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ACT08-FINANCIAL MANAGEMENT 1

01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

FINANCIAL STATEMENT ANALYSIS involves careful selection of data from financial


statements in order to assess and evaluate the firms past performance, its present
condition and future business potentials.
OBJECTIVE OF FS ANALYSIS
1. Profitability of the firm
2. Ability to meets its obligation
3. Safety of the investment in the business
4. Effectiveness of management in running the firm
PROBLEMS/LIMITATION IN FS ANALYSIS
1. Comparison of financial data
2. The need to look beyond the ratio
TRADITIONAL TECHNIQUES OF INTERPRETING FS
1. Horizontal Analysis
2. Trend Analysis
3. Vertical Analysis
4. Ratio Analysis

HORIZONTAL ANALYSIS
- Presents the differences in absolute amount and in percentage between two
periods.
- % of change = Amount of Change / Base
SAMPLE PROBLEM 1

DAVID Corporation
Balance Sheet
Comparative figures of December 31, 2015 and 2016
Increase (Decrease)
Assets 2015 2016 Amount Percenta
ge
Cash and Cash Equivalents 400 600 200 50
Trade and other receivables 2,600 2.900 300 12
Inventories 1,200 1,000 (200) (17)
Long term investments 2,000 2,200 200 10
Property and equipment 4,000 4,400 400 10
Other assets 0 400 400 0
Total Assets 10,2 11,50 1,300 13
00 0
LIABILITIES & EQUITY
Trade and other payables 3,000 3,500 500 17
Bond Payable 500 400 (100) 20
Discount on bonds payable (20) (18) (2) 0
Ordinary Share Capital 3,100 3,200 100 3
Share Premium 2,000 2,200 200 10
Retained Earnings 1,620 2,218 598 37
Total Liabilities and Equity 10,2 11,50 1,300 13
00 0

Page 1 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

TREND ANALYSIS
- The purpose of trend analysis is to track down what happened in the past and
provide a pattern on what may happen in the coming years.
SAMPLE PROBLEM 2

2010 2011 2012 2013 2014 2015 2016


Net P22,980, P23,600, P28,998, P22,766, P29,765, P34,675, P38,512,
Sal 000 890 879 550 876 239 235
es

2010 2011 2012 2013 2014 2015 2016


Indexes 100 103 126 99 130 151 168

Ratio 1.00 1.03 1.26 0.99 1.30 1.51 1.68

VERTICAL ANALYSIS
- Gets the proportional component of each of the variables in the financial
statements in relation to a chosen base (100%).
- By expressing the financial data in percentage using a particular base, the size
of different companies is brought to a common expression.

SAMPLE PROBLEM 3
Let us assume the following income statement data of two companies, Alden
and Maine Corporation.

Comparative Income Statement


For the year ended December 31, 2016
(in thousands)
Alden Corporation Maine Corporation
Net sales 200,000 3,000
Cost of goods sold (160,000) (1,000)
Selling and admin expenses (10,000) (500)
Interest expense (3,000) (200)
Profit before income tax 27,000 1,300
Income tax (10,800) (520)
Net Profit 16,200 780

The Sales return and allowances for Alden and Maine Corporation were P3.6
million and 400,000 respectively.

Comparative Vertical Analysis of Income Statement


For the year ended December 31, 2016
Alden Corporation Maine Corporation

Gross Sales 101.8% 113.3%


Less: SRA (1.8%) (13.3%)
Net sales 100% 100%
Cost of goods sold (80%) (33.3%)
Selling and admin expenses (5.0%) (16.7%)
Interest expense (1.5%) (6.7%)
Profit before income tax 13.5% 43.3%
Income tax (5.4%) (17.3%)
Net Profit 8.1% 26.0%

Page 2 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

RATIO ANALYSIS
1. Profitability Ratios
2. Growth Ratios
3. Liquidity Ratios
4. Leverage Ratios

PROFITABILITY RATIOS
Return on Sales (ROS) = Profit/Net Sales
Return on Asset (ROA)= Profit/ Average Total Assets
Return on Equity (ROE) = Profit/Average Equity
Return on Ordinary Equity= Profit - Preference Dividends
Average Ordinary SHE
Earnings per Share (EPS) = Profit-Preference Dividends
Average shares outstanding

PROFITABILITY RATIO Ability of the business to generate


PROFIT.

Return on Sales This ratio measures the ability of the


management to produce return to
OWNERS for every peso of net sales.
Return on Asset / Return on This ratio measures the ability of the
Investment management to generate return on every
peso of resources employed in
operating the business.
Return on Equity This ratio measures the effectiveness of
management in generating wealth from the
normal business operations in relation to
the amount invested by the owners.
Return on Ordinary Equity This measures the ability of the
management to produce return on every
peso of investment by ORDINARY
SHAREHOLDERS.
Earnings per Share This is computed for ORDINARY SHARES
only. It is the most important ratio in
measuring profitability. It captures all of the
four ratios above.

SAMPLE PROBLEM 4
The following selected data were taken from the financial records of GMA
Corporation.
Net Income P 1,000,000
Average total assets 12,000,000
Net Sales 20,000,000
10% cumulative preference shares, P100 par,
Liquidation value, P120, 20,000 shares issued 2,000,000
Ordinary Shares, P30 par, 220,000 shares issued, 6,600,000
treasury Shares, 20,000

Determine the following:


1. Return on Sales 1,000,000/ 20,000,000 = 5%
2. Return on Asset 1,000,000 / 12,000,000 = 8.33%
3. Return on Equity 1,000,000 / 8,000,000 = 12.5%
4. Return on Ordinary Equity 1,000,000-200,000 / 6,000,000 = 13.3%
5. Earnings per Share 1,000,000-200,000 / 200,000 = P4

Page 3 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

GROWTH RATIOS
Price Earnings Ratio = Market Price per share / EPS
Dividend yield ratio = Dividend per share / Market price per share
Dividend payout ratio = Dividend per share / EPS

Book Value per ordinary share = Ordinary Shareholders


Equity
Ordinary Shares Outstanding
Book Value per preference share = Preference Shareholders Equity
Preference Shares Outstanding

GROWTH RATIOS These ratios indicate the


organizations potential and
attractiveness as an
INVESTMENT OPTION.
Price Earnings Ratio Indicates the ability of the The Higher the Better.
firm to recover investments (It takes longer years
from earnings. to recover their
investment)
Dividend yield ratio Indicates the ability of the
firm to RETURN investments
to owners in terms of cash
and dividends, and not the
accrued net income.
Dividend payout ratio Indicates how generous the
management in distributing
its earnings to owners.
Book Value of Ordinary Measures the companys
Shares wealth based on the VALUE
of its net assets/ equity.
Book Value of Preference It does not reflect the
Shares potential of the companys
growth.
SAMPLE PROBLEM 5
ABS-CBN Corporation provided the following selected financial data of GMA
NEWS-TV Corporation on December 31, 2016. The company did not declared
dividends in 2015.
Earnings per share P 25
Market dividend per share 125
Dividend per common shares 10
Net shareholders equity 4,200,000
12% Preference share, P60 par
200,000 shares issued and outstanding
Liquidation value, P90 1,200,000
Ordinary shares outstanding 80,000

Determine the following:


1. Price Earnings Ratio 125/25 = 5: 1
2. Dividend yield ratio 10 / 125 = 8%
3. Dividend payout ratio 10 / 25 = 40%
4. Book Value of Ordinary and
Preference 4,200,000
TSHE
Less: Preference SHE 1800,000
Liquidation Value (200,000 * 90 ) 288,000
Dividends in arrears (1200* 12% *2) 2,088,000/ 200,000 = P 10.44
TOTAL PREFERENCE EQUITY
2,112,000/ 80,000 = P 26.40
TOTAL ORDINARY SHARES
Page 4 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

LIQUIDITY RATIOS
Inventory Turnover = Cost of Sales / Average inventories
Receivable Turnover = Net credit sales / Average trade receivables
Payable Turnover = Net credit purchases / Average trade payables
Age = Days in a year / Turnover
Operating Cycle = Age of Inventory + Age of Receivable
Net cash cycle = Operating cycle Age of Payable
Current Ratio = Current Asset / Current Liabilities
Quick Asset Ratio = Quick Assets / Current Liabilities

LIQUIDITY RATIO The ability of the business Focal point of liquidity


to pay its obligations in analysis is CASH. Ability
cash as they mature to convert assets to cash,
to receive the receivable,
the ability to sell its
merchandise.
1. Inventory Turnover Effectiveness of the
business in SELLING its
inventories.
(Number of times the
entire inventory is sold in
a given period)
2. Age of Inventory Measures the average
number of days that
inventory is held before
sale.
3. Receivable Turnover Effectiveness of the
business in using the
investment in
RECEIVABLES TO NET
CREDIT SALES.
4. Age of Receivable Measures the average
number of days to collect
its receivable.
5. Payable Turnover Reflects how effective the
business in utilizing the
trade credit line offered by
supplier.
6. Age of Payable Determines whether the
firm is paying its invoices
on a timely basis.
7. Operating cycle Measures the average
number of days to convert
inventories to cash.
8. Net cash cycle Measures the average
number of days is
available before payment
to creditors.
SECONDARY RATIOS
9. Current Ratio The ability to meet its
current obligation in
relation to its current
assets.
Ability in paying short

Page 5 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

term obligations.
10.Quick Ratio Measures the ability of the
firms to pay its ST debts
from its most liquid asset.
11.Working Capital The amount needed in the
firms business to operate.

SAMPLE PROBLEM 6
The following selected financial data from the records of David Corporation and
Dean Corporation as of and for the year ended December 31, 2016.
David Corp. Dean Corp.
Net credit sales P60M 120M
Cost of goods sold 20M 45M
Net credit purchases 20M 43M
Average trade receivables 4M 4M
Average inventories 2M 2M
Average trade payables 3.5M 3.5M
Sales credit terms 2/10, n/30 2/10, n/30
Purchase credit terms 3/30, n/60 3/30, n/60

Determine the following:

Ratios Computations David Corp. Dean Corp.


12.Inventory Turnover 20/2 = 10 TIMES
45/2 22.5 TIMES
13.Age of Inventory 360/ 10 36 days
360 / 22. 5 16 days
14.Receivable Turnover 60 / 4 15 times
120 / 4 30 times
15.Age of Receivable 360 / 15 24 days
360/ 30 12 days
16.Payable Turnover 20 / 3. 5 5.7 times
43/ 3. 5 12.3 times
17.Age of Payable 360 / 5.7 64 days
360 / 12.3 30 days
18.Operating Cycle 36+ 24 60 days
16+12 28 days
19.Net Cash Cycle 60-64 (4 days)
28-30 (2 days)

Dean Corporation is more efficient in managing its operating cycle because it has
shorter OC days. This explains why Dean Corporation was able to pay its creditors in
30 days and avail of 3% discount offered.

Who among the two companies has a better receivable management?


When customer does not avail of the trade discounts, critical evaluations should be
made on the effectiveness of the discount offered.

Page 6 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

FINANCIAL LEVERAGE RATIOS


Debt Ratio = Total Debt / Total Equity
Debt to Equity Ratio = Total debt / Total Shareholders equity
Times interest earned = EBIT / Interest Expense

FINANCIAL LEVERAGE RATIOS Refers to the use of debt to increase


shareholders equity. Using debt to finance
business activities would mean greater
exposure to financial risk.
Measures the relative share of creditors over
Debt Ratio / Debt to Asset Ratio the total resources of the firm.

Measures the use of debt to finance


Debt to Equity Ratio operations.
Measures the long term ability of the firm to
Times interest earned meet interest payments. If profitable, the
business is more capable of meeting its
interest payments.

SAMPLE PROBLEM 7
Say, we have two companies with the same total equity of P200 million pesos.
However, they raised the money needed to finance investments differently as
follows:
A. Co. B. Co.
Debt, 10% 40,000,000 160,000,000
Shareholders Equity 160,000,000 40,000,000
EBIT 50,000,000 50,000,000

Determine the following:

Ratios Computation A. Co B. Co.


40,000,000/ 200,000,000 .20
Debt Ratio Creditors 160,000,000 / 200,000,000 .80
Risk
40,000,000/160,000,000 .25
Debt to Equity Ratio 160,000,000/ 40,000,000 4.0
Owners Risk
50,000,000 / 4,000,000 12.5
Times interest earned 50,000,000 / 16,000,000 3.125

Page 7 of 8 BSA 3A
ACT08-FINANCIAL MANAGEMENT 1
01 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

-END OF FSA-

Page 8 of 8 BSA 3A