion of inventory and
receivables to cash. The changes mentioned resulted to
deterioration in the short-term solvency position of the company as
of the end of the year 2014 compared with year 2013.
Answer:

Long-term Financial Position Analysis

The book value of property, plant and equipment declined
because of the depreciation provision for the year. Total
liabilities increased by only 1%, whereas shareholders equity
increased by 11.8%. Thus, the company’s capital structure
shifted slightly away from borrowing and toward capital
provided by profitable operations. These changes can be
viewed favorably because they indicate strengthening of the
long-term financial position by end of year 2014.
Answer:

Operating Efficiency and Profitability Analysis

Sales revenue increased by 11% while cost of goods sold increased
by 12.4%. This is unfavorable because this could indicate that the
company was unable to adjust the selling price of goods
commensurate to the increase in cost of goods purchased or
changes resulted to the reduction in the gross profit rate which is
unfavorable. The 11% increase in sales was accompanied by a 7.8%
and 2.8 % increase in selling and administrative expenses,
respectively. This is favorable because this could indicate
management’s efficiency I keeping expenses with control.
Answer:

On an overall basis, operating performance could

be considered satisfactory or favorable because of
the lower price in operating costs of 10.5% as
compared with the increase in revenue of 11%
which resulted to an 18.4% increase in operating
income. Repayment of notes payable reduced
interest expense by 4.7%. Reduced interest expense
together with higher operating income before
taxes by 25.9%.
TREND PERCENTAGES

These are index numbers showing relative

changes in financial data resulting with the
passage of time.
TREND PERCENTAGES

1. In the comparative statements that choose the

year to be used as the base and convert the
amount of each item by 100%. The base year
may be the earliest year involved in the
comparison, the latest year or any intervening
year . Generally, the base year should be
representative of the normal operating activity
of the firm.
TREND PERCENTAGES

2. Compute the percentage relationship that each

statement item bears to the same item in the “base
year” by simply dividing each value by the base year.
3. Compare the trends of related financial and operating
data to form an opinion as to whether favorable or
unfavorable tendencies are reflected by the data.
 Example: EXAMPLE.xlsx
Answer:
COMMON SIZE FINANCIAL STATEMENTS

It translate peso amounts to percentages which

indicate the relative size of an item proportion to
the whole . Common Financial Position shows assets,
liabilities and owners equity as a percentage of
total assets while common size income statements
express revenue as percentage of sale revenues.
Also known as vertical analysis.
FINANCIAL RATIO

Is a comparison in fraction, proportion, decimal

or percentage form of two significant figures
taken from financial statements. It expresses the
direct relationship between two or more
quantities in the statement of financial position
and income statement of a business firm.
FINANCIAL RATIO

Liquidity ratio
Activity Ratio
Leverage Ratio
Profitability Ratio
 Analysis of Liquidity or Short-Term
Solvency

Current Ratio
 Analysis of Liquidity or Short-Term
Solvency

Current Ratio
 Analysis of Liquidity or Short-Term
Solvency

Quick or Acid test Ratio

 Analysis of Liquidity or Short-Term
Solvency

Quick or
Acid test Ratio
 Analysis of Liquidity or Short-Term
Solvency

Cash Flow Liquidity Ratio

 Analysis of Liquidity or Short-Term
Solvency

Cash Flow Liquidity Ratio

 Analysis of Asset Liquidity and
Management Asset Efficiency

Accounts Receivable Turnover

 Analysis of Asset Liquidity and
Management Asset Efficiency

Accounts Receivable Turnover

 Analysis of Asset Liquidity and
Management Asset Efficiency

Average Collection Period

 Analysis of Asset Liquidity and
Management Asset Efficiency

Average Collection Period

 Analysis of Asset Liquidity and
Management Asset Efficiency

Inventory Turnover
 Analysis of Asset Liquidity and
Management Asset Efficiency

Inventory Turnover
 Analysis of Asset Liquidity and
Management Asset Efficiency

Average Sales Period

 Analysis of Asset Liquidity and
Management Asset Efficiency

Average Sales Period

 Analysis of Asset Liquidity and
Management Asset Efficiency

Fixed Asset Turnover

 Analysis of Asset Liquidity and
Management Asset Efficiency

Fixed Asset Turnover

 Analysis of Asset Liquidity and
Management Asset Efficiency

Total Asset Turnover

 Analysis of Asset Liquidity and
Management Asset Efficiency

Total Asset Turnover

 Analysis of Leverage : Debt Financing and
Coverage

Debt Ratio
 Analysis of Leverage : Debt Financing and
Coverage

Debt Ratio
 Analysis of Leverage : Debt Financing and
Coverage

Debt to Equity Ratio

 Analysis of Leverage : Debt Financing and
Coverage

Debt to Equity Ratio

 Analysis of Leverage : Debt Financing and
Coverage

Time Interest Earned

 Analysis of Leverage : Debt Financing and
Coverage

Time Interest Earned

 Analysis of Leverage : Debt Financing and
Coverage

Fixed Charge Coverage

 Analysis of Leverage : Debt Financing and
Coverage

Fixed Charge Coverage

 Operating Efficiency and Profitability

Gross Profit Margin

 Operating Efficiency and Profitability

Gross Profit Margin

 Operating Efficiency and Profitability

Operating Profit Margin

 Operating Efficiency and Profitability

Operating Profit Margin

 Operating Efficiency and Profitability

Cash Flow Margin

 Operating Efficiency and Profitability

Cash Flow Margin

 Operating Efficiency and Profitability

Return on Assets
 Operating Efficiency and Profitability

Return on Assets
 Operating Efficiency and Profitability

Return on Equity
 Operating Efficiency and Profitability

Return on Equity
 Operating Efficiency and Profitability

Financial Leverage Index

 Operating Efficiency and Profitability

Financial Leverage Index

 Other Measures to measure return to
Investors

Earning per share

 Other Measures to measure return to
Investors

Earning per share

 Other Measures to measure return to
Investors

Price Earning Ratio

 Other Measures to measure return to
Investors

Price Earning Ratio

 Other Measures to measure return to
Investors

Dividend Payout Ratio

 Other Measures to measure return to
Investors

Dividend Payout Ratio

 Other Measures to measure return to
Investors

Dividend Yield
 Other Measures to measure return to
Investors

Dividend Yield