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Financial

Statement
Analysis
Presented by:
Elemos, Pia Angela
Feliciano, Kathlene Mae
Ramos, Christianne Nicole
Tumbaga, Katrina Mae
Zamora, Patricia Nicole

WG Corporation Comparative Financial

2010
2011
2012
Statement
Assets
Cash and Cash
Equivalent
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
Property, Plant &
Equipment (net)
TOTAL ASSETS

Liabilities and Equity


Note Payable
Accounts Payable
Accrued Expenses
Total Current Liabilities
Non-Current Liabilities
Total Liabilities


148,000
283,000
322,000
10,000
763,000
460,000
1,223,000

290,000
81,000
28,000
399,000
150,000
549,000

100,000
410,000
616,000
14,000

1,140,000
904,000

90,000
394,000
696,000
15,000

1,195,000
974,000

2,044,000
2,169,000

295,000
290,000
94,000
94,000
116,000
116,000
505,000
500,000
453,000
530,000
958,000
1,030,000

Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Income
Interest Expense
Earnings before tax
Income tax expenses
Earnings after tax

Cash Dividend

1,235,000 2,106,000 2,211,000


849,000 1,501,000 1,599,000
386,000
605,000
612,000
180,000
383,000
402,000
206,000
222,000
210,000
20,000
51,000
59,000
186,000
171,000
151,000
74,000
69,000
60,000

112,000
103,000
91,000

50,000 50,000
;50,000

HORIZONTAL
TREND
ANALYSIS

Horizontal or Trend
Analysis
A type of time-series analysis of
evaluating what has occurred over a
period of time in relation to a particular
starting point.
The main goal is to evaluate the
progress and changes in the firms
resources and claims to such resources.
Items are expressed as a percentage of
a base year or the starting point of the
evaluation.

Trend Percentage Formula


COMMON SIZE
FINANCIAL
STATEMENT
ANALYSIS

Common Size Financial Statement


Analysis (Vertical Analysis)
It expresses each balances of account as a
percentage of total assets, total liabilities &
equity, and total sales.
It can be a useful tool for gaining insight about
the structure of a firms assets, liabilities, equity,
and expenses.
In using this tool, analyst will be able to ascertain
what are the areas of wherein the firm focuses its
efforts since it will reveal what are the majority
compositions of a particular account balances.

2010

2011

2012

Assets
Cash and Cash
Equivalent
Accounts Receivable
Inventory
Other Current Assets
Property, Plant &
Equipment (net)
TOTAL ASSETS

148,000 12% 100,000

5%

90,000

283,000 23% 410,000 20% 394,000


322,000 26% 616,000 30% 696,000
10,000 1%
14,000 1%
15,000
460,000 38% 904,000 44% 974,000

4%
18%
32%
1%
45%

1,223,0
00

100
%

2,044,0
00

100
%

2,169,0
00

100%

Liabilities and Equity


Note Payable
Accounts Payable
Accrued Expenses
Non-Current Liabilities
Equity
Total Liabilities and
Equity

290,000 24% 295,000 14% 290,000


81,000 7%
94,000 5%
94,000
28,000 2% 116,000 6% 116,000
150,000 12% 453,000 22% 530,000
674,000 55% 1,086,0 53% 1,139,0
00
00
1,223,0 100 2,044,0 100 2,169,0
00
%
00 %
00

13%
4%
5%
24%
53%
100%

Net Sales
Cost of Goods Sold
Operating Expenses
Interest Expense
Income tax expenses
Earnings after tax

1,235, 100
000 %
849,00
69%
0
180,00
15%
0
20,000 2%
74,000 6%
112,00
9%
0

2,106, 100
000 %
1,501,0
71%
00
383,00
18%
0
51,000 2%
69,000 3%
103,00
5%
0

2,211,
100%
000
1,599,0
72%
00
402,00
18%
0
59,000
3%
60,000
3%
91,000

4%

RATIO
ANALYSIS

Ratio Analysis
A method or process by which the
relationship of items or group of items
in the financial statements are
computed, and presented
Used to interpret the financial
statements so that the strengths and
weaknesses of a firm, its historical
performance and current financial
condition can be determined.

Profitability Evaluation
Return on Asset (ROA)
This ratio measure the firms effectiveness
and efficiency in utilizing its assets to
generate income without reference to the
financing tool used in acquiring those assets.

2011

2012

Profitability Evaluation
Return on Equity (ROE)
This ratio measures the return provided to
the firms shareholders. It integrates the
result of the firms three business activities;
operating, investing, and financing.

2011

2012

Du Pont Analysis
The analysis focuses on the three types
of business activities, the operating
activities represented by the Sales
Margin, the investing activities
represented by the Asset Turnover and
the financing activities represented by
the Capital Multiplier.

Formula
Sales Margin =
Asset Turnover =
Capital Multiplier =

Risk Evaluation
Liquidity Ratios
Measures the firms ability to pay short-term
commitments using short-term resources.

Current Ratio =

Activity Ratios
Also called as efficiency ratios or turnover
ratios. These ratios show the relationship
between sales and various assets of a firm.

Inventory Turnover (ITO)

Receivable Turnover (RTO)


Inventory Turnover
(ITO)

Receivable Turnover
(RTO)

2011

2012

5.5 times

Debt Ratio

Equity Ratio
Debt to Equity Ratio
Times interest earned


Debt Ratio

Equity Ratio

2011

2012

53%

53%

Debt to Equity
Ratio

Times interest
earned

CASH FLOW
ANALYSIS

CASH FLOW ANALYSIS


Cash flow measures recognize inflows when cash is

received but not necessarily earned, and they recognize


outflows when cash is paid but the expenses not
necessarily incurred.
Cash flow analysis helps in assessing liquidity, solvency
and financial flexibility.
Liquidity is the nearness to cash of assets and liabilities.
Solvency is the ability to pay liabilities when they
mature.
Financial flexibility is the ability to react and adjust to
opportunities and adversities.

Cash flow analysis helps to address


the following:
How much cash is generated from or used in

operations?
What expenditures are made with cash from
operations?
How are dividends paid when confronting an operating
loss?
What is the source of cash for debt payments?
How is the increase in investments financed?
What is the source of cash for new assets?
Why is cash lower when income increased?
What is the use of cash received from new financing?

Free Cash Flow


Free cash flow is the amount of cash
that a company has left over after it has
paid all of its expenses, including
investments.
Positive free cash flows reflect the
amount available for business activities
after allowances for financing and
investing requirements to maintain
productive capacity at current levels.

Other Definitions
1. Free Cash Flow = Cash flow from operations
Net capital expenditure required to maintain
productive capacity Dividends on preferred
stock and common stock.
2. Free cash flow = Net operating profit after
taxes Increase in net operating assets
(dividends not considered as they are financing
activity).
3. EBIT (1-t) + Depreciation Change in net
working capital Capital expenditure

Cash flow Ratios


Cash flow adequacy ratio
It is a measure of a companys ability to
generate sufficient cash from operations to
cover capital expenditure, investment in
inventories and cash dividend.

Cash flow Ratios


Note:
Investment in receivables is omitted because they
are financed primarily by short-term credit.
Only additions to inventories are included
A ratio of 1 indicates the company exactly covered
these cash needs without a need for external
financing. A ratio below 1 suggests internal cash
sources were insufficient to maintain dividends
and current operating growth levels.

Cash Reinvestment Ratio


It is a measure of the percentage of
investment in assets representing
operating cash retained and reinvested
in the company for both replacing assets
and growth in operations.
=

Profit Variance Analysis


Deals with how to analyze the profit
variance that constitutes the departure
between actual profit and the previous
years income or the budgeted figure.
Important to the management because by
analyzing the change in gross profit they
will be able to assess the effectiveness of
their policies such as purchasing, pricing,
mark up and investment policies.

Techniques in analyzing gross profit variation


analysis:
If a firm manufactures or buys and sells only one
product, the analysis may show the impact of change
in volume, selling price and unit cost on the gross

profit.
Increase (decrease) in Gross profit:
Quantity factor:
Sales this year at last years prices
Less: Sales last year
Increase (Decrease) in sales

Pxx
(xx)
Pxx

Multiplied by: Gross profit rate last year


%
Increase (Decrease) in Gross profit
Pxx

Price factor:
Sales this year
Pxx
Less: Sales this year at last years prices
(xx)
Increase (Decrease) in Gross profit
Pxx
Cost factor:
COS this year
Pxx
Less: COS this year at last years cost
(xx)
Increase (Decrease) in Gross profit
Pxx
Net increase (decrease) in GP

If unit selling price, unit cost and quantity sold for the current
and previous years available, this simplified format may be used:

Increase in Sales
Quantity factor = change in quantity x selling price last year
Pxx
Price factor = change in price x quantity sold last year
xx
Quantity/Price factor = change in quantity x change in selling
price
xx
Total
Pxx
Less: Increase in COS
Quantity factor = change in quantity x unit cost last year
Pxx
Price factor = change in price x quantity sold last year
xx
Quantity/Price factor = change in quantity x change in unit
cost
xx
Total

When two or more products whose


gross margins are not the same, sales
mix factor also known as gross profit
rate factor shall also be presented aside
from the analysis of quantity, cost and
price factor.

USE OF COMPUTER
IN FINANCIAL
ANALYSIS

Use of Computers in
Financial Analysis
With computers, the graphical approach and the
mathematical approach to financial analysis are easy
to use
The users of the analysts report will appreciate trend
analysis through a line graph that literally highlight the
change of each line item

Since common size financial statement presents the


composition of the base account, the best way to present
such analysis is through the usage of a pie chart that will
literally present the portion being composed of a particular
account in as far as the base account is concern which will
aid in the immediate determination of the firms focus.

140%

120%

100%

80%

Cash and Cash


Equivalent
Accounts Receivable
Inventory
Other Current Assets
Property, Plant &
Equipment (net)

60%

40%

20%

0%
1
-20%

-40%

-60%

Cash and Cash Equivalent


Accounts Receivable
Inventory
Other Current Assets
Property, Plant & Equipment (net)

Information
Weakness in
Financial
Statement Analysis

Strong financial statement analysis does


not necessarily mean that the
organization has a strong financial future
Other factors like bankruptcy of major supplier and
customers, or the fast pace change in the products
life cycle of the firm or the sudden breakdown of
equipments and machineries requiring immediate
replacement, or the untimely withdrawal of an
investor might cause cash flow problems.
Hence, in making a conclusion as to the over-all
result of the financial statement analysis, caveats
should be given to readers as to the areas in which
possible cash flow crisis might occur.

Financial statement analysis might look


good but there may be other factors that
can cause an organization to collapse.
The problem lies in the constant changes in the
business environment. This would mean that any
actions performed in the previous operating period
may not be applicable to the current situations and
scenarios. Also, after evaluating the risk and
profitability of a firm, an analyst might conclude
that the firm will be able to face the current
business environment in relation to the estimated
change in the environment. A change in the
countrys political stability, or bankruptcy of a major
financial institution can cause the collapse of a firm.

BUSINESS
VALUATION

Business Valuation
An examination conducted towards
rendering an estimate or opinion as to
the fair market value of a business
interest at a given point in time
Valuation is an art rather than exact
science
It is nothing more than an expression of
informed opinion which is based on fact and
judgment
Valuations are not precise rather they are
generally stated as range in values

What is Being Valued


It is business interest that

is being valued. However, a


valuator can be requested to
provide an estimation or
opinion only on goodwill or
other intangible assets or the
value of a specific division of
the business.

Approaches in
Determining Value
Empirical Approach
Fair Market Value is best determined by
reference to open market transactions
involving similar businesses

Investment Approach
Fair Market Value is best determined by
reference to detailed investment analysis
using the techniques of financial statement
analysis