Financial Analysis and L-T Financial, Planning
Financial Statement Analysis
 gain insight strengths and weaknesses
 help to predict future plans, earnings, conditions
Financial Ratio :
 evaluate past performance of a company
 valuable tools
 standardize B/Z, I/S numbers (different size of firms will not
affect the analysis)
Financial ratios perform 3 types of analyses :
A.
Trend analysis (Time- Series) : look at the trend in a ratio
over time >> evaluate a firm’s performance over time
B.
Industry Comparative analysis :
 compares a firm’s performance to a standard >> called
industry average (industry norms)
 average ratios of other companies w/n the same industry
C.
Cross – sectional analysis :
 different firms are compared at the same point in time
Financial ratios
1. Liquidity ratios
 focus on relationship between CA, CL
 measure a firm’s ability to pay its current obligations (S-T
debts, instant, debts)
1. Net Working Capital (NWC) : NWC = CA-CL
2. Current ratio : Current ratio = Current Assets/Current Liabilities
3. Quick or Acid test ratio : Quick or Acid test ratio = (Current
Assets-Incentory)/Current Liabilities
 measures ability to payoff S-T debts w/o relying on sales of
inventories
 eliminate inventory (least liquid CA) >> must be converted to
sales first
So,
A.
high ratio
 good >> higher ability to pay off S-T debts
B.
low ratio
 not good >> higher risk of not being able to payoff S-T debts
 less liquid firm >> greater risk of insolvency or default
2. Asset management ratios
Measure how assets are turned over >> efficiently in using
assets to generates sales or revenue
1. Inventory Turnover Ratio : Inventory Turnover =
COGS/Inventory
A.
High ratio
 good >> rapid turnover
 due to superior merchandising (stocking only fast selling items)
B.
Low ratio
 bad >> due to obsolete (out of date inv.), damaged goods, over
stocked
 excess inv. >> unproductive – represent investment with
low/zero return
2. Receivables Turnover : Receivables Turnover =
Sales/Receivables
3. Average Collection Period (ACP) : ACP = (Receivables x
365)/Sales
#of days a firm must wait after making a sale before receiving
cash from customers
A.
High ratio
 not good >> uncollectible accounts, tax (careless/out off
control) collection policy (about customers quality, credit term),
or a liberal (too nice) credit policy
 shortest ACP >> not the best >> customers switch to other
firms >> lost sale
B.
Low ratio
 good >> fast paying customers, strict collection policy, tough
credit policy
 shorter ACP >> better asset management efficiency of the firm
4. Fixed Asset Turnover : Fixed Asset Turnover Ratio =
Sales/(Net Fixed Assets)
5. Total Asset Turnover : Total Asset Turnover Ratio = Sales/Total
Assets
So,
A.
B.
High ratio >> good
Low ratio >> bad
3. Debt management ratios
Financial Leverage ratio : measures a firm uses debt
(borrowed funds, or financial leverage) to finance assets
1. Debt ratio : Debt Ratio = Total Debt/Total Assets
A.
High debt – not good >> high proportion of borrowed
funds used to buy assets
B.
Low debt – creditors prefer low debt ratio
2. Total Debt to Equity Ratio : Total Debt to Equity Ratio = Total
Debt/Total Equity
4. Profitability ratios – measure ability to earn profits (generate
returns) on sales, assets, and shareholders’ equity
A.
High ratio – good
B.
Low ratio - bad
1. Gross Profit Margin : GPM = Gross Profit/Sales
2. Operating Profit Margin : OPM = EBIT
3. Net Profit Margin : NPM = Net income available to
shareholders/Sales
4. Return on Asset (ROA) : ROA = Net income available to
shareholders/Total Assets
5. Return on Equity (ROE) : ROE = Net income available to
shareholders/Common Equity
5. Market value ratios
 indicate the willingness of investors to value a firm in the
marketplace
 what investors think of firm’s past performance (using financial
statement) and future prospects (financial market)
 so, we need information of stock price from the market (SET =
Stock Exchange of Thailand)
1. Price per Earning (P/E) ratio : Price-Earnings Ratio = Price per
share/Earnings per share – shows how much investors willing
to pay for each $1 of a firm’s EPS (EPS = NI to C/S /#of
shares)
A.
High ratio – higher >> firm w higher growth prospects
B.
Low ratio – lower >> riskier firm
2. Dividend yield = DPS/Market price per share
Reference : ชีท excellent center