Chapter 17
“How Well Am I Doing?”
Financial Statement
Analysis
Limitations of Financial
Statement Analysis
Differences in accounting methods between
companies sometimes make comparisons
difficult.
We use the LIFO method to
value inventory.
McGraw-Hill/Irwin
We use the FIFO method to
value inventory.
© The McGraw-Hill Companies, Inc., 2003
Limitations of Financial
Statement Analysis
Industry
trends
Technological
changes
Changes
within the firm
Consumer
tastes
Economic
factors
Analysts should look beyond
the ratios.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Statements in Comparative
and Common-Size Form
 Dollar and percentage
changes on statements
Analytical
techniques used to
examine
relationships among
financial statement
items
McGraw-Hill/Irwin
 Common-size
statements
 Ratios
© The McGraw-Hill Companies, Inc., 2003
Dollar and Percentage
Changes on Statements
Comparing statements underscores
movements and trends and may provide
valuable clues about what to expect in the
future.
Horizontal
analysis
McGraw-Hill/Irwin
Trend
analysis
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
Horizontal analysis shows the changes
between years in the financial data in
both dollar and percentage form.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
Example
The following slides illustrate a horizontal
analysis of Clover Corporation’s December
31, 2004 and 2003 comparative balance
sheets and comparative income
statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
CLOVER CORPORATION
Comparative Balance Sheets
December 31
2004
Assets
Current assets:
Cash
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
McGraw-Hill/Irwin
$
12,000
60,000
80,000
3,000
155,000
40,000
120,000
160,000
$ 315,000
Increase (Decrease)
Amount
%
2003
$
23,500
40,000
100,000
1,200
164,700
40,000
85,000
125,000
$ 289,700
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
Calculating Change in Dollar Amounts
Dollar
Change
=
Current Year
Figure
–
Base Year
Figure
The dollar
amounts for
2003 become
the “base” year
figures.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
Calculating Change as a Percentage
Percentage
Change
McGraw-Hill/Irwin
=
Dollar Change
Base Year Figure
×
100%
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
CLOVER CORPORATION
Comparative Balance Sheets
December 31
2004
2003
Increase (Decrease)
Amount
%
Assets
Current assets:
Cash
$ 12,000 $ 23,500 $ (11,500)
(48.9)
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
Total current assets
$12,000 –155,000
$23,500164,700
= $(11,500)
Property and equipment:
Land
40,000
40,000
Buildings and equipment,
net
120,000
85,000
($11,500
÷ $23,500)
× 100% = 48.9%
Total property and equipment
160,000
125,000
Total assets
$ 315,000 $ 289,700
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
CLOVER CORPORATION
Comparative Balance Sheets
December 31
2004
Assets
Current assets:
Cash
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
McGraw-Hill/Irwin
$
12,000
60,000
80,000
3,000
155,000
40,000
120,000
160,000
$ 315,000
$
2003
Increase (Decrease)
Amount
%
23,500
40,000
100,000
1,200
164,700
$ (11,500)
20,000
(20,000)
1,800
(9,700)
(48.9)
50.0
(20.0)
150.0
(5.9)
35,000
35,000
$ 25,300
0.0
41.2
28.0
8.7
40,000
85,000
125,000
$ 289,700
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
We could do this for the liabilities
& stockholders’ equity, but now
let’s look at the income statement
accounts.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
2004
Net sales
$ 520,000
Cost of goods sold
360,000
Gross margin
160,000
Operating expenses
128,600
Net operating income
31,400
Interest expense
6,400
Net income before taxes
25,000
Less income taxes (30%)
7,500
Net income
$ 17,500
McGraw-Hill/Irwin
2003
$ 480,000
315,000
165,000
126,000
39,000
7,000
32,000
9,600
$ 22,400
Increase
(Decrease)
Amount
%
$ 40,000
8.3
45,000
14.3
(5,000)
(3.0)
2,600
2.1
(7,600)
(19.5)
(600)
(8.6)
(7,000)
(21.9)
(2,100)
(21.9)
$ (4,900)
(21.9)
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
2004
2003
Net sales
$ 520,000 $ 480,000
Cost of goods sold
360,000
315,000
Gross margin
160,000
165,000
increased
by 8.3%126,000
yet
OperatingSales
expenses
128,600
net income
Net operating
incomedecreased
31,400by 21.9%.
39,000
Interest expense
6,400
7,000
Net income before taxes
25,000
32,000
Less income taxes (30%)
7,500
9,600
Net income
$ 17,500 $ 22,400
McGraw-Hill/Irwin
Increase
(Decrease)
Amount
%
$ 40,000
8.3
45,000
14.3
(5,000)
(3.0)
2,600
2.1
(7,600)
(19.5)
(600)
(8.6)
(7,000)
(21.9)
(2,100)
(21.9)
$ (4,900)
(21.9)
© The McGraw-Hill Companies, Inc., 2003
Horizontal Analysis
CLOVER
CORPORATION
There were increases
in both
cost of goods
Comparative Income Statements
sold (14.3%) and
operating expenses (2.1%).
For the Years Ended December 31
These increased costs more than offset theIncrease
increase in sales, yielding an overall (Decrease)
decrease in net
income.1999
2000
Amount
%
Net sales
$ 520,000
Cost of goods sold
360,000
Gross margin
160,000
Operating expenses
128,600
Net operating income
31,400
Interest expense
6,400
Net income before taxes
25,000
Less income taxes (30%)
7,500
Net income
$ 17,500
McGraw-Hill/Irwin
$ 480,000
315,000
165,000
126,000
39,000
7,000
32,000
9,600
$ 22,400
$ 40,000
45,000
(5,000)
2,600
(7,600)
(600)
(7,000)
(2,100)
$ (4,900)
8.3
14.3
(3.0)
2.1
(19.5)
(8.6)
(21.9)
(21.9)
(21.9)
© The McGraw-Hill Companies, Inc., 2003
Trend Percentages
Trend percentages
state several years’
financial data in terms
of a base year, which
equals 100 percent.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Trend Analysis
Trend =
Percentage
McGraw-Hill/Irwin
Current Year Amount
Base Year Amount
× 100%
© The McGraw-Hill Companies, Inc., 2003
Trend Analysis
Example
Look at the income information for
Berry Products for the years 2000
through 2004. We will do a trend
analysis on these amounts to see
what we can learn about the
company.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Trend Analysis
Berry Products
Income Information
For the Years Ended December 31
Item
Sales
Cost of goods sold
Gross margin
2004
$ 400,000
285,000
115,000
2003
$ 355,000
250,000
105,000
Year
2002
$ 320,000
225,000
95,000
2001
$ 290,000
198,000
92,000
2000
$ 275,000
190,000
85,000
The base
year is 2000, and its amounts
will equal 100%.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Trend Analysis
Berry Products
Income Information
For the Years Ended December 31
Item
2004
2003
Year
2002
Sales
Cost of goods sold
Gross margin
2001
105%
104%
108%
2000
100%
100%
100%
2001 Amount ÷ 2000 Amount × 100%
( $290,000 ÷ $275,000 ) × 100% = 105%
( $198,000 ÷ $190,000 ) × 100% = 104%
( $ 92,000 ÷ $ 85,000 ) × 100% = 108%
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Trend Analysis
Berry Products
Income Information
For the Years Ended December 31
Item
Sales
Cost of goods sold
Gross margin
2004
145%
150%
135%
2003
129%
132%
124%
Year
2002
116%
118%
112%
2001
105%
104%
108%
2000
100%
100%
100%
By analyzing the trends for Berry Products, we
can see that cost of goods sold is increasing
faster than sales, which is slowing the increase
in gross margin.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Trend Analysis
160
Percentage
150
We can use the trend
percentages to construct a
graph so we can see the
trend over time.
140
130
Sales
COGS
GM
120
110
100
2000
2001
2002
2003
2004
Year
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Common-Size Statements
Common-size
statements use
percentages to express
the relationship of
individual components to
a total within a single
period. This is also
known as vertical
analysis.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Common-Size Statements
Example
Let’s take another look at the
information from the comparative
income statements of Clover
Corporation for 2004 and 2003.
This time let’s prepare common-size
statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Common-Size Statements
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
Percentages
2004
2003
2004
2003
Net sales
$ 520,000 $ 480,000
100.0
100.0
Cost of goods sold
360,000
315,000
Net sales is
Gross margin
160,000
165,000
usually the
Operating expenses
128,600
126,000
Net operating income
31,400
39,000
base and is
Interest expense
6,400
7,000
expressed
Net income before taxes
25,000
32,000
as 100%.
Less income taxes (30%)
7,500
9,600
Net income
$ 17,500 $ 22,400
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Common-Size Statements
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
Percentages
2004
2003
2004
2003
Net sales
$ 520,000 $ 480,000
100.0
100.0
Cost of goods sold
360,000
315,000
69.2
65.6
Gross margin
160,000
165,000
Operating expenses
128,600
126,000
2004 Cost
÷ 2004 Sales
Net operating
income
31,400× 100%
39,000
( $360,000
) × 100%
= 69.2%
Interest
expense ÷ $520,000
6,400
7,000
Net income before taxes
25,000
32,000
Cost ÷ 2003
× 100%
Less income 2003
taxes (30%)
7,500 Sales
9,600
$480,000
) × 100% = 65.6%
Net income ( $315,000 $÷17,500
$ 22,400
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Gross Margin Percentage
Gross Margin
Percentage
=
Gross Margin
Sales
This measure indicates how much
of each sales dollar is left after
deducting the cost of goods sold to
cover expenses and a profit.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Common-Size Statements
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31
Common-Size
What conclusions can we draw?
Percentages
2004
2003
2004
2003
Net sales
$ 520,000 $ 480,000
100.0
100.0
Cost of goods sold
360,000
315,000
69.2
65.6
Gross margin
160,000
165,000
30.8
34.4
Operating expenses
128,600
126,000
24.8
26.2
Net operating income
31,400
39,000
6.0
8.2
Interest expense
6,400
7,000
1.2
1.5
Net income before taxes
25,000
32,000
4.8
6.7
Less income taxes (30%)
7,500
9,600
1.4
2.0
Net income
$ 17,500 $ 22,400
3.4
4.7
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Which of the following statements describes
horizontal analysis?
a. A statement that shows items appearing
on it in percentage and dollar form.
b. A side-by-side comparison of two or
more years’ financial statements.
c. A comparison of the account balances on
the current year’s financial statements.
d. None of the above.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Which of the following statements describes
horizontal analysis?
a. A statement that shows items appearing
on it in percentage and dollar form.
b. A side-by-side comparison of two or
more years’ financial statements.
c.Horizontal
A comparison
of theshows
account
analysis
thebalances
changes on
the current
between
yearsyear’s
in thefinancial
financialstatements.
data in both
d. Nonedollar
of theand
above.
percentage form.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Now, let’s look at
Norton
Corporation’s
2004 and 2003
financial
statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
NORTON CORPORATION
Balance Sheets
December 31
2004
Assets
Current assets:
Cash
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
McGraw-Hill/Irwin
$
30,000
20,000
12,000
3,000
65,000
165,000
116,390
281,390
$ 346,390
2003
$
20,000
17,000
10,000
2,000
49,000
123,000
128,000
251,000
$ 300,000
© The McGraw-Hill Companies, Inc., 2003
NORTON CORPORATION
Balance Sheets
December 31
2004
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Notes payable, short-term
Total current liabilities
Long-term liabilities:
Notes payable, long-term
Total liabilities
Stockholders' equity:
Common stock, $1 par value
Additional paid-in capital
Total paid-in capital
Retained earnings
Total stockholders' equity
$
39,000
3,000
42,000
2003
$
40,000
2,000
42,000
70,000
112,000
78,000
120,000
27,400
158,100
185,500
48,890
234,390
17,000
113,000
130,000
50,000
180,000
Total liabilities and stockholders' equity $ 346,390
$ 300,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
NORTON CORPORATION
Income Statements
For the Years Ended December 31
Net sales
Cost of goods sold
Gross margin
Operating expenses
Net operating income
Interest expense
Net income before taxes
Less income taxes (30%)
Net income
McGraw-Hill/Irwin
2004
$ 494,000
140,000
354,000
270,000
84,000
7,300
76,700
23,010
$ 53,690
2003
$ 450,000
127,000
323,000
249,000
74,000
8,000
66,000
19,800
$ 46,200
© The McGraw-Hill Companies, Inc., 2003
Now, let’s calculate
some ratios based
on Norton
Corporation’s
financial
statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Ratio Analysis – The Common
Stockholder
NORTON CORPORATION
2004
Use this information to
calculate ratios to
measure the well-being
of the common
stockholders of Norton
Corporation.
Number of common shares
outstanding
Beginning of year
End of year
Net income
17,000
27,400
$
53,690
Stockholders' equity
Beginning of year
180,000
End of year
234,390
Dividends per share
Dec. 31 market price per share
Interest expense
2
20
7,300
Total assets
Beginning of year
McGraw-Hill/Irwin
End of year
300,000
© The McGraw-Hill Companies,
Inc., 2003
346,390
Earnings Per Share
Earnings per Share =
Net Income – Preferred Dividends
Average Number of Common
Shares Outstanding
Whenever a ratio divides an income statement
balance by a balance sheet balance, the average
for the year is used in the denominator.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Earnings Per Share
Earnings per Share =
Earnings per Share =
Net Income – Preferred Dividends
Average Number of Common
Shares Outstanding
$53,690 – 0
(17,000 + 27,400)/2
= $2.42
This measure indicates how much
income was earned for each share of
common stock outstanding.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Price-Earnings Ratio
Price-Earnings
Ratio
Price-Earnings
Ratio
=
=
Market Price Per Share
Earnings Per Share
$20.00
$2.42
= 8.26 times
This measure is often used by investors
as a general guideline in gauging stock
values. Generally, the higher the priceearnings ratio, the more opportunity a
company has for growth.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Dividend Payout Ratio
Dividend
Payout Ratio
Dividend
Payout Ratio
=
=
Dividends Per Share
Earnings Per Share
$2.00
$2.42
= 82.6%
This ratio gauges the portion of current
earnings being paid out in dividends.
Investors seeking current income would
like this ratio to be large.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Dividend Yield Ratio
Dividend
Yield Ratio
Dividend
Yield Ratio
=
=
Dividends Per Share
Market Price Per Share
$2.00
$20.00
= 10.00%
This ratio identifies the return, in terms
of cash dividends, on the current
market price of the stock.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Return on Total Assets
Return on
=
Total Assets
Net Income + [Interest Expense × (1 – Tax Rate)]
Average Total Assets
Return on
=
Total Assets
$53,690 +[7,300 × (1 – .30)]
($300,000 + $346,390) ÷ 2
= 18.19%
This ratio measures how well assets
have been employed.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Return on Common
Stockholders’ Equity
Return on Common = Net Income – Preferred Dividends
Stockholders’ Equity
Average Stockholders’ Equity
Return on Common
$53,690 – 0
=
= 25.91%
Stockholders’ Equity
($180,000 + $234,390) ÷ 2
This measure indicates how well the
company employed the owners’
investments to earn income.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Financial Leverage
Financial leverage involves acquiring
assets with funds at a fixed rate of
interest.
Return on
investment in >
assets
Fixed rate of
return on
borrowed
funds
Positive
= financial
leverage
Return on
investment in <
assets
Fixed rate of
return on
borrowed
funds
Negative
= financial
leverage
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Which of the following statements is true?
a. Negative financial leverage is when the
fixed return to a company’s creditors and
preferred stockholders is greater than the
return on total assets.
b. Positive financial leverage is when the
fixed return to a company’s creditors and
preferred stockholders is greater than the
return on total assets.
c. Financial leverage is the expression of
several years’ financial data in
percentage form in terms of a base year.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Quick Check 
Which of the following statements is true?
a. Negative financial leverage is when the
fixed return to a company’s creditors and
preferred stockholders is greater than the
return on total assets.
b. Positive financial leverage is when the
fixed return to a company’s creditors and
preferred stockholders is greater than the
return on total assets.
c. Financial leverage is the expression of
several years’ financial data in
percentage form in terms of a base year.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Impact of Income Taxes
Tax
Deductible
Interest on
Debt
Dividends
on Stock
McGraw-Hill/Irwin
Yes
No
Debt is more
efficient in
generating
positive
financial
leverage than
preferred
stock.
© The McGraw-Hill Companies, Inc., 2003
Book Value Per Share
Book Value
per Share
=
Book Value
per Share
Common Stockholders’ Equity
Number of Common Shares Outstanding
=
$234,390
27,400
= $ 8.55
This ratio 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 and if all creditors were paid off.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Ratio Analysis – The Short–
Term Creditor
NORTON CORPORATION
2004
Use this information
to calculate ratios
to measure the
well-being of the
short-term
creditors for
Norton
Corporation.
McGraw-Hill/Irwin
Cash
$
30,000
Accounts receivable, net
Beginning of year
17,000
End of year
20,000
Inventory
Beginning of year
10,000
End of year
12,000
Total current assets
65,000
Total current liabilities
42,000
Sales on account
500,000
Cost of goods sold
140,000
© The McGraw-Hill Companies, Inc., 2003
Working Capital
December 31,
2004
Current assets
$
Current liabilities
Working capital
McGraw-Hill/Irwin
65,000
(42,000)
$
23,000
© The McGraw-Hill Companies, Inc., 2003
Current Ratio
Current
Ratio
Current
Ratio
=
=
Current Assets
Current Liabilities
$65,000
$42,000
=
1.55 : 1
This ratio measures the ability
of the company to pay current
debts as they become due.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Acid-Test (Quick) Ratio
Acid-Test
=
Ratio
Quick Assets
Current Liabilities
Quick assets are Cash,
Marketable Securities,
Accounts Receivable and
current Notes Receivable.
Norton Corporation’s quick
assets consist of cash of
$30,000 and accounts
receivable of $20,000.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Acid-Test (Quick) Ratio
Acid-Test
=
Ratio
Acid-Test
=
Ratio
Quick Assets
Current Liabilities
$50,000
$42,000
= 1.19 : 1
This ratio is like the current
ratio but excludes current assets such
as inventories that may be difficult to
quickly convert into cash.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Accounts Receivable Turnover
Accounts
Receivable
Turnover
=
Sales on Account
Average Accounts Receivable
Accounts
$500,000
= 27.03 times
Receivable =
($17,000 + $20,000) ÷ 2
Turnover
This ratio measures how many
times a company converts its
receivables into cash each year.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Average Collection Period
Average
365 Days
Collection = Accounts Receivable Turnover
Period
Average
Collection =
Period
365 Days
27.03 Times
= 13.50 days
This ratio measures, on average,
how many days it takes to collect
an account receivable.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Inventory Turnover
Inventory
Turnover
Inventory
Turnover
=
Cost of Goods Sold
Average Inventory
$140,000
=
= 12.73 times
($10,000 + $12,000) ÷ 2
This ratio measures the number
of times merchandise inventory
is sold and replaced during the year.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Average Sale Period
Average
Sale Period
Average
=
Sale Period
=
365 Days
Inventory Turnover
365 Days
12.73 Times
= 28.67 days
This ratio measures how many
days, on average, it takes to sell
the inventory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Ratio Analysis – The Long–
Term Creditor
Use this information to calculate
ratios to measure the well-being of
the long-term creditors for Norton
Corporation.
NORTON CORPORATION
2004
Earnings before interest
expense and income taxes
This is also referred
to as net operating
income.
McGraw-Hill/Irwin
Interest expense
$
84,000
7,300
Total stockholders' equity
234,390
Total liabilities
112,000
© The McGraw-Hill Companies, Inc., 2003
Times Interest Earned Ratio
Times
Interest =
Earned
Times
Interest =
Earned
Earnings before Interest Expense
and Income Taxes
Interest Expense
$84,000
= 11.5 times
7,300
This is the most common
measure of the ability of a firm’s
operations to provide protection
to the long-term creditor.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Debt-to-Equity Ratio
Debt–to–
Total Liabilities
Equity =
Stockholders’ Equity
Ratio
Debt–to–
Equity =
Ratio
$112,000
$234,390
= 0.48 to 1
This ratio measures the amount of assets
being provided by creditors for each dollar
of assets being provided by the owners of
the company.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
Sources of Financial Ratios
Source
Almanac of Business and Industrial Financial
Ratios. Prentice-Hall. Published annually.
Annual Statement Studies. Robert Morris
Associates. Published annually.
www.rmahq.org/Ann_Studies/assstudies.html
Business & Company ASAP . Database that is
updated continuously.
EDGAR . Securities and Exchange
Commission. Web site that is updated
continuously. www.sec.gov
EBSCOhost (Business Source Elite index) .
EBSCO publishing. Database that is updated
continuously.
FreeEDGAR . EDGAR Online, Inc. Web site
that is updated continuously.
www.freeedgar.com
McGraw-Hill/Irwin
Source
Hoover's Online . Hoovers, Inc. Web site that is
updated continuously. www.hoovers.com
Key Business Ratios. Dun & Bradstreet.
Published annually.
Moody's Industrial Manual and Moody's Bank
and Finance Manual . Dun & Bradstreet.
Published annually.
PricewaterhouseCoopers Web site that is
updated continuously.
www.edgarscan.tc.pw.com
Standard & Poor's Industry Survey . Standard &
Poor's. Published annually.
© The McGraw-Hill Companies, Inc., 2003
End of Chapter 17
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003