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Financial Ratio Analysis

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Financial statements
Shows the results of operations and the financial condition of an enterprise
income statement and the balance sheet

relationship of items with each other provides indicators that lead to a meaningful analysis of the operations of the enterprise

Financial Ratios
indicators of relationships
between figures within statements between the income statement and the balance sheet

Used to show whether a situation has improved or gotten worse or in order to determine a pattern

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Internal Comparison
Analyze ratios from a historical perspective determine trend of the ratios and compare to expected future ratios for the company to assist management in decision making

External Comparison
Compare ratios of the firm with the ratios of various firms or with the industry averages during a period Gives insight into the financial conditions performance of the firm relative and

Financial ratios classifications

PROFITABILITY, LIQUIDITY, LEVERAGE AND ACTIVITY

Profitability Ratios
shows whether the business is earning enough given the total amount of money invested in it *liquid vs solvent vs profitable

SHIRT TALES T-SHIRT PRINITING Balance Sheet As of December 31, 2012

Balance Sheet
ASSETS
Current Assets Cash P

LIABILITIES and OWNERS EQUITY


Current Liabilities 2,300.00 Accounts Payable P 6,700.00

Accounts receivable
Inventory

20,000.00
4700.00

Accrued liabilities
Total current liabilities

1,200.00
7,900.00

Prepaid expense Total current assets

300.00 27,300.00
Long-term liabilities

Fixed Assets Machinery & Equipment Furniture and Fixtures

DBP Loan 35,000.00 7,700.00 Total liabilities Owners Equity

30,000.00 37,900.00

Total Fixed Assets


Less: Depreciation

42,700.00
1,100.00

Shirt Tales, Capital


Accumulated Profits

35,000.00
6,000.00

Net book value

41,600.00
Total owners equity 41,000.00

Other assets Patent Total assets

10,000.00 P 78,900.00 Total liabilities and owners equity

78,900.00

Income Statement
Sales Less: Cost of sales Gross profit on sales Less: Operating Expense Salary Rental Commissions Delivery Expense Professional fees Taxes Light and water Net income before interest and taxes Less: Interest expense Income from operations Les: Income tax Net profit for the month P 30,000 1,200 18,000 P 4,000 600 2,000 400 1,000 800 200

SHIRT TALES T-SHIRT PRINITNG For the month ended, December 31, 2012

9,000 9,000 500 8,500 2,500 P 6,000

Gross Profit Margin


Sales Less: Cost of sales Gross profit on sales Less: Operating Expense Salary Rental Commissions Delivery Expense Professional fees Taxes Light and water Net income before interest and taxes Less: Interest expense Income from operations Les: Income tax Net profit for the month P 30,000 1,200 18,000 P 4,000 600 2,000 400 1,000 800 200

Formula
Gross Profit Sales =18,000 30,000

Explanation
o Measures the total margin to cover operating expenses and yield a profit Key indicator of firms average mark-up obtained on products sold and measures the firms ability to pass along its increased costs to its customers

o
=60% 9,000 9,000 500 8,500 2,500 P 6,000

Net profit margin


Sales Less: Cost of sales Gross profit on sales Less: Operating Expense Salary Rental Commissions Delivery Expense Professional fees Taxes Light and water Net income before interest and taxes Less: Interest expense Income from operations Les: Income tax Net profit for the month P 30,000 1,200 18,000

Formula Net Income After Taxes o Sales

Explanation Indicates the net income percentage on products sold. A measure of the firms overall profitability

P 4,000 600 2,000 400 1,000 800 200

6,000 30,000 =20%

9,000 9,000 500 8,500 2,500 P 6,000

Return on sales
ASSETS
Current Assets Cash Accounts receivable Inventory Prepaid expense Total current assets P 2,300.00

Formula Net Income After Taxes Total assets 6,000 78,900 =7.6%

20,000.00 4700.00 300.00 27,300.00

Explanation Reflects how the firm has earned from the investment of all its financial resources A key measure of managements performance in using assets to generate profits

Fixed Assets Machinery & Equipment Furniture and Fixtures

35,000.00 7,700.00

Total Fixed Assets


Less: Depreciation Net book value

42,700.00
1,100.00 41,600.00

Les: Income tax Net profit for the month

Other assets Patent Total assets

10,000.00 P 78,900.00

2,500 P 6,000

Return on investments
Les: Income tax Net profit for the month 2,500 P 6,000

Formula Net Income After Taxes o Long term liabilities + capital 6,000 71,000 =8.4%

Explanation Measures how much the firm has earned on the funds provided by the owners and long-term creditors

Long-term liabilities DBP Loan Total liabilities Owners Equity Shirt Tales, Capital Accumulated Profits 35,000.00 6,000.00 30,000.00 37,900.00

Total owners equity

41,000.00

Return on equity
Net profit for the month

Total owners equity 41,000.00

P 6,000

Formula Net profit Total capital 6,000 41,000 =14.6 o o

Explanation Shows the return you, as the owner, would receive on your investment in the business. Measures firms overall performance.

Liquidity Ratios
These ratios determine the firms ability to meet its maturing short-term obligations using its current assets. *billionaire in starbucks

Current assets are those expected to be converted into cash within the business cycle.
are cash itself, securities, inventories and account receivables.

current liabilities are obligations that would come due within a year.
notes/accounts payable, taxes payable and accruals.

Current ratio or Working capital ratio


ASSETS
Current Assets Cash Accounts receivable Inventory Prepaid expense Total current assets P

LIABILITIES and OWNERS EQUITY


Current Liabilities 2,300.00 Accounts Payable Accrued liabilities Total current liabilities P 6,700.00 1,200.00 7,900.00

20,000.00 4700.00 300.00 27,300.00

Formula Current assets Current liabilities o

Explanation Measures the ability of the firm to meet its current liabilities through assets that may readily be converted into cash Typically, a current ratio of 2:1 is suggested to meet the firms obligations

27,300 7,900
=3.46:1

Acid-Test Ratio
ASSETS
Current Assets Cash Accounts receivable Inventory Prepaid expense Total current assets

LIABILITIES and OWNERS EQUITY


Current Liabilities P 2,300.00 Accounts Payable 20,000.00 Accrued liabilities 4700.00 Total current liabilities 300.00 27,300.00 P 6,700.00 1,200.00 7,900.00

Formula Current Assets Less: Inventory Less: Prepayments Current liabilities

Computation 22,300 7,900

=2.82:1 Or Cash + Accounts Receivable Current liabilities o

Explanation Expresses the firms ability to pay-off short term obligations with cash and assets convertible to cash without relying on the sale of inventories An acid-test ratio is the rule of thumb for the firm in meeting its current obligations

Leverage or Solvency Ratios


A company's leverage relates to how much debt it has on its balance sheet, and it is another measure of financial health. *billionaire in starbucks *liquid vs solvent *assets to cover debts

Debt-Equity
Formula
Long-term liabilities
DBP Loan Total liabilities Owners Equity Shirt Tales, Capital Accumulated Profits 35,000.00 6,000.00 30,000.00 37,900.00

Explanation o The ratio expresses the relationship between capital contributed by long-term creditors and owners capital The lower the ratio, the less the debt pressure and the greater the protection from creditors

Total liabilities Total Capital 37,900 41,000

o =0.92:1

Total owners equity

41,000.00

Activity Ratios
helpful in evaluating the small firms performance and showing how effectively the business employs its resources

*net of depreciation

Fixed Asset turnover

Formula
Sales P 30,000

Explanation o Measures the contribution of fixed assets to sales and how fixed assets are utilized

Sales Total Fixed Assets* 30,000 41,600 =72 times

Total Fixed Assets Less: Depreciation Net book value

42,700.00 1,100.00 41,600.00

*net of depreciation

Total Asset Turnover


Formula
Sales P 30,000

Explanation o Measures the contribution of total assets to sales and how total assets are utilized

Sales Total Assets 30,000 78,900 =38 times

Total assets

P 78,900.00

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