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Financial Statement Analysis

Financial Ratio
Classifications

Liquidity Profitability Solvency

Liquidity

1 2 3 4 5 6

Average
Acid test Inventory Days in Receivable
Current Ratio collection
Ratio turn over inventory turn over
period

7 8

Cash
Cash
conversion
management
cycle(CCC)
B1

To meet short
A B term obligation

Cash sales
Allocate cash
during CCC
sales
period B2
To meet
unexpected
needs for cash

Current Assets
1- Current Ratio = = 2.96:1
Current Liabilities
Comment: Each 1 dollar as a current liability could be covered by $2.96 as
current asset

Cash+Short term investment+AR(net)


2- Acid test Ratio = = 1.02:1
Current Liabilities

Comment: Each 1 dollar as a current liability could be covered by $1.02 as a cash


asset

Cost of goods sold


3- Inventory turnover = = 2.3 times
Average inventory

Comment: This Company has ability to purchase or produce then sell all
inventory items 2.3 times during a year

365 (days)
4- Days in inventory = = 159 days
inventory turnover

Comment: This Company has ability to purchase or produce then sell all
inventory during 159 days on average per year

Net credit sales


5- Receivable turnover = = 10.2 times
Average net AR

Comment: This Company has ability to sell then collect all receivable 10.2 times
on average during the year

365 (days)
6- Average collection period = = 35.78 days
Receivable turnover

Comment: This Company has ability to sell and collect all receivable balance
during 35.78 days on average per year

7- Cash conversion cycle (CCC) = Days in inventory + Average collection period

= 194.78 ≈ 195 days

Comment: This Company has ability to convert all inventory items to cash during
195 days on average per year so when we need to evaluate the liquidity
performance, we can depend on current ratio
8- Cash management
Net Sales
(A) Cash sales during CCC period = x CCC = 1120315.068
365 (days)

(B) Allocate cash sales


Current liabilities
(B1) To meet short term obligations = x CCC = 184047
365 (days)
(B2) To meet unexpected needs for cash
Current liabilities
= cash sales during CCC period – [ x CCC]
365 (days)

= 936268

Profitability

2
1

Management Stockholder

A A B C D

Return on Earning per Payout ratio Dividends


Net Income
AB equity (ROE) share (EPS) (PR) per share

B Profit margin
ABC

Return on
Net Sales
BC asset (ROA)

C Asset turn
over

Average
Sales

1- Management
Net income
(AB) Profit margin = = 12.6 %
Net sales

Comment: Each 100 dollars as a sales could generate $12.6 as a return


Net sales
(BC) Asset turnover = = 1.2 times
Average total assets

Comment: Each dollar as a total assets could generate $1.2 as a sales

(ABC) Return on asset (ROA) = profit margin x asset turnover

= 15.4%

Comment: Each 100 dollars as assets could generate $15.4 as a return

2- Stockholder

Net income
(A) Return on equity (ROE) =
Average common stockholder equity

263800
=795000+1003000
2

= 29.3%
Comment: Each 100 dollars as equity could generate $29.3 as a return

Net income
(B) Earnings per share (EPS) =
Average common share outstanding

263800
= 270000+275400
2

= $0.97
Comment: Each common share outstanding could generate $0.97 as a return

Cash dividends 61200


(C) Payout ratio (PR)= = = 23.2 %
Net income 263800

Comment: The management decided to pay dividends 23.2% of its net income

(D) Dividends per share = EPS x PR = 0.225 $/share

Comment: The management decided to pay dividends $0.225 for each common
share
Solvency

1 2

Stockholders
book value of Creditors
common share

A B

Financial
Times interest
leverage (Debts
earned
to Assets)

Total stockholder equity


1- Stockholder book value of common share =
Number of common share

Number of common share = value of year 2011 - value of year 2010

Stockholder book value of common share = 0.7

Comment: The book value for common share has been increased by 0.7 through
2010 & 2011

2- Creditors
Debts 832000
(A) Financial leverage = = = 45.3%
Assets 1835000

Comment: Each 100 dollar as assets could be finance by $45.3 as liabilities

Income before income taxes and interest expenses


(B) Times interest earned =
Interest expenses

468000
= = 13 times
36000

Comment: Each 1 dollar as interest expenses could be covered by $13 as income