2. Comparative Analysis
There are three types of comparisons to provide
decision usefulness of financial information:
• Intra-company basis
• Inter-company basis
• Industry averages
3. Comparative Analysis
• Intra-company basis – comparisons within the
company.
• Inter-company basis – comparisons with other
companies.
• Industry averages – comparisons with other
companies in the same industry.
4. Financial Statement Analysis
Three basic tools are used in financial statement
analysis :
1. Horizontal analysis
2. Vertical analysis
3. Ratio analysis
5. Horizontal Analysis
• Is a technique for evaluating a series of financial
statement data over a period of time.
• Did an increase or decrease take place?
6.
7. Vertical Analysis
• Expresses each item in a financial statement as a
percent of a base amount.
• Total Assets is the base amount on a Balance Sheet.
• Common-size balance sheet
• Net Sales is the base amount on an Income
Statement.
• Common-size income statement
10. Liquidity Ratios
Measure the short-term ability of the
enterprise to pay its maturing
obligations and to meet unexpected
needs for cash.
WHO CARES?
Short-term creditors such as
bankers and suppliers
14. Solvency Ratios
Measure the ability of the enterprise
to survive over a long period of time
WHO CARES?
Long-term creditors and
stockholders
15. Debt to Assets Ratio
Indicates % of total assets provided by
creditors
Total Liabilities
Total Assets
16. Times Interest Earned Ratio
Indicates company’s ability to meet
interest payments as they come due
_
EBIT
_
Interest Expense
17. Cash Debt Coverage Ratio
Indicates long-term debt-paying ability
(cash basis)
Cash provided by operations
Average total liabilities
18. Turnover Ratios
Measure how efficiently, or
intensively, a firm uses its assets to
generate sales
.
WHO CARES?
Short-term creditors such as
bankers and suppliers
24. Profitability Ratios
Measure the income or operating success of an
enterprise for a given period of time
WHO CARES? Everybody
WHY? A company’s income affects:
➩ its ability to obtain debt and equity financing
➩ its liquidity position
➩ its ability to grow
29. Earnings Per Share (EPS)
Indicates net income earned on each
share of common stock sales
Net Income
Shares Outstanding
30. Price Earnings Ratio
Indicates relationship between market
price per share and earnings per share
Stock Price
Earnings Per Share
31. Payout Ratio
Indicates % of earnings distributed in
the form of cash dividends
Dividends
Net Income
32. Retention Ratio
Indicates % of earnings plowed back
into the corporation.
Addition to Retained Earnings
Net Income
33. Limitations Of
Financial Analysis
• Horizontal, vertical, and ratio analysis are
frequently used in making significant
business decisions.
• One should be aware of the limitations of
these tools and the financial statements.