LECTURE “0” (SELF STUDY)
Introduction to Financial Satement Analysis
Berk, De Marzo
Chapter 2
2
Types of Financial Statements
1. Balance Sheet: A snapshot in time of the firm’s financial position.
Assets= liabilities +equity
• Current Assets: Cash or expected to be turned into cash in the next year-Cash,
Marketable Securities, Accounts Receivable, Inventories, Other Current
Assets, Example: Pre-paid expenses.
• Long-Term Assets: Net Property, Plant, & Equipment: Depreciation (and
Accumulated Depreciation)
• Book Value = Acquisition cost – Accumulated depreciation
• Goodwill and intangible assets: Amortization
• Other Long-Term Assets: Example: Investments in Long-term Securities
• Liabilities
• Current Liabilities: Due to be paid within the next year
• Accounts Payable, Short-Term Debt/Notes Payable, Current Maturities of
Long-Term Debt, Other Current Liabilities, Taxes Payable, Wages Payable
• Long-Term Liabilities: Long-Term Debt, Capital Leases, Deferred Taxes
3
Global
Conglomerat
e Corporation
Balance
Sheet for
2012 and
2011
4
Global
Conglomer
ate
Corporatio
n Balance
Sheet for
2012 and
2011
5
Financial Satement Analysis
• Stockholder’s Equity
• Book Value of Equity
• Book Value of Assets – Book Value of Liabilities
• Could possibly be negative
• Many of the firm’s valuable assets may not be captured on the balance sheet
• Market Value of Equity (Market Capitalization)
• Market Price per Share x Number of Shares Outstanding
• Cannot be negative
• Often differs substantially from book value
• Market Value Versus Book Value
Market Value of Equity
Market-to-Book Ratio 
Book Value of Equity
6
Financial Satement Analysis
2. Income Statement:
• Total Sales/Revenues - Cost of Sales= Gross Profit
• Gross Profit-Operating Expenses (Selling, General, and Administrative
Expenses, R&D, Depreciation & amortization)=Operating Income
• Operating Income +/- Other Income/Other Expenses= Earnings Before
Interest and Taxes (EBIT)
• EBIT-/+Interest Income/Interest Expense=Pre-Tax Income-Taxes=Net
Income.
Net Income
EPS 
Shares Outstanding
EPS= Earnings Per Share
7
Global Conglomerate Corporation Income Statement
Sheet for 2012 and 2011
8
Financial Satement Analysis
• Statement of Cash Flows: applies the information from the
income statement and balance sheet to determine how much
cash the firm has generated and allocated during a set period.
• Three Sections
• Operating Activities: Adjusts net income by all non-cash items related to
operating activities and changes in net working capital
• Investment Activities: Capital Expenditures and Buying or Selling
Marketable Securities
• Financing Activities: Payment of Dividends
• Retained Earnings = Net Income – Dividends
9
Global Conglomerate Corporation Statement of Cash Flows for 2012 and
2011
10
Financial Statement Analysis
• Profitability Ratios
Gross Profit
Gross Margin=
Sales
EBIT 
EBIT
Sales
Operating Income
Operating Margin=
Sales
Net Profit Margin 
Net Income
Total Sales
11
Financial Statement Analysis
• Liquidity Ratios
• Current Ratio
• Current Assets / Current Liabilities
• Cash Ratio
• Cash / Current Liabilities
12
Financial Statement Analysis
• Working Capital Ratios
• Accounts Receivable Days
Accounts Receivable Days 
• Accounts Payable Days
Accounts Payable Days 
• Inventory Days
Inventory Days 
Accounts Receivable
Average Daily Sales
Accounts Payable
Average Daily Cost of Sales
Inventory
Average Daily Cost of Sales
13
Financial Statement Analysis
• Working Capital Ratios
• Accounts Receivable Turnover
Annual Sales
Accounts Receivable Turnover 
Accounts Receivable
• Accounts Payable Turnover
Annual Cost of Sales
Accounts Payable Turnover 
Accounts Payable
• Inventory Turnover
Inventory Turnover 
Annual Cost of Sales
Inventory
14
Financial Statement Analysis
• Interest Coverage Ratios
• EBIT/Interest
• EBITDA/Interest
• EBITDA = EBIT + Depreciation and Amortization
15
Financial Statement Analysis
• Leverage Ratios
• Debt-Equity Ratio
Total Debt
Debt-Equity Ratio 
Total Equity
• Debt-to-Capital Ratio
Total Debt
Debt-to-Capital Ratio 
Total Equity + Total Debt
16
Financial Statement Analysis
• Leverage Ratios
• Net Debt
• Total Debt + Excess Cash & Short-Term Investments
• Debt-to-Enterprise Value
Net Debt
Debt-to-Enterprise Value Ratio 
Market Value of Equity + Net Debt
• Equity Multiplier
• Total Assets / Book Value of Equity
17
Financial Statement Analysis
• Valuation Ratios
– P/E Ratio
P / E Ratio 
Market Capitalization
Share Price

Net Income
Earnings per Share
– Enterprise Value to EBIT
Enterprise Value to EBIT=
Market Value of Equity + Debt - Cash
EBIT
– Enterprise Value to Sales
Enterprise Value toSales=
Market Value of Equity + Debt - Cash
Sales