Financial Ratio Analysis

Involves the methods of calculating and interpreting

financial ratios to assess the firms performance and
status.

Users of Financial Ratio Analysis

1. Outside providers of Capital

- Suppliers (providers of short-term resources)
- Bank Creditors
- Investors (holders of the firms equity shares)

2. Regulatory Sector

3. Corporate Management
Financial Ratio Analysis
STRUCTURE OF FINANCIAL STATEMENTS
1. Balance Sheet

- Reports the firms total resources and the total claims of the owners
and creditors.

2. Income Statement

- Summarizes the revenue and expense funds of the firm for an entire
period.
 EB TAN CONSOLIDATED INDUSTRIES, INC.
Sample Balance Sheet Balance Sheet (figures in thousand pesos)
2011 2012
CURRENT ASSETS
Cash 47,691 41,148
Accounts Receivable 23,403 22,956
Inventories 73,052 100,309
Notes Receivable; Prepaid Expense 14,132 14,811
Total Current Assets 158,278 179,224

FIXED ASSETS
Land, Property & Equipment (not in use) 39,024 27,393
Property, Plant and Equipment 282,520 976,402
Total Fixed Assets 321,544 1,003,795

TOTAL ASSETS 479,822 1,183,019

CURRENT LIABILITIES
Accounts Payable 76,450 87,028
Notes Payable 27,720 35,229
Income Tax Payable 6,100 7,292
Acceptance Payable 6,600 1,396
Portion of L/T Debt Due (w/in the 1 yr) 10,490 14,821
Contracts Payable 11,490 2,930
Total Current Liabilities 138,850 148,696

LONG-TERM DEBT, RESERVE FOR RETIREMENT

BENEFITS & OTHER CONTINGENCIES 194,442 800,486

STOCKHOLDER'S EQUITY
Capital Stock 41,730 41,348
Capital Paid in excess of par value (net) 28,200 102,331
Retained Earnings 76,600 90,158
Total Stockholer's Equity 146,530 233,837

TOTAL LIABILITIES & STOCKHOLDER'S EQUITY 479,822 1,183,019

 EB TAN CONSOLIDATED INDUSTRIES, INC.
Sample Income Statement Income Statement (figures in thousand pesos)

2011 2012

Sales 524,790 531,590

Cost of Goods Sold 460,417 462,191

Gross Profit 64,373 69,399

Operating Expense 21,409 21,856

Income from Operations 42,964 47,543

Fixed Charges / Interest 12,970 13,607

Income Before Tax 29,994 33,936

Income Tax 10,425 11,805

Income After Tax 19,569 22,131

Financial Ratio Analysis
CLASSES OF FINANCIAL RATIOS
1. Profitability Ratios

- Indicate the margins on sales and overall efficiency of asset or capital

employed
- Shows profitability in relation to sales and to investment.

GROSS PROFIT MARGIN (GPM)

Reflects the firms ability to cover its manufactured or purchase

cost of merchandise.

Reflects the efficiency of operation and managements policy in

pricing.
Sales - CGS
GPM = %
Sales
Financial Ratio Analysis
NET PROFIT MARGIN (NPM)

A more specific ratio showing the relative efficiency of the firm

after considering all expenses and taxes.

Net Income
NPM = %
Sales

RETURN ON EQUITY (ROE) or Return on Investment (ROI)

Measure of the ability to generate returns on the stockholders

average investment.

Net Income
ROE = %
Ave. S/H
Equity
Financial Ratio Analysis
CLASSES OF FINANCIAL RATIOS
2. Turnover Ratios

- Indicate the efficiency in the use of specific asset categories.

- Indicate relative efficiency with which the firm utilizes its resources in
order to generate output.

TOTAL ASSET TURNOVER (TAT)

Reflects the aggregate, company-wide efficiency in asset

utilization

Sales
TAT = times
Total Assets
(ave.)
Financial Ratio Analysis
FIXED ASSET TURNOVER (FAT)

Traces the degree of fixed asset utilization in sales performance.

Sales
FAT = times
Fixed Assets
(ave.)

ACCOUNTS RECEIVABLE TURNOVER (ART)

Indicates the liquidity of receivables.

Credit Sales
ART = times
A / R (ave.)
Financial Ratio Analysis
AVERAGE COLLECTION PERIOD (ACP)

Shows the average number of days receivables are outstanding.

The average number of days it takes to convert receivables into
cash.
360 days
ACP = days
ART

INVENTORY TURNOVER (IT)

Indicates the liquidity of

inventory. CGS
Tells how fast the inventory is IT = Inventory
times
turned over (or converted into (ave.)
receivables (or cash) through
sales.
Financial Ratio Analysis
CLASSES OF FINANCIAL RATIOS
3. Liquidity Ratios

- A measure of the firms capacity to meet current obligations from its

liquid assets.
- A measure of the ability to meet short-term obligations.

CURRENT RATIO (CR)

Most frequently used; regarded as a crude measure of liquidity

since it does not consider the liquidity of the individual
components of the current assets.

Current
Assets
CR =
Current
Liabilities
Financial Ratio Analysis
QUICK RATIO (or Acid-Test Ratio) , QR

Measures the firms capacity to cover its short term obligations

using only the more liquid assets.

Curr Assets - Invty

QR =
Current Liabilities
Financial Ratio Analysis
CLASSES OF FINANCIAL RATIOS
4. Leverage Ratios

- Indicate the overall dependence of the firm on outside creditors

relative to stockholder and internal financing.

DEBT TO ASSET RATIO (D/A)

Indicates the proportion of the total assets financed by the

firms creditors.

Total Debt
D/A =
Total Assets
Financial Ratio Analysis
DEBT TO EQUITY RATIO (D/E)

Indicates which group has the greater representation in the

assets of the firm creditors or stockholders.

Long-Term Debt
D/E =
Equity
Performance Evaluation Standards
Standards Source Data
PAST PERFORMANCE Internal to the firm
(previous years financial
statements)
IDEAL levels or A priori: set based on the
BENCHMARKS analysts experience firm has met the hurdle
COMPETITORS External (other companys
financial statements)
INDUSTRY External (industry financial
data)
BUDGETED or PLANNED Internal (budgets) or
PERFORMANCE external (forecasts based
on industry data)
Evaluation Criteria
To determine whether the
trend in the firms financial
performance has been
improving or not
To determine whether the
To determine whether the
firm has performed better
than its competitors
To determine how the firm
performed relative to the
average firm in the same
industry
To determine whether
targeted financial
performance has been
attained.
 END OF
PRESENTATION