Chapter
Nine
Financial
Statement
Analysis
© 2015 McGraw-Hill Education.
Methods of Analysis
Horizontal Analysis
Percentage Analysis
Vertical Analysis
Ratio Analysis
9-2
Horizontal and Percentage
Analysis
Horizontal analysis (or trend analysis)
refers to studying the behavior of
individual financial statement items over
several accounting periods.
Absolute Amounts
Percentage Analysis
9-3
Milavec Company Horizontal
Analysis
2015
2014
9-4
Vertical Analysis
Vertical analysis uses
percentages to compare
individual components of
financial statements to a key
statement figure. A commonsize financial statement is a
vertical analysis in which
each financial statement item
is expressed as a
percentage.
9-5
Milavec Company Vertical Analysis
2012
2011
9-6
2012
2011
9-7
Ratio Analysis
Ratio analysis
involves studying
various
relationships
between different
items reported in a
set of financial
statements.
9-8
Liquidity Ratios
Liquidity ratios indicate a
company’s ability to pay shortterm debts. They focus on
current assets and current
liabilities.
1. Working Capital
2. Current Ratio
3. Quick Ratio
4. Accounts Receivable Ratios
5. Inventory Ratios
9-9
Solvency Ratios
Solvency ratios are used to analyze
a company’s long-term debtpaying ability and its financing
structure.
1. Debt to Assets Ratio
2. Debt to Equity Ratio
3. Number of Times Interest Earned
4. Plant Assets to Long-Term Liabilities
9-10
Profitability Ratios
Profitability ratios measure a
company’s ability to generate
earnings.
1. Net Margin (or Return on Sales)
2. Asset Turnover Ratio
3. Return on Investment
4. Return on Equity
9-11
Stock Market Ratios
Stock market ratios analyze the
earnings and dividends of a
company.
1. Earnings Per Share
2. Book Value
3. Price-Earnings (PE) Ratio
4. Dividend Yield
9-12
Earnings Per Share
Earnings
per
Share
=
Net Earnings Available for Common Stock
Average Number of Outstanding Common
Shares
This measure indicates how much
income was earned for each share of
common stock outstanding.
9-13
Earnings Per Share
$25,000 (net income) - $3,000 (preferred dividend)
= $1.60 per share
(15,000 + 12,500)/2 (average outstanding common shares)
9-14
Book Value Per Share
Book Value
per Share
Stockholders’ Equity - Preferred Dividends
Outstanding Common Shares
=
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.
9-15
Book Value Per Share
$362,000 - $50,000
15,000
= $20.80 per share
9-16
Price-Earnings Ratio
Price-Earnings =
Ratio
Market Price Per Share
Earnings Per Share
This ratio compares the earnings of a
company to the market price for a share
of the company’s stock.
9-17
Dividend Yield
Dividend
Yield
=
Dividends Per Share
Market Price Per Share
This ratio identifies the return, in terms
of cash dividends, on the current
market price of the stock.
9-18
Limitations of Financial
Statement Analysis
Different
Industries
Changing
Economic
Environment
Accounting
Principles
9-19
End of Chapter Nine
9-20