Tools of Financial

Analysis and
Planning
Financial Statement Analysis
 What is Financial
Statement?
Financial statements are like a fine perfume – to be sniffed but not swallowed.
—ABRAHAM BRILLOFF
Role of a Financial Manager
• Responsible for the financial health of an organization
• Create financial reports, direct investments, and create
plans and strategies for the long-term financial benefit
of a business or organization
 The Firm are the provider of:

Capital Creditor Investor

Used by companies to pay Is a party who lends Puts capital to use for
for the ongoing production money or extends credit to long-term gain
of goods and services in another party, the debtor.
order to create profit.
• Trade creditors Are primarily interested in the liquidity of a firm
(suppliers owed money for goods and services)

• Bondholders Interested in the cash-flow ability of the firm to service

debt over a long period of time.

• Mangement They are the one that employs financial analysis for
the purpose of internal control and to better provide
what capital suppliers seek in financial condition and
performance from the firm.
Introduction
Precious Kayle C. Adviento
 Financial (statement) Analysis
The art of transforming data from financial statements into
information that is useful for informed decision making.
Balance sheet
A summary of a firm’s financial position on a given date that
shows:
total assets = total liabilities + owners’ equity.
Though the balance sheet represents a snapshot of the firm’s
financial position at a moment in time
Income statement
summarizes the revenues and expenses of the firm over a
particular period of time, again usually a year or a quarter
Income statement depicts a summary of the firm’s profitability
over time.
 In US, Financial Accounting Standards Board (FASB) determines the
accounting standards used to prepare, present, and report a
corporation’s financial statements by issuing Statements of Financial
Accounting Standards (SFAS).
- a publication promulgated by FASB that
establishes the generally accepted accounting standards in the US.

These statements make up what is known as the US Generally Accepted

Accounting Principles (US GAAP, or simply GAAP).
- standards that encompass the details, complexities,
and legalities of business and corporate accounting.
Balance Sheet Information
• Financial statement that reports a company's assets, liabilities,
and shareholder equity at a specific point in time.
• Summary of all of your business accounts
• A balance sheet may give insight or reason to invest in a stock.
• Second most important financial statement
Cash Equivalents Shareholders’ equity
Highly liquid, shortterm marketable
securities that are readily convertible to
known amounts of cash and generally Total assets minus total liabilities.
have remaining maturities of three
Shareholders’ equity will be “paid” only
months or less at the time of acquisition
through regular cash dividends,
common stock repurchases, and,
perhaps, a final liquidation dividend.
Shareholders’ equity, or net worth as it
is sometimes called, consists of several
subcategories.
Common stock (at
Retained earnings
par) and additional
Represent a company’s cumulative
paid-in capital profits after dividends since the firm’s
inception: thus these are earnings that
Together represent the total amount of have been retained (or reinvested) in the
money paid into the company in firm.
exchange for shares of common stock.
 Aldine Manufacturing Company
Balance sheets
For the Month ended September 18, 2020
ASSETS OWNER'S EQUITY
Current Assets Aldine, Capital Sept. 18 2020 P1,591,400
Cash P1,358,400 Total Liabilities and P1,982,900
Office Supplies 2,500 Owner's equity:
Prepaid Insurance 12,200
Total Current Assets P1,372,900

Non-current Assets
Cash P600,000
Computer Equipment 10,000
Total Non-current Assets P610,000
Total Assets: P1,982,900
NOTE: To check if you are finished and
LIABILITIES correct always remember that the TOTAL
Current Liabilities ASSETS AND THE TOAL LIABILITIES
Accounts Payable P2,500 AND OWNER'S EQUITY ARE
Notes Payable 389,000 BALANCED.
Total Liabilities: P391,500
Income Statement Information
Cost of goods sold
Product costs (inventoriable costs) that become period expenses only when
the products are sold; equals beginning inventory plus cost of goods
purchased or manufactured minus ending inventory

• Selling, general, and administrative expenses as well as interest expense

are shown separately from the cost of goods sold because they are viewed
as period expenses rather than product costs.
For a manufacturing
company Statement of retained
earnings
A financial statement summarizing the
Depreciation expense is generally changes in retained earnings for a stated
considered one component of the cost period – resulting from earnings (or
of goods manufactured losses) and dividends paid.
For a merchandising
firm
Depreciation is generally listed
separately as another period expense
 Aldine Manufacturing Company
Income Statement
For the Month ended September 18, 2020

Service Revenue
P135,000
Less: Expenses
Utility Expenses P,1,600
Chartable Contribution Expenses 10,000
Rent Expense 15,000
Salaries Expense 12,000
Total Expenses:
P38,600
Total Assets: NOTE: There is no debit and credit in
P96,400 Financial Statement. Only Journal Entries,
Trial Balance, and Ledger will be will use
the debit and credit .
 A Possible
Framework for
Analysis
Abalos, Ralph Sherwin Kieffer F.
A Possible Framework for Analysis
Analysis of the funds need of the firm
Analytical tools used to answer these questions include sources
and uses of funds statements, statements of cash flow, and cash
budgets.
Analysis of the financial condition and
profitability of the firm
The tools used to assess the financial condition and performance
of the firm are financial ratios.

In combination, and over time, these data offer valuable insight

into the health of a firm – its financial condition and profitability
Analysis of the business risk of the firm
Business risk relates to the risk inherent in the operations of the
firm.

The analyst needs to estimate the degree of business risk of the

firm being analyzed.
Determining the financial needs of the firm
All three of these factors should be used in determining the financial needs of the firm.
Moreover, they should be considered jointly.

• The nature of the • The firm’s level of • The financial

needs for funds business risk also condition and
influences the strongly affects performance of
type of financing the type of the firm also
that should be financing that influence the type
used should be used. of financing that
should be used.
Negotiations with suppliers of capital
The interaction of the firm with these suppliers of
capital determines the amount, terms, and price of
financing.

Analysis cannot be undertaken in isolation from the

fact that ultimately an appeal will have to be made to
suppliers of capital.
 Use of Financial Ratios

•To evaluate a firm’s financial condition •Analysts calculate ratios because in this
and performance, the financial analyst way they get a comparison that may
needs to perform “checkups” on various prove more useful than the raw numbers
aspects of a firm’s financial health. by themselves.
FINANCIAL RATIOS INVOLVE
TWO TYPES OF COMPARISON
INTERNAL EXTERNAL
COMPARISO COMPARIS
N ON
Analyst can compare a Involves comparing the
present ratio with past and ratios of one firm with
expected future ratios for those of similar firms or
the same company. with industry averages at
the same point in time.
TYPES OF
RATIOS Balance Sheet
Ratios
01
summarizes some aspect of the firm’s “financial condition”
at a point in time – the point at which a balance sheet has
been prepared.

Income Statement Ratios or Income

Statement/Balance Sheet Ratios
02 summarizes some aspect of a firm’s performance
over a period of time, usually a year
FINANCIAL
RATIOS
1. Liqudity 2. Coverage 3. Profitability
Ratios Ratios Ratios

4. Activity 5. Debt
Ratios Ratio
Thank you
Reference:

Van Horne James C. & Wachowicz Jr. , John M.

(2009) Fundamentals of Financial
Management 13th Edition Pearson Education
Limited
CREDITS: This presentation template was created by
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 BALANCE
SHEET RATIO
 • are used to measure a firm’s ability to meet short-term
LIQUIDITY obligations. Theycompare short-term obligations with short-term
(or current) resources available to meetthese obligations
RATIOS
 • The current ratio indicates how well you can
liquidate your current assets to pay off your
CURRENT current liabilities. Basically, this ratio measures
RATION the liquidity of your company. High liquidity
means you can come up with the money for an
unexpected expense quickly
 CURRENT RATIO EXAMPLE

• Say you have ₱30,000 in current assets and ₱15,000 in current liabilities. Divide your current liabilities by your
current assets to get your current ratio.

• Current Ratio = ₱30,000 / ₱15,000

• Your current ratio would be 2:1. This means you have twice as many assets as liabilities.
 • The quick ratio is more conservative than the current ratio
because it removes inventory from the formula. Some businesses
prefer to remove inventory from the ratio because carried over
inventory cannot necessarily be converted into cash at its book
QUICK RATIO value.

• Quick Ratio = (Current Assets – Current Inventory) / Current

Liabilities
 QUICK RATIO EXAMPLE

• Let’s take a look at a quick ratio example using the same numbers from the current ratio example. Again, you
have ₱30,000 in current assets and ₱15,000 in current liabilities. And, you have ₱2,000 in inventory.

• Quick Ratio = (₱30,000 – ₱2,000) / ₱15,000

• Your quick ratio would be 1.87:1, which is not much lower than your current ratio of 2:1. This means that only a
small amount of your assets are in inventory, and you have a healthy quick ratio.
 • Net Working capital is the difference between your current assets
NET WORKING and current liabilities. You can use the working capital formula to
determine whether or not your business will be able to meet
CAPITAL current obligations, like payroll, bills, and loan payments.
• Working Capital = Current Assets – Current Liabilities
 WORKING CAPITAL EXAMPLE

• Say you have $40,000 in current assets and $20,000 in current liabilities.

• Working Capital = $40,000 – $20,000

• Your business has $20,000 in working capital.

 • A debt-to-equity ratio shows you how dependent your business is
DEBT-TO-EQUITY on debt. Debt-to-equity indicates how much equity is available to
cover debts. To find this ratio, divide your company’s total
RATIO liabilities by your total shareholder equity.
• Debt-to-equity Ratio = Total Liabilities / Total Shareholder Equity
 DEBT-TO-EQUITY RATIO EXAMPLE

• Say your business has $40,000 in total liabilities and $25,000 in total shareholder equity.

• Debt-to-equity Ratio = $40,000 / $25,000

• Your company’s debt-to-equity ratio is 1.6:1. This means your business has $1.60 of debt for every dollar of
equity.
 • Use the solvency ratio to see if your business has enough cash
flow to pay off long-term debts while also meeting other short-
term obligations. The solvency ratio can determine that your
finances are healthy enough to pay off long-term debts and still
SOLVENCY operate.
• You can track your solvency ratio month to month to detect
RATIO problems with your finances. If you see it steadily decreasing over
time, your business may have a problem.
• Solvency Ratio = (Total Net Income + Depreciation) / Total
Liabilities
 SOLVENCY RATIO EXAMPLE

• Let’s say your business has $25,000 in total net income, $5,000 in depreciation, and $20,000 in total liabilities.
Plug in your totals to the solvency ratio formula from above.

• Solvency Ratio = ($25,000 + $5,000) / $20,000

• Your business’s solvency ratio is 1.5:1, or 150%. With a solvency ratio of 150%, your business should have no
trouble paying long-term debts.
INCOME STATEMENT AND
INCOME STATEMENT/
BALANCE SHEET
 INTRODUCTION
WE NOW TURN OUR ATTENTION TO THREE NEW TYPES OF RATIO-
COVERAGE, ACTIVITY, AND PROFITABILITY RATIOS – THAT ARE
DRIVED FROM EITHER INCOME STATEMENT OR INCOME
STATEMENT/BALANCE SHEET DATA. THE SIGNIFICANT IS THAT
WE ARE NO LONGER TALKING ABOUT JUST STOCK (BALANCE
SHEET) RELATIONSHIP. NOW, EACH RATIO RELATES A FLOW
(INCOME STATEMENT) ITEM TO ANOTHER FLOW ITEM OR A
MIXTURE OF A FLOW TO A STOCK ITEM. (AND TO COMPARE A
FLOW WITH A STOCK ITEM CORRECTLY, WE MAY NEED TO MAKE
SOME MINOR ADJUSTMENT.)
 Coverage ratio / Interest coverage ratio
 Coverage ratios are designed to relate the financial charges of a firm
to its ability to service, or cover, them. Bond rating services, such as
Moody’s Investors Service and Standard & Poor’s, make extensive
use of these ratios. One of the most traditional of the coverage ratios
is the interest coverage ratio, or times interest earned. This ratio is
simply the ratio of earnings before interest and taxes for a particular
reporting period to the amount of interest charges for the period; that
is,
The interest coverage ratio formula is
calculated as follows
 EBIT ( earning before interest and taxes)
interest expenses

 Operating profit
interest expense

 EBITAD ( earning before interest, tax, Depreciation and amortization)

interest expense
Earnings before interest and taxes (EBIT
Interest Expense

R145553028
R40351656
= 3.61
 ACTIVITY RATIO

 Measures the efficiency of the company in converting its

resources into sales or cash (operations)
 Relationship between Income Statement and Balance Sheet
Accounts
RECEIVABLES
ACTIVITY
PAYABLE ACTIVITY
INVENTORY
ACTIVITY
TOTAL ASSET TURNOVER
The total asset turnover ratio compares the sales of a
company to its asset base. The ratio measures the ability of
an organization to efficiently produce sales, and is typically
used by third parties to evaluate the operations of a business.
Ideally, a company with a high total asset turnover ratio can
operate with fewer assets than a less efficient competitor, and
so requires less debt and equity to operate. The result should
be a comparatively greater return to its shareholders.
How to Calculate the Total Asset
Turnover Ratio

 Total Asset Turnover = Net sales ÷ Total assets

 Example: 10,000,000 ÷ 5,000,000 = 2.0

THANK YOU
PROFITABILITY RATIO
 PROFITABILITY RATIO
- Profitability ratios are of two types – those showing
profitability in relation to sales and those showing
profitability in relation to investment. Together, these
ratios indicate the firm’s overall effectiveness of
operation.
 PROFITABILITY IN RELATION TO SALES

• GROSS PROFIT MARGIN

- it shows how much a business is
earning, taking into account the
needed costs to produce its goods
and services. 

GROSS PROFIT MARGIN:

  = GROSS PROFIT
NET SALES
= 1,312
3,992
= 0.3286×100 = 32.9%
 PROFITABILITY IN RELATION TO SALES

• NET PROFIT MARGIN

- it is the measure of the firm’s
profitability of sales after taking
account of all expenses and income
taxes.

NET PROFIT MARGIN:

  = NET PROFIT AFTER TAXES
NET SALES
= 201
3,992
= 0.5035x100 = 5.04%
 PROFITABILITY IN RELATION TO
INVESTMENT

• RETURN ON INVESTMENT
- the worth we get by partitioning the
total compensation investment.

RETURN ON INVESTMENT:
  = NET PROFIT AFTER TAXES
TOTAL ASSETS
= 201
3,250
= 0.0618×100 = 6.18%
 PROFITABILITY IN RELATION TO
INVESTMENT

• RETURN ON EQUITY
- it compares net profit after taxes
(minus preferred stock dividends, if
any) with the equity that
shareholders have invested in the
firm.

RETURN ON EQUITY:
  = NET PROFIT AFTER TAXES
SHAREHOLDER’S EQUITY
= 201
1,796
= 0.1119x100 = 11.19%
TREND
ANALYSIS
 TREND ANALYSIS
  - Trend analysis is a technique used in technical analysis that
attempts to predict future stock price movements based on
recently observed trend data.
- In terms of investing, trend analysis also tries to predict a
trend, such as a bull market run, and then ride that trend until
data suggests a trend reversal, such as a bull-to-bear market.
TREND ANALYSIS FOR
ACCOUNTING
- The trend analysis in
accounting can be used by
management or the
analyst to forecast future
financial statements.
 In fiscal years 2010 and 2009, Coca-Cola had the
operating income shown as follows:

HOW DO
WE USE
TREND • AMOUNT CHANGE
Current year amount - Base year amount
ANALYSIS? 8,449 – 8,231 = 218
• PERCENT CHANGE
Amount change ÷ Base year amount
218 ÷ 8,231 = 0.026 × 100 = 2.6%

AMOUNT CHANGE = 218

PERCENT CHANGE = 2.6%
 • AMOUNT CHANGE
TREND ANALYSIS Current year amount - Base year amount
FOR FINANCIAL STATEMENTS • PERCENT CHANGE
Amount change ÷ Base year amount
• NET SALES
Amount change:
> 35,119 – 30,990
= 4,129
Percent change:
> 4,129 ÷ 30,990 = 0.133 × 100
= 13.3%
• COST OF GOODS SOLD
Amount change:
> 12,693 – 11,088
= 1,605
> 1,605 ÷ 11,088 = 0.1447 x 100
= 14.5%
 TREND ANALYSIS
FOR FINANCIAL STATEMENTS

NET SALES
Amount change = 4,129
Percent change = 13.3%

COST OF GOODS
SOLD
Amount change = 1,605
Percent change = 14.5%
TREND ANALYSIS FOR
FINANCIAL RATIOS