FIN MAN

• Financial statement analysis


  The process of identifying financial strengths and weaknesses of the firm by properly establishing relationship between the items in the financial statements and other related information to arrive at an evaluation and conclusion as to the soundness of the financial position and the results of operations of an enterprise
• The objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an entity that is useful to a wide range of users in making economic decisions
• Merely reading and understanding the financial statement per se is not enough. A thorough analysis and interpretation of such statements is necessary if management and other users are expected to make informed judgments and decisions
• Information derived from financial statement analysis

  Can be used in assessing and evaluating the firm's past performance, its present condition and future business potentials
• Types of comparisons to improve the decision usefulness of financial information


  • Intra-company basis
  • Inter-company basis
  • Industry averages
• Intra-company basis


  Comparisons within a company are often useful to detect changes in financial relationships and significant trends
• Inter-company basis


  Comparisons with other companies provide insight into a company's competitive position
• Industry averages


  Comparisons with industry averages provide information about a company's relative position within the industry
• Methods and techniques in analysis

  • Horizontal (trend) analysis
  • Vertical (common-size) analysis
  • Ratio analysis
• Horizontal or trend analysis

  1. Increase/Decrease method

  2. Trend percentages or index numbers
• Increase/Decrease method


  Highlights the peso as well as the percentage increase or decrease of each item in the comparative statements
• Trend percentages or index numbers


  The changes in financial statement items from a base year to following years are often expressed as trend percentages to show the extent and direction of change
• Vertical or common-size analysis

  A technique for evaluating financial statement data that expresses each item in a financial statement within a year as percent of a base amount
• Common-size statement of financial position

  Total assets represent 100%, other items are expressed as percentages of total assets
• Common-size statement of comprehensive income


  Net sales or net operating revenue is set at 100%, each item is divided by net sales/net operating revenue to express as percentage of net sales
• Debt to Equity Ratio

  Total Liabilities / Average Shareholders' Equity
• Creditors would like the debt-to-equity ratio to be relatively low
• Debt to Equity Ratio

  • A company is generally considered safer if it has a low debt to equity ratio—that is, a higher proportion of owner-supplied capital—though a very low ratio can indicate excessive caution. In general, debt should be between 50 and 80 percent of equity.
• Profitability Ratios


  Show the combined effects of liquidity, asset management, and debt management on a firm's operating results. Measure the earning ability of a company and the extent to which invested funds are being used efficiently.
• Gross Margin Ratio/ Gross Profit Ratio


  Measures the margin on sales the company is achieving. Can be an indication of manufacturing efficiency or marketing effectiveness. Reflects efficiency with which a firm produces its products.
• There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest, charges and dividends.
• Return on Sales (Profit Margin)

  Percentage of net profit to net sales. Measures the overall profitability of the company, or how much is being brought to the bottom line. A high profit margin indicates good cost control.
• In general terms, net profitability shows the effectiveness of management or the firm's capacity to face adverse economic conditions such as price competition, low demand, etc. Obviously, the higher the ratio, the better is the profitability.
• Total Assets Turnover


  Measures a company's ability to use assets to generate sales. A very low figure may mean that the company maintains too many assets or has not deployed its assets well, whereas a high figure means that the assets have been used to produce good sales numbers.
• Return on Assets (ROA)

  Measures how profitably assets have been employed. Considers the return to investors on all assets invested in the company. A very low ROA usually indicates inefficient management, whereas a high ROA means efficient management.
• Return on Equity (ROE)

  The most important measure of profitability for investors. Represents the amount of income generated per peso of book value of equity or common equity. Monitored by financial analysts, business managers and investors as it is an important metric showing how successful is the management of the company in creating value for the business and its stakeholders.
• Earnings per Share (EPS)


  A good measure of profitability and when compared with EPS of similar companies, it gives a view of the comparative earnings or earnings power of the firm.
• Price-Earnings Ratio


  Tells how much investors are willing to pay for a peso of current earnings. Widely used by investors as a general guideline in gauging stock values.
• Dividend Payout Ratio


  Gauges the portion of current earnings being paid out in dividends. A high or low dividend payout ratio is neither good nor bad taken by itself.
• Dividend Yield Ratio


  Of interest to retirees and other shareholders who need a steady stream of cash income from their investments. Compares dividend yields to the returns they could earn on bonds and other fixed income securities.
• Book Value Per Share

  Measures the amount that would be distributed to holders of each share of ordinary share if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.
• Financial statement analysis has several inherent limitations. The analyst should bear them in mind in evaluating the performance and status of a single enterprise or of several enterprises compared to each other.
• Limitations of Financial Statements Analysis


  • The results of analytical procedures applied emphasize only certain trends and changes in individual items and relationships. The reason behind the trend or change is not provided.
  • Ratios and percentages are affected by any change in accounting procedures the company may have adopted in the current period in relation to prior periods.
  • Conventional financial statements do not reflect the effects of changing price levels. Misperceptions can result for the failure to account for the effects of inflation or deflation.
  • Use of different accounting procedures by two or more companies will result in ratios and percentages that are not comparable.
  • Information reflected on financial statements is not exact and not final. Estimates and judgment are applied by the accountant in measuring operating results and financial position.
  • Financial statements, which are the basis of financial analysis, are historical reports. They merely provide a basis for predicting future events.
• To arrive at some informed conclusions, the statement user must be able to interpret the results of financial analysis. There should be a standard against which the result of analysis could be compared.
• Standards for Interpreting Financial Statement Analysis

  • Personal standards which are based on the analyst's own experience and observation
  • Budgeted standards which come from the company's goals and plans as reflected on the budget
  • Historical standards which refer to the company's performance in the past
  • Rule of thumb standards which are general and obtained from other companies' financial standards, trade publication and published references
• Steps in Financial Statement Analysis

  • Identify the economic characteristics and competitive dynamics of the industry in which a particular firm participates
  • Identify the strategies the firm pursues to gain and sustain a competitive advantage
  • Assess the quality of the firm's financial statements and, if necessary, adjust them for such desirable characteristics as sustainability or comparability
  • Analyze the current profitability and risk of the firm using information in the financial statements
  • Prepare forecasted financial statements
  • Value the firm
• A/R TO


  Sales on Account÷Ave. A/R
• Ave. Collection Period


  Days÷A/R TO
• Inv TO


  COGS÷Ave. Inv
• WIP Inv TO


  Goods Manufactured÷Ave. WIP