17
Financial Statement
Analysis
Student Version
17-1
11-1
1
Describe basic financial
statement analytical
methods.
17-2
11-2
1
Horizontal Analysis
The percentage analysis of increases
and decreases in related items using
comparative financial statements is
called horizontal analysis.
17-3
11-3
1
Exhibit 1
Comparative
Balance
Sheet—
Horizontal
Analysis
Horizontal Analysis:
Difference
Base year (2009)
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11-4
$17,000
= 3.2%
$533,000
1
Exhibit 2
Comparative Schedule of Current
Assets—Horizontal Analysis
Horizontal Analysis:
Difference
$25,800
= 39.9%
Base year (2009) $64,700
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1
Exhibit 3
Comparative Income Statement—
Horizontal Analysis
Horizontal Analysis:
Increase amount $296,500
= 24.0%
Base year (2009) $1,234,000
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1
Exhibit 4
Comparative Retained Earnings
Statement—Horizontal Analysis
Horizontal Analysis:
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Increase amount
$37,500
Base year (2009)
$100,000
= 37.5%
1
Vertical Analysis
A percentage analysis used to show
the relationship of each component
to the total within a single statement
is called vertical analysis.
17-8
11-8
1
Vertical Analysis of
Balance Sheet
In a vertical analysis of the balance
sheet, each asset item is stated as a
percent of the total assets. Each
liability and stockholders’ equity item
is stated as a percent of the total
liabilities and stockholders’ equity.
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1
Exhibit 5
Comparative
Balance
Sheet—
Vertical
Analysis
Vertical Analysis:
Current assets
Total assets
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11-10
$550,000
= 48.3%
$1,139,500
1
Vertical Analysis of the
Income Statement
In a vertical analysis of the
income statement, each
item is stated as a percent
of net sales.
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11-11
1
Exhibit 6
Comparative Income
Statement—Vertical Analysis
Vertical Analysis:
Selling expenses $191,000
= 12.8%
Net sales
$1,498,000
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1
Common-Size Statements
In a common-sized statements, all
items are expressed as a percentage.
Common-sized statements are
useful in comparing the current
period with prior periods, individual
businesses, or one business with
with industry percentages.
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1
Exhibit 7
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Common-Sized Income Statement
2
Use financial statement
analysis to assess the
solvency of a business.
11-15
17-15
2
Working Capital
The excess of current assets of a business
over its current liabilities is called
working capital. The working capital is
often used in evaluating a company’s
ability to pay current liabilities.
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2
Working Capital = Current Assets – Current Liabilities
Current assets
Current liabilities
Working capital
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2010
$550,000
–210,000
$340,000
2009
$533,000
–243,000
$290,000
2
Current Ratio
The current ratio, sometimes
called the working capital
ratio or bankers’ ratio
measures a company’s ability
to pay its current liabilities.
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2
Current Ratio =
Current assets
Current liabilities
Current ratio
Current Assets
Current Liabilities
2010
$550,000
$210,000
2.6
$550,000
$210,000
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2009
$533,000
$243,000
2.2
$533,000
$243,000
2
Quick Ratio
A ratio that measures the “instant”
debt-paying ability of a company
is called the quick ratio or acidtest ratio.
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2
Quick assets are cash
and other current assets
that can be quickly
converted to cash.
2010
Quick assets:
Cash
Temporary Investments
Accounts receivable (net)
a. Total quick assets
b. Current liabilities
Quick ratio (a ÷ b)
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$ 90,500
75,000
115,000
$280,500
$210,000
1.3
2009
$ 64,700
60,000
120,000
$244,700
$243,000
1.0
2
Accounts Receivable Turnover
The relationship between sales and
accounts receivable may be stated as
the accounts receivable turnover.
Collecting accounts receivable as
quickly as possible improves a
company’s solvency.
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2
Accounts Receivable Turnover =
a. Net sales
Accounts receivable (net):
Beginning of year
End of year
Total
b. Average (Total ÷ 2)
Accounts receivable turnover
(a ÷ b)
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Net Sales
Average Accounts
Receivable
2010
$1,498,000
2009
$1,200,000
$ 120,000
115,500
$ 235,000
$ 117,500
$ 140,000
120,000
$ 260,000
$ 130,000
12.7
9.2
2
Number of Days’ Sales
in Receivables
The number of days’ sales in
receivables is an estimate of the length
of time (in days) the accounts
receivable have been outstanding.
Number of Days’ =
Sales in Receivables
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Average Accounts
Receivable
Net Sales
365
Average Daily
Sales
2
2010
a. Average accounts receivable
(Total accounts
receivable ÷ 2)
Net sales
b. Average daily sales
(Sales ÷ 365)
Number of days’ sales in
receivables (a ÷ b)
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2009
$ 117,500
$1,498,000
$ 130,000
$1,200,000
$
$
4,104
28.6
3,288
39.5
2
Inventory Turnover
The relationship between the
volume of goods (merchandise)
sold and inventory may be stated
as the inventory turnover. The
purpose of this ratio is to assess
the efficiency of the firm in
managing its inventory.
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2
Inventory Turnover =
a. Cost of goods sold
Inventories:
Beginning of year
End of year
Total
b. Average (Total ÷ 2)
Inventory turnover (a ÷ b)
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Cost of Goods Sold
Average Inventory
2010
2009
$1,043,000
$ 820,000
$ 283,000
264,000
$ 547,000
$ 273,500
$ 311,000
283,000
$ 594,000
$ 297,000
3.8
2.8
2
Number of Days’
Sales in Inventory
The number of days’ sales in
inventory is a rough measure
of the length of time it takes
to purchase, sell, and replace
the inventory.
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2
Average Inventory
Number of Days’
=
Sales in Inventory
Average Daily Cost of
Goods Sold
Cost of Goods Sold
365
a. Average inventory (Total ÷ 2)
Cost of goods sold
b. Average daily cost of goods
sold (COGS ÷ 365 days)
Number of days’ sales in
inventory (a ÷ b)
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2010
$ 273,500
$1,043,000
2009
$ 297,000
$ 820,000
$2,858
$2,247
95.7
132.2
2
Ratio of Fixed Assets to
Long-Term Liabilities
The ratio of fixed assets to long-term
liabilities is a solvency measure that
indicates the margin of safety of the
noteholders or bondholders. It also
indicates the ability of the business to
borrow additional funds on a longterm basis.
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2
Ratio of Fixed Assets to
=
Long-Term Liabilities
Fixed Assets (net)
Long-Term
Liabilities
2010
a. Fixed assets (net)
b. Long-term liabilities
Ratio of fixed assets to
long-term liabilities (a ÷ b)
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$444,500
$100,000
4.4
2009
$470,000
$200,000
2.4
2
Ratio of Liabilities to
Stockholders’ Equity
The relationship between the total
claims of the creditors and
owners—the ratio of liabilities to
stockholders’ equity—is a
solvency measure that indicates
the margin of safety for creditors.
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2
Total Liabilities
Ratio of Liabilities to
=
Stockholders’ Equity
Total Stockholders’
Equity
2010
a. Total liabilities
b. Total stockholders’ equity
Ratio of liabilities to
stockholders’ equity ( a÷ b)
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$310,000
$829,500
0.4
2009
$443,000
$787,500
0.6
2
Number of Times Interest
Charges Earned
Corporations in some industries normally
have high ratios of debt to stockholders’
equity. For such corporations, the relative
risk of the debtholders is normally
measured as the number of times interest
charges are earned (during the year),
sometimes called the fixed charge
coverage ratio.
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2
Number of Times Interest
=
Charges Earned
Income before income tax
a. Add interest expense
b. Amount available to meet
interest charges
Number of times interest
charges earned (b ÷ a)
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Income Before Income Tax
+ Interest Expense
Interest Expense
2010
2009
$162,500
6,000
$134,600
12,000
$168,500
$146,600
28.1
12.2
2
Number of Times Preferred
Dividends Are Earned
The number of times interest charges
are earned can be adapted for use with
dividends on preferred stock.
Number of Times
Preferred Dividends =
Are Earned
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Net Income
Preferred Dividends
3
Use financial statement
analysis to assess the
profitability of a
business.
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3
Profitability Analysis
Profitability analysis focuses
primarily on the relationship
between operating results and
the resources available to a
business.
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3
Ratio of Net Sales to Assets =
a. Net sales
Total assets:
Beginning of year
End of year
Total
b. Average (Total ÷ 2)
Average Total
Assets
2010
$1,498,000
2009
$1,200,000
$1,053,000
1,044,500
$2,097,500
$1,048,750
$1,010,000
1,053,000
$2,063,000
$1,031,500
Ratio of net sales to assets (a ÷ b)
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Net Sales
1.4
1.2
3
Rate Earned on Total Assets =
Net income
Plus interest expense
a. Total
Total assets:
Beginning of year
End of year
Total
b. Average (Total ÷ 2)
Rate earned on total
assets (a ÷ b)
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11-40
Net Income +
Interest Expense
Average Total Assets
2010
$ 91,000
6,000
$ 97,000
2009
$ 76,500
12,000
$ 88,500
$1,230,500
1,139,500
$2,370,000
$1,185,000
$1,187,500
1,230,500
$2,418,000
$1,209,000
8.2%
7.3%
3
Rate Earned on
=
Stockholders’ Equity
a. Net income
Stockholders’ equity:
Beginning of year
End of year
Total
b. Average (Total ÷ 2)
Rate earned on stockholders’
equity (a ÷ b)
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Net Income
Average Total
Stockholders’ Equity
2010
$ 91,000
2009
$ 76,500
$ 787,500
829,500
$1,617,000
$ 808,500
$ 750,000
787,500
$1,537,500
$ 768,750
11.3%
10.0%
3
Rate Earned on Common
=
Stockholders’ Equity
Net income
Less preferred dividends
a. Remainder—common stock
Common stockholders’ equity:
Beginning of year
End of year
Total
b. Average (Total ÷ 2)
Rate earned on common
stockholders’ equity (a ÷ b)
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Net Income –
Preferred Dividends
Average Common
Stockholders’ Equity
2010
91,000
9,000
82,000
2009
$ 76,500
9,000
$ 67,500
$ 637,500
679,500
$1,317,000
$ 658,500
$ 600,000
637,500
$1,237,500
$ 618,750
12.5%
10.9%
$
$
3
Net Income –
Preferred Dividends
Earnings per Share (EPS)
=
on Common Stock
Shares of Common Stock
Outstanding
Net income
Preferred dividends
a. Remainder—identified with
common stock
b. Shares of common stock
Earnings per share on common
stock (a ÷ b)
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2010
$91,000
9,000
2009
$76,500
9,000
$82,000
50,000
$67,500
50,000
$1.64
$1.35
3
Market Price per Share of
Common Stock
Price-earnings (P/E) ratio =
Earnings per Share on
Common Stock
Market price per share of
common stock
Earnings per share on common
stock
Price-earnings ratio on
common stock
17-44
11-44
2010
2009
$41.00
$27.00
÷ 1.64
÷ 1.35
25
20
3
Dividends per Share =
Dividends
Shares of Common Stock
Outstanding
2010
2009
a. Dividends
$40,000 $30,000
b. Shares of common stock outstanding 50,000 50,000
Dividends per share of common stock
(a ÷ b)
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$0.80
$0.60
3
Dividends per Share of
Common Stock
Dividend Yield =
Market Price per Share of
Common Stock
a. Dividends per share of
common stock
b. Market price per share of
common stock
Dividend yield on
common stock
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2010
2009
$ 0.80
$ 0.60
41.00
27.00
2.0%
2.2%
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