FINANCIAL STATEMENT ANALYSIS FINANCIAL MANAGEMENT – MAS 3

PART I: FINANCIAL STATEMENTS  Accounting Policies: Differences in accounting policies

and practices can make comparisons between
– it is the written record about the historical information companies challenging.
of an entity’s financial performance, operations and  Non-Financial Factors: Financial statements do not
other business activities. capture non-financial factors such as market
– The need for financial statement is very important as it conditions, management quality, and competitive
serves as the over-all picture of the company’s landscape, which can significantly impact a company's
profitability and financial condition. performance.
Basic Component of a complete FS:  Window Dressing: Companies may engage in "window
dressing" to improve the appearance of their financial
✓ Statement of Financial Position (Balance Sheet) statements, which can mislead analysts.
✓ Statement of Comprehensive Income (Income Statement)  One-Time Events: Unusual or non-recurring items can
✓ Statement of Cash Flow distort the true financial position and performance of a
✓ Statement of Changes in Owners’ Equity company.
✓ Notes to Financial Statements  Subjectivity: Certain elements of financial statements,
like asset valuations and depreciation methods, involve
Financial Statement also serves as a communication link
subjective judgments that can vary between companies
between the company it the intended users.
and over time.
Users of Financial Statements:
Key Financial Statements in FS Analysis
✓ Creditors/Potential Creditors
A. Income Statement
✓ Investors (Stockholders)/Potential Investors
- also known as the Profit and Loss Statement,
✓ Suppliers
shows the company's revenues, expenses, and
✓ Customers
profits over a specific period. It helps stakeholders
✓ Management and BOD
understand the company’s operating performance
✓ Government
and profitability.
These various users of financial statements make Key Components:
decisions whether they are going to continue or make an • Revenue - Total income generated from the sale of
engagement to the company, therefor, a thorough analysis goods or services.
and interpretation of the FS is very crucial. • Cost of Goods Sold (COGS) - Direct costs
attributable to the production of goods sold by the
PART II: FINANCIAL STATEMENT ANALYSIS company.
– It is the process of extracting information from • Gross Profit - Revenue minus COGS.
financial statements to better understand a company’s • Operating Expenses: Expenses incurred in the
current and future performance and financial ordinary course of business, such as salaries, rent,
condition. and utilities.
– It is a systematic examination of a company's financial • Net Income - The company's total profit after all
statements, including the Income Statement, Balance expenses, including taxes and interest, have been
Sheet, and Cash Flow Statement, to understand its deducted from revenue.
financial health and performance. This analysis helps
stakeholders make informed decisions about B. Balance Sheet
investing, lending, and managing the company. - The Balance Sheet provides a snapshot of the
company's financial position at a specific point in
Importance of Financial Statement Analysis time. It helps stakeholders assess the company’s
assets, liabilities, and equity.
✓ Informed Decision-Making: It enables investors,
Key Components:
creditors, and management to make better decisions by
• Assets - Resources owned by the company, divided
providing insights into the company's profitability,
into Current Assets (e.g., cash, accounts
liquidity, efficiency, and solvency.
receivable, inventory) and Non-Current Assets
✓ Performance Evaluation: By comparing financial data
(e.g., property, plant, equipment).
over time and against industry benchmarks, it helps
• Liabilities - Obligations the company owes to
assess the company's operational efficiency and
others, divided into Current Liabilities (e.g.,
financial stability.
accounts payable, short-term debt) and Non-
✓ Risk Assessment: Identifying potential risks and
Current Liabilities (e.g., long-term debt, deferred
weaknesses in the company's financial structure allows
tax liabilities).
for proactive management and mitigation of risks.
• Equity - The residual interest in the assets of the
✓ Strategic Planning: It aids in setting realistic financial
company after deducting liabilities, including
goals, developing strategies for growth, and allocating
common stock, retained earnings, and additional
resources effectively.
paid-in capital.
✓ Compliance and Reporting: Ensures that the company
adheres to regulatory requirements and maintains
C. Cash Flow Statement:
transparency with stakeholders.
- Shows the company's cash inflows and outflows
Limitations of Financial Statement Analysis over a specific period. It helps stakeholders
understand how the company generates and uses
 Historical Data: Financial statements are historical cash.
documents and may not accurately predict future
performance or trends.
 FINANCIAL STATEMENT ANALYSIS FINANCIAL MANAGEMENT – MAS 3
Key Components: – For Balance Sheet, normally the common base is the
• Operating Activities - Cash flows from the core total assets while for the income statement is the total
business operations, such as cash received from or net sales
customers and cash paid to suppliers. – Vertical Analysis is commonly used to compare two or
• Investing Activities - Cash flows from the purchase more companies with differing absolute values in their
and sale of long-term assets, such as property, financial statements.
plant, and equipment, or investments in other o For example, Company A has current assets of
companies. P1,000,000, whereas Company B has current
• Financing Activities - Cash flows from transactions assets of P150,000. Based solely on the
with the company's owners and creditors, such as absolute amounts, it might seem that
issuing shares, paying dividends, and borrowing or Company A is in a better position because it
repaying debt. has more current assets. However, to make a
more meaningful comparison, a common unit
PART III. ANALYTICAL TOOLS AND of measurement, such as a percentage, should
TECHNIQUES be used. Vertical Analysis facilitates this by
expressing each financial statement item as a
A. Horizontal Analysis (Trend Ratios and Percentage)
percentage of a base figure, enabling a clearer
B. Vertical Analysis (Common size statements)
and more accurate comparison between
C. Ratio Analysis companies of different sizes.
HORIZONTAL ANALYSIS
RATIO ANALYSIS
– Involves comparing financial data over multiple – In an FS Analysis, the most widely applied method is
periods. the financial ratio analysis.
– Helps identify trends, growth patterns, and changes in – Financial ratio is a comparison in fraction, proportion,
financial performance over time. decimal or percentage of two significant figures taken
Procedure: from a financial statement.
– These ratios provide valuable insights into different
1. Compute the absolute change/peso change from aspects of the company's operations, such as liquidity,
the current period amount (value in the most profitability, efficiency, and leverage. Different
recent period) to the base period amount (value in stakeholders, such as investors, creditors, and
the earlier period where the most recent period is management, use these ratios to make informed
compared with) decisions.
Example: Comparison of 2025 income to 2024 income.
2025 income – current period 5 Basic Categories of Financial Ratio Analysis:
2024 income – base period 1. Liquidity Ratios
Absolute Change = 2025 Income – 2024 Income 2. Activity Ratios
2. Calculate the percentage change by dividing the 3. Solvency Ratios
absolute change/peso change to the base period 4. Profitability Ratios
amount. 5. Market Ratios
Example: Comparison of 2025 income to 2024 income.
Percentage Change = Absolute Chage/2024 Income 1. LIQUIDITY RATIOS

Formula Form: – The liquidity of a firm is measured by its ability to

satisfy its short-term obligations as they come due.
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 – Liquidity refers to the solvency of the firm’s overall
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑒𝑟𝑖𝑜𝑑 𝐴𝑚𝑜𝑢𝑛𝑡 − 𝐵𝑎𝑠𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 𝐴𝑚𝑜𝑢𝑛𝑡 financial position—the ease with which it can pay
= its bills.
𝐵𝑎𝑠𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 𝐴𝑚𝑜𝑢𝑛𝑡
Interpreting Horizontal Analysis When Base Period is 0: Types of Liquidity Ratios:

Absolute Change: Focus on the absolute change in the 1. Current Ratio

account value from the base period to the current period. 2. Acid Test Ratio/Quick Ratio
This will give you a clear numerical representation of the
Current Ratio - one of the most commonly cited financial
growth or change.
ratios, measures the firm’s ability to meet its short-
Example: If the Sales in the base period (Year 1) were P0 and in term obligations.
the current period (Year 2) are P100,000, the absolute change is
It is expressed as follows:
P100,000.
Current ratio = Current assets / Current liabilities
Percentage Change: Since calculating a percentage change
from a base of zero is not possible, you can highlight the A higher current ratio indicates a greater degree of
fact that there was no initial value and emphasize the liquidity.
significance of the absolute change.
Acid Test Ratio/Quick Ratio - The quick (acid-test) ratio
VERTICAL ANALYSIS is similar to the current ratio except that it excludes
inventory, which is generally the least liquid current asset.
– Involves comparing financial data within a single period,
usually expressed as a percentage of a base item The generally low liquidity of inventory results from two
(common base). primary factors:
 FINANCIAL STATEMENT ANALYSIS FINANCIAL MANAGEMENT – MAS 3
1) Many types of inventories cannot be easily sold 𝐴𝐴𝑅 𝐴𝑣𝑒 𝐴𝑅
= 𝑥 360
because they are partially completed items, 𝐴𝐶𝑃 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
special-purpose items, and the like; and
Inventory Turnover – it measures the number of times that
2) inventory is typically sold on credit, which
inventory is replaced during the period.
means that it becomes an account receivable
before being converted into cash. For Merchandising
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Formula:
𝑄𝑢𝑖𝑐𝑘 𝑅𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
As with the current ratio, the quick ratio level that 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒 𝑀𝑒𝑟𝑐ℎ𝑎𝑛𝑑𝑖𝑠𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
a firm should strive to achieve depends largely on the
nature of the business in which it operates. The quick ratio Alternative Formula:
provides a better measure of overall liquidity only when a
firm’s inventory cannot be easily converted into cash. If 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
inventory is liquid, the current ratio is a preferred measure 𝐼𝑛𝑣. 𝐵𝑒𝑔 + 𝐼𝑛𝑣. 𝐸𝑛𝑑
2
of overall liquidity.
Average Age of Inventory – it is the number of period
2. ACTIVITY RATIOS where profit is realized from sold inventories.
– Also known as Management Efficiency Ratios Formula:
– measure the speed with which various accounts are
converted into sales or cash—inflows or outflows. 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠
𝐴𝑣𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣 =
– In a sense, activity ratios measure how efficiently a firm 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
operates along a variety of dimensions such as
inventory management, disbursements, and Alternative formula:
collections. 𝐴𝑣𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐴𝑣𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣 = 𝑥 360
Types of Activity Ratios: 𝐶𝑂𝐺𝑆
For Manufacturing
1. Receivables Turnover
2. Average Age of Receivables/Average Collection Formula:
Period
3. Inventory Turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑅𝑎𝑤 𝑀𝑎𝑡𝑠 𝑈𝑠𝑒𝑑
1. 𝑅𝑎𝑤 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
4. Average Age of Inventory 𝐴𝑣𝑒 𝑅𝑎𝑤 𝑀𝑎𝑡𝑠 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
5. Trade Payables Turnover 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑒𝑑
6. Average Age of Trade Payables/Average 2. 𝑊𝐼𝑃 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒 𝑊𝐼𝑃 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
Payment Period
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
Receivable Turnover – it is the time required to complete 3. 𝐹𝑖𝑛𝑖𝑠ℎ𝑒𝑑 𝐺𝑜𝑜𝑑𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒 𝐹𝐺 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
one collection cycle (time receivables are recorded,
collected, and recorded again). Operating Cycle - Is the time it takes for a company to
purchase inventory, sell it, and collect the cash from
- The faster the cycle is completed, the more quicky
the sale. This cycle is crucial for understanding a
receivables are converted into cash.
company's efficiency in managing its inventory and
Formula: receivables.

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 ∗ Formula:

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
Operating Cycle = Days Inventory Outstanding* +
*Net Sales maybe used in case the composition cannot be Days Sales Outstanding**
breakdown to cash and credit sales
*Days Inventory Outstanding (DIO) – Average Age of Inventory
𝐴𝑅 𝐵𝑒𝑔 + 𝐴𝑅 𝐸𝑛𝑑 **Days Sales Outstanding (DSO) – Average Age of Receivables
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑅 =
2
Trade Payables Turnover - is a short-term liquidity
Average Age of Receivables/Average Collection Period measure used to quantify the rate at which a company pays
off its suppliers. It shows how many times a company pays
- Also known as days’ sales in receivables, indicates the off its accounts payable during a particular period.
average number of days during which the company
must wait before receivables are collected. Formula:

Formula: 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠

𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠
𝐴𝐴𝑅/𝐴𝐶𝑃 =
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 Alternative Formula:
Number of working days follows banker’s rule of 360 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
days. In some cases, 365 days can be used. 𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑃. 𝐵𝑒𝑔 + 𝐴𝑃. 𝐸𝑛𝑑
2
Alternative formula:
 FINANCIAL STATEMENT ANALYSIS FINANCIAL MANAGEMENT – MAS 3
Average Age of Trade Payables – length of time or the higher returns on equity but also increases
number of days during which trade payables remain financial risk.
unpaid. – Lower Ratio: Suggests that the company is less
reliant on debt and is financing its operations more
Formula: through equity, which generally means lower
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠 financial risk but also potentially lower returns.
𝐴𝑣𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐴𝑃 =
𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 Formula:
Alternative formula: 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 − 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝐴𝑣𝑒 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝐴𝑣𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐴𝑃 = 𝑥 360
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 Times Interest Earned Ratio/Interest Coverage Ratio -
3. SOLVENCY RATIOS measures the firm’s ability to make contractual interest
payments.
– The term “solvency” refers to the entity’s ability to pay
all its debt, whether they are maturing short-term or – It determines the extent to which operations cover
long-term. interest expense.
– Both long-term creditors and stockholders are – The higher its value, the better able the firm is to
concerned that about the solvency of the company. fulfill its interest obligations.
– Creditors are particularly concerned with the
Formula:
company's ability to pay interest and the principal
amount of its obligations, while stockholders are 𝐸𝐵𝐼𝑇
𝑇𝐼𝐸 =
primarily interested in receiving regular dividends. In 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
the event of insolvency, the likelihood of stockholders
receiving dividends decreases significantly. 4. PROFITABILITY RATIOS

Types of Solvency Ratios: – There are many measures of profitability. As a group,

these measures enable analysts to evaluate the firm’s
1. Debt Ratios profits with respect to a given level of sales, a certain
2. Equity Ratios level of assets, or the owners’ investment.
3. Debt to Equity Ratios – Without profits, a firm could not attract outside
4. Times Interest Earned Ratio capital. Owners, creditors, and management pay close
attention to boosting profits because of the great
Debt Ratios - The debt ratio measures the proportion of importance the marketplaces on earnings.
total assets financed by the firm’s creditors. The higher this
ratio, the greater the amount of other people’s money being Types of Profitability Ratios
used to generate profits.
1. Return on Sales (ROS)
– The higher this ratio, the greater the firm’s degree 2. Return on Total Assets (ROA)
of indebtedness and the more financial leverage it 3. Return on Equity (ROE)
has. 4. Earnings Per Share (EPS)
Financial leverage is the magnification of risk and return Return on Sales – measures the amount of income
through the use of fixed-cost financing, such as debt and provided by the average peso sales.
preferred stock. The more fixed-cost debt a firm uses, the
greater will be its expected risk and return. The basic formula for ROS:
𝐼𝑛𝑐𝑜𝑚𝑒
Formula: 𝑅𝑂𝑆 =
𝑆𝑎𝑙𝑒𝑠 ∗∗
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 **Net sales is preferred in case it is available
𝐷𝑒𝑏𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
o Gross Profit, Operating Profit, or Net Profit can be
Equity Ratio – it measures the proportion of total assets used as numerator in the formula depending on the
financed by owners or stockholders. It is complementary to need of the user.
debt ratio.
Gross Profit Margin – The gross profit margin measures
Formula: the percentage of each sales peso remaining after the firm
has paid for its goods.
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 – The higher the gross profit margin, the better (that
is, the lower the relative cost of merchandise sold).
Debt to Equity Ratio - is a financial ratio that compares a
company's total debt to its total equity. This ratio provides Formula:
insight into the company's financial leverage and helps
stakeholders understand the degree to which the company 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 ∗
𝐺𝑃𝑀 =
is financing its operations through debt versus its own 𝑆𝑎𝑙𝑒𝑠
funds (equity). *Gross Profit = Sales – Cost of Goods Sold
– Higher Ratio: Indicates that the company has
Operating Profit Margin – it measures the percentage of
higher leverage and is using more debt relative to
each sales peso remaining after all costs and expenses other
equity to finance its operations. This can lead to
than interest, taxes, and preferred stock dividends are
deducted.
 FINANCIAL STATEMENT ANALYSIS FINANCIAL MANAGEMENT – MAS 3
– It represents the “pure profits” earned on each Earnings Per Share (EPS) - EPS represents the number of
sales dollar. dollars earned during the period on behalf of each
– Operating profits are “pure” because they measure outstanding share of common stock.
only the profits earned on operations and ignore
interest, taxes, and preferred stock dividends. A – The firm’s earnings per share (EPS) is generally of
high operating profit margin is preferred. interest to present or prospective stockholders and
management.
Formula:
Formula:
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
𝑂𝑃𝑀 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑜𝑛 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘
𝑆𝑎𝑙𝑒𝑠 𝐸𝑃𝑆 =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠
EBIT (Earnings Before Interest and Taxes) and operating profit
are often used interchangeably when a company doesn't have non- 5. MARKET RATIOS
operating income or expenses.
– Market ratios relate the firm’s market value, as
Net Profit Margin - The net profit margin measures the measured by its current share price, to certain
percentage of each sales peso remaining after all costs and accounting values.
expenses, including interest, taxes, and preferred stock – These ratios give insight into how investors in the
dividends, have been deducted. marketplace feel the firm is doing in terms of risk and
return.
– The higher the firm’s net profit margin, the better. – They tend to reflect, on a relative basis, the common
stockholders’ assessment of all aspects of the firm’s
Formula:
past and expected future performance.
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡
𝑁𝑃𝑀 = Types of Market Ratios:
𝑆𝑎𝑙𝑒𝑠
– The net profit margin is a commonly cited measure 1. Price-earnings ratio (P/E)
of the firm’s success with respect to earnings on 2. Market-Book Ratio (M/B)
sales. “Good” net profit margins differ 3. Dividend Yield Ratio
considerably across industries. 4. Dividend Payout Ratio

Return on Total Assets (ROA) - The return on total assets Price-Earnings Ratio (PE) - is commonly used to assess
(ROA), often called the return on investment (ROI), the owners’ appraisal of share value.
measures the overall effectiveness of management in
- The P/E ratio measures the amount that investors
generating profits with its available assets. The higher the are willing to pay for each dollar of a firm’s
firm’s return on total assets the better. earnings.
Formula: - The level of this ratio indicates the degree of
confidence that investors have in the firm’s future
𝐸𝐵𝐼𝑇 performance.
𝑅𝑂𝐴 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 - The higher the P/E ratio, the greater the investor
confidence.
Alternative Formula:
Formula:
𝐸𝐵𝐼𝑇
𝑅𝑂𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐵𝑒𝑔 + 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠, 𝐸𝑛𝑑 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
2 𝑃/𝐸 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Return on Equity (ROE) - measures the return earned Note: This formula is for common shares only.
stockholders’ investment in the firm. It measures how the
management effectively utilizes its equity to generate Market-Book Ratio (MB) – provides an assessment of how
profits. investors view the firm’s performance. It relates the market
value of the firm’s shares to their book— strict
Formula:
accounting—value.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 = Formula:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Alternative Formula: 𝑀/𝐵 =
𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 Alternative Formula:
𝑅𝑂𝐸 =
𝑆𝐻𝐸, 𝐵𝑒𝑔 + 𝑆𝐻𝐸, 𝐸𝑛𝑑
2 𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑀/𝐵 =
𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘 𝐸𝑞𝑢𝑖𝑡𝑦 ∗
If a user specifically wants to determine the return on
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
common equity, the formula is:
*Common Stock Equity is the residual amount of Shareholders
Equity after considering preferred stock.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑜𝑛 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑆𝑡𝑜𝑐𝑘
𝑅𝑂𝐸 =
𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 ∗, 𝐵𝑒𝑔 + 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 ∗, 𝐸𝑛𝑑 CSE = Total Equity – Preferred Stock Equity
2
Dividend Yield - shows how much a company pays out in
*Common Stock Equity is the residual amount of Shareholders
dividends each year relative to its stock price.
Equity after considering preferred stock.
 FINANCIAL STATEMENT ANALYSIS FINANCIAL MANAGEMENT – MAS 3
- It provides investors with an idea of the income
they can expect from holding a stock, expressed as
a percentage of the stock's current market price. Compiled by:

Formula: Joshua Q. Poquiz, CPA

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 =
𝑀𝑎𝑟𝑘𝑒𝑡 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Reference Books:
Dividend Payout – it is the ratio of dividends per share to
earnings per share. • Management Advisory Services by Roque
• Financial Management by Balatbat & Cabrera, 2019
- is a financial metric that shows the proportion of a Edition
company's earnings that are paid out to • Principle of Managerial Finance by Gitman & Zutter,
shareholders as dividends. 13th Edition
- It provides insight into how much profit is being • Some are additions and revised by Joshua Poquiz
distributed versus how much is retained for
reinvestment in the business.

Formula:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 =
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

Alternative Formula:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜

𝑇𝑜𝑡𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑃𝑎𝑖𝑑 𝑡𝑜 𝐶𝑜𝑚𝑚𝑜𝑛
=
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

PART IV: DUPONT SYSTEM OF ANALYSIS

– The DuPont system of analysis is used to dissect the

firm’s financial statements and to assess its financial
condition. It merges the income statement and balance
sheet into two summary measures of profitability,
return on total assets (ROA) and return on common
equity (ROE).
– DuPont Analysis is a framework used to analyze a
company's Return on Equity (ROE) by breaking it
down into three key components. This method helps
investors and analysts understand the factors driving a
company's ROE, providing deeper insights into its
financial performance.

Formula:

𝑅𝑂𝐸 = 𝑁𝑃𝑀 𝑥 𝑇𝐴𝑇 𝑥 𝐹𝐿𝑀

NPM – Net Profit Margin

TAT – Total Asset Turnover
FLM – Financial Leverage Multiplier

Net Profit Margin: Measures the company's ability to

convert revenue into profit.

Formula:

Net Profit Margin=Net Income/Revenue

Asset Turnover: Indicates how efficiently the company

uses its assets to generate revenue.

Formula:

Asset Turnover=Revenue/Total Assets

Equity Multiplier: Reflects the company’s financial

leverage.

Formula:

Equity Multiplier=Total Assets/Total Equity