# Financial Analysis by 4k75yts4

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```									          Financial Analysis
   Presented By:

Jeff McCurdy
Jason Weir
Lee Andersen
Presentation Overview
   Definition
   Value
   Ratios
   Limitations
   Resources
   Questions
Definition

   Financial analysis is used as a tool
for providing critical insight about a
company’s financial condition and
future competitive ability.
Financial Analysis Value
   Information can be obtained very quickly
especially for publicly held companies.

   Information is usually freely available, and
requires a relatively low investment to
perform analysis.

   Allows one to compare a company’s
performance with it’s past performance
and find established trends, both good and
Financial Analysis Value
   Can compare company’s performance with
that of competitors.

   Provides the ability to compare the firm’s
performance with that of it’s industry
standard.

   Can condense huge amounts of
information into a handful of meaningful
numbers.
Financial Analysis Value
   By doing the financial analysis it
should be clear whether or not the
company can afford a proposed
course of action.

   Helps point out areas of potential
concern.
Where do the numbers for analysis
come from?
   Income Statement: Summarizes the
results of a company’s operation, in terms
of revenues and expenses for a given
accounting period.

   Balance Sheet: Statement detailing what
a company owns (assets) and claims
against the company (liabilities and
owner’s equity) on a particular date.
5 Types of Ratios
   Liquidity Ratios

   Leverage Ratios

   Activity Ratios

   Profitability Ratios

   Growth Ratios
Financial Analysis Using Ratios
   Liquidity Ratios

These ratios indicate the ease of turning
assets into cash. In general the higher
the ratio the better especially if the
company is relying on creditor money to
finance its assets.

Source: Financial Ratio and Statement Analysis; p. 409
Liquidity Ratios
   Current Ratio

Current Assets
Current Liabilities

   Demonstrates the extent to which a firm can
meet it’s short term obligations.
Liquidity Ratios
   Quick Ratio

Current assets – Inventory
Current Liabilities

   Demonstrates the extent to which a firm can
meet it’s short term obligations without relying
upon the sale of it’s inventories.
Leverage Ratios
   Leverage Ratios:

This group of ratios is designed to
help the analyst assess the degree of
financial risk that a business faces.

By looking at leverage ratios the
analyst can decide whether the firms
level of debt is appropriate or not.
Leverage Ratios
   Debt to Total Assets Ratio

Total Debt
Total Assets

   The percentage of total funds that are provided
by creditors.
Leverage Ratios
   Debt to Equity Ratio

Total Debt
Total Stockholders’ Equity

   The percentage of total funds provided by
creditors versus by the owners.
Leverage Ratios
   Long Term Debt-to-Equity Ratio

Long-Term Debt
Total Stockholders’ Equity

   The balance between debt and equity in a firm’s
long-term capital structure.
Activity Ratios
   Activity Ratios:
• Also called efficiency ratios.

These are a group of ratios that
measure inventory levels, accounts
receivable days, fixed and total asset
turnover rates and sales ratios.
Activity Ratios
   Inventory Turnover Ratio

Sales
Inventory of finished goods

   Demonstrates whether a firm holds excessive
stocks of inventories and whether a firm is selling
its inventories slowly compared to the industry
average.
Activity Ratios
   Accounts Receivable Turnover

Annual Credit Sales
Accounts Receivable

   The average length of time it takes a firm to
collect on credit sales. (in a percentage term)
Activity Ratios
   Fixed Assets Turnover

Sales
Fixed Assets

   Measures sales productivity and plant and
equipment utilization.
Activity Ratios
   Total Assets Turnover

Sales
Total Assets

   This demonstrates whether a firm is generating a
sufficient volume of business for the size of its
asset investment.
Activity Ratios
   Average Collection Period

Accounts Receivable
Total credit sales/365 days

   The average length of time it takes a firm to
collect on credit sales in days.
Profitability Ratios
   Profitability Ratios:

Used to assess the profitability of a firm
and changes in its profit performance.
These ratios are probably the most
important indicators of a business’ past
financial success as well as growth
potential.
Profitability Ratios
   Gross Profit Margin

Sales – Cost of Goods Sold
Sales

   The total margin available to cover operating
expenses and yield a profit.
Profitability Ratios
   Operating Profit Margin

Earnings before interest and taxes
Sales

   Profitability without concern for taxes and
interest.
Profitability Ratios
   Net Profit Margin

Net Income
Sales

   After tax profits per dollar of sales
Profitability Ratios
   Return on Total Assets
(ROA)
Net Income
Total Assets

   After tax profits per dollar of assets; this ratio is
also called return on investment. (ROI)
Profitability Ratios
   There are also profitability ratios that
are used more for investment
purposes. Such as:

   Return on Stockholders’ Equity-ROE

   Earnings Per Share-EPS

   Price-earning Ratio-PE
Growth Ratios
   Growth Ratios:

Sales Growth: Measures the annual
percentage growth rate for total sales in
the firm.

Income Growth: Measures the annual
percentage growth rate for profits within
the firm.
Limitations of Financial Analysis

   Financial ratios have some limitations
that must be considered when the
analyst uses them in analyzing a
company.
Limitations
   Ratios alone do not offer any
strategic guidance. They only point
to the strengths and weaknesses in
the past.

   Are based on historical accounting
information.
Limitations
   Ratios ignore intangible assets such as:
Employees, Brand Names, and Intellectual
Capital.

   Ratios may be misleading depending on
the company strategy.

   Comparing your company to industry
average may lead to being stuck in the
middle.
Limitations
   Internal comparisons may be
growing, but the company is slipping
compared to rivals.

   There may be differences in
accounting practices that may skew
the numbers.
Limitations
   Ratios may be easy to rely on, but
they are not all encompassing.

   Reliable analysis depends upon
accurate input.

   Analysis does not account for outside
influences.
Resources
   Robert Morris Associates

   The Almanac of Business and Industrial
Financial Ratios

   The Quarterly Financial Report for
Manufacturing Corporations

Source: The Techniques of Strategic and Competitive Analysis: p. 413-414
Resources
   Standard & Poor’s Industry Surveys

   Value Line Investment Surveys

   Published financial statements on the
internet.

Source: The Techniques of Strategic and Competitive Analysis: p. 413-414
Sources
   The Techniques of Strategic and
Competitive Analysis p. 400-418

   Financial Statement Analysis Chapter 11;
Exhibit 11-8. p.426-427

   Financial Accounting Concepts 3rd Ed.
p. 118,379,120 & 231.

   Managerial Accounting 10th Ed. p. 45-48.
Question???

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