CHAPTER 13
Analysis of Financial
Statements
9-1
Analysis of Financial
Statements

Ratio analysis

Trend Analysis

DuPont Analysis

Competitive Comparisons & “Benchmarking”

Limitations of ratio analysis
9-2
Objectives of Ratio Analysis

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Standardize numbers
Compare Performance

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Trends
Competition
Identify Strengths & Weaknesses
Make Management Decisions to improve
Future Performance
9-3
5 Basic Categories of
Ratio Analysis
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Liquidity
Asset Management
Debt Management
Profitability
Market Value
Understand Table 13-2
9-4
3 Basic
Performance Comparisons

Trends (Change over time)

Common Size

% Change
9-5
DuPont Analysis

Ties the Ratios Together
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Profitability
Asset Management
Debt Management
ROEcom = NIcomm/CommEquity
= PM X TAT X EqMultiplier
9-6
Other Important
Performance Measures

Free Cash Flows (FCF)
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Market Value Added (MVA)
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FCF = NOPAT – Net Capital Investment
NOPAT = EBIT X (1 – Tax Rate)
MVA = CommEquity MV – CommEquity BV
Economic Value Added (EVA)

EVA = NOPAT – Cost of Capital
9-7
Competitive Comparisons &
“Benchmarking”

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Fundamental Analysis compares firm
with Industry Averages
Question??
“Do you want to be Average??”
“Benchmarking” compares firm with
Selected or Best Performing
Competitors
9-8
3 Main Users of Ratio Analysis

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Within Firm Managers
Credit Analysts (Suppliers, Banks, &
Bonds)
Stock Analysts
9-9
Major Limitations of
Ratio Analysis
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Multi Division Firms
Seasonal Factors
“Window Dressing” by Management
Different Accounting Practices
Some Ratios difficult to assess (i.e.
Liquidity)
Balance among “good” and “bad” ratios
Accuracy of data
9-10
Problems with ROE

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Does not consider Risk
Does not consider size of Invested
Capital
Does not consider Market Value of
Stock
9-11
Looking Beyond the Numbers
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Dependency on one/few
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Customers
Products
Suppliers
Countries (% Foreign Business)
Competition
Future Prospects
Legal & Regulatory Environment
9-12