Financial Statement ANALYSIS

 Is the use of financial statement to analyze

company’s position and performance, and to
assess future financial performance.

 Provides a better understanding to the present

and future financial health of a company.
Helps diagnose profitabiity
and financial soundness.

Viability

Stability

Profitability
Helps forecast
future performance
PROFITABILITY

PARAMETERS

LIQUIDITY STABILITY
Financial Analysis enables users
to :
 Evaluate financial condition of
the company.
 Prioritise tasks for the future.
 Monitor achieved results.
 Detect potential threats.
 Horizontal Analysis also referred as Comparative Financial
Statement Analysis. Review of changes in
individual account balances on a year-to-
year or multiyear basis.
Year to year change analysis
Vertical Analysis also referred as Common-Size Financial
Statement Analysis.
RATI
OANALYSI
S Ratios are fractions or percentages
computed by dividing one account
or line item amount by another
 Past
History
- Comparing the value of ratio
over time
- Allows trends to be assessed
- The company’s management can
use this information to take
corrective actions

Standards
for Industrial Averages
- Comparing a company’s ratios with
Compariso
the same ratios for companies in
n the
same business.
- Annual publications provide
industrial
figures.
 Leverag
Liquidity
Ability of a e of a
Ability
company company
to meets its current to meets its long-
obligations and short-term
obligations
• Current Ratio
• Times-Interest-
• Quick or Acid-Test
earned
Classification • Accounts
• Debt Ratio
Receivable
of Ratios Turnover
• Debt-to-Equity
• Inventory
turnover
 Current Quick or Acid-
Ratio
Ability to pay its short-term Atest
measure of
liabilities out of short-term liquidity that
assets compares only the
Current Assets most liquid assets
Cash + Marketable Securities
Current Liabilities
LIQUIDI + Account Receivable
Current Liabilities
RATIO
TY
S
Accounts Receivable Turnover Inventory
Ratio Turnover
Determine how long it takes Determine how many times
the company to turn its the average inventory turns
receivable into cash over or sold
Net sales Cost of Goods Sold
Average Accounts Receivable Average Inventory
 Accounts Receivable Turnover Inventory Turnover
Ratio Ratio
Net sales Cost of Goods Sold
Average Accounts Receivable Average Inventory

Beg. Receivables + Ending Ave.

Ave. A/R Beg. Inventory + Ending Inventory
Receivables Inventory
= 2
2 =

Turnover 365 Turnover 365

in days = Receivable Turnover Ratio in days = Inventory Turnover Ratio
 Leverag
Liquidity
Ability of a e of a
Ability
company company
to meets its current to meets its long-
obligations and short-term
obligations
• Current Ratio
• Times-Interest-
• Quick or Acid-Test
earned
Classificatio • Accounts
• Debt Ratio
Receivable
n of Ratios Turnover
• Debt-to-Equity
• Inventory
turnover
Time-Interest-
Debt Ratio
Earned
Income

Leverage
Before Interest
+ Total Liabilities
Taxes Expense
Total Assets

Ratios
Interest
Expense
Uses the income Measures the degree of
statement to asses a protection afforded
company’s ability to creditors in case of Can help an individual
service its debts insolvency
to evaluate a
Debt-to-Equity company’s debt-
Ratio carrying ability
Total Liabilities
Total Stockholders’ Equity

Compares the amount of

debt that is financed by
stockholders
ASSET 
MANAGEMENT 
RATIOS
ASSET MANAGEMENT RATIOS
 Asset management ratios are the key to
analyzing how effective and efficient one’s
business. Knowing your position regarding the
efficiency of using assets to make sales is crucial
to the success of your firm.

 Itmeasures how the firm uses its assets to

generate revenue and income.
ASSET MANAGEMENT RATIOS

 Finished
Goods or Merchandise Inventory
Turnover Ratio

- If your firm sales physical products, it is the

most important ratio.

- Indicates if a firm holds excessive stocks of

inventories that are unproductive.
ASSET MANAGEMENT RATIOS

Formula:
generally computed as:
Sales = ____ x
Inventory

Can also be computed as:

Cost of Sales = __ x
Average Inventory
ASSET MANAGEMENT RATIOS

 Average Age of Inventories or Number of Days

of Inventory Ratio

- measures the average number of days that

inventory is held before sale.
ASSET MANAGEMENT RATIOS
Formula:
365 (Fiscal Year) = ____ Days
Inventory Turnover Ratio

If you don’t have Inventory Turnover Ratio, this

formula can be used:

Inventory = ____ Days

Cost of Goods Sold x 365
ASSET MANAGEMENT RATIOS
 Receivables Turnover Ratio

- measures the average number of days to

collect a receivable.

- Receivables turnover looks at how fast we

collect on our sales or, on average, how many
times each year we clean up or totally collect
our accounts receivable.
ASSET MANAGEMENT RATIOS

Formula:
Net Credit Sales = ____ Days
Average Accounts Receivable
ASSET MANAGEMENT RATIOS
 Average Collection Period Ratio

-  measures the number of days it takes a

company to collect its credit accounts from its
customers.

Formula:
365 Days = ___ Days
Receivables Turnover Ratio
ASSET MANAGEMENT RATIOS
 Fixed Assets Turnover Ratio

- measures and looks at how efficiently the

company uses its fixed assets, like plant and
equipment, to generate sales.

- If you can't use your fixed assets to

generate sales, you are losing money because
you have those fixed assets.
ASSET MANAGEMENT RATIOS

Formula:
Sales = ____ x
Net Fixed Assets
ASSET MANAGEMENT RATIOS
 Total Capital Turnover Ratio

- measures the level of total assets having

explicit costs relative to sales volume. It is also
an asset management ratio that is a "big
picture" ratio.

Formula:
Sales
Total Capital
ASSET MANAGEMENT RATIOS
 Total Assets Turnover Ratio

- measures the level of capital investment

relative to sales volume. Also if there is a
problem with inventory, receivables, working
capital, or fixed assets, it will show up in the
total asset turnover ratio. The total asset
turnover ratio shows how efficiently your assets,
in total, generate sales.
ASSET MANAGEMENT RATIOS

Formula:
Sales = ____ x
Total Assets
COST MANAGEMENT 
RATIOS
COST MANAGEMENT RATIOS

 Measure how well a firm controls its costs.

 isa form of management accounting that allows

a business to predict impending expenditures to
help reduce the chance of going over budget.
COST MANAGEMENT RATIOS
 Gross Profit Rate Ratio

- measures how much can be spent for

marketing, research and development, and
administration costs while still reaching targeted
income.

Formula:
Net Sales – Cost of Sales
Net Sales
COST MANAGEMENT RATIOS
 Labor Cost Ratio

- measures the percentage of labor cost to

sales.

Formula:
Labor Cost
Net Sales
COST MANAGEMENT RATIOS
 Employment Growth Rate

- Used as a measure of operational growth. It

is compared with the investment rate to
determine whether capital is being substituted
for labor.

Formula:
# of workers (present) – (past)
# of workers (past)
PROFITABILITY RATIO
 Measure earnings in relation to some base, such as
assets, sales or capital
PROFIT MARGIN ON SALES OR NET
PROFIT PERCENTAGE
 Measures the percentage of net income to sales.
NET OPERATING INCOME TO SALES

 Measures the percentage of operating income to sales.

Earnings Before Interests & Taxes
Net Operating Income = 

   Net Sales
Return on Investment

 Indicates whether management is using funds wisely.

 Net Income
Return on Investment= 

             Average Total Assets
Net Operating Income to Total Capital
 A variation of the return on total assets that exclude non – interest
bearing debt from total assets.

 Earnings Before Interests & Taxes
Net Operating Income =
To Total Capital    Equity + Interest Bearing debt
GROWTH RATIOS 
AND VALUATION 
RATIOS
GROWTH RATIOS
 Measure the changes in the economic status of
a firm over a period of time.
GROWTH RATIOS
1. Basic Earnings per Share (BEPS) - reflects the
company’s earning power, i.e., its ability to generate
income from normal operations
 Formula:

Income Available to Common Stockholders

Average Common Shares Outstanding

2. Earnings Yield – shows the relationship of earnings per

share to the market price per share.
 Formula:
Earnings per Share
Market Price per Share
GROWTH RATIOS
3. Cash Flow per Share – an indication of short-term
capacity to make capital outlays and dividend
payments
 Formula:
Cash provided by Operations-Dividends
Common Shares Outstanding

4. Dividend Payout Ratio – shows whether a firm pays

out most of its dividends or reinvests the earnings
internally
 Formula:
Cash Dividends per Common Share
Earnings per Share
GROWTH RATIOS
5. Dividend Yield – shows the relationship of common
dividends per share to the market price of such shares
 Formula:
Cash Dividends per Common Share
Market Price per Common Share

6. Ratio of Operating Cash Flows to Cash Dividends –

measures the ability to pay dividends from current
operating sources
 Formula:
Net Cash provided by Operations
Cash Dividends
GROWTH RATIOS
7. Internal Growth Rate – measures the percentage
increase in assets kept in the business
 Formula:
Amount Retained
Asset Base

8. Sustainable Equity Growth Rate– measures the

relationship of the earnings retained and the return
thereon
 Formula:

Return on Common Equity x (1 – Dividend Payout Ratio)

VALUATION RATIOS
 Measure of stakeholder value as reflected in the
price of the firm’s stock

*stakeholder value - maximization of the interests of

all stakeholders
VALUATION RATIOS
1. Book Value per Share – measures the amount of net
assets available to the shareholders of a given type of
stock
 Formula: Equity
Shares Outstanding

2. Market to Book Ratio or Price to Book Ratio –

measures how high is the shares’ market price in
relation to book value. Well-managed firms should sell
at high multiples of their book value.
 Formula: Market Price per Share
Book Value per Share
VALUATION RATIOS
3. Price-Earnings Ratio – measures the relationship
between the shares’ market price and earnings per
share. Growth companies are likely to have high PE
ratio.
 Formula: Market Price
Earnings per Share

4. Return to Shareholders – measures what shareholders

actually earn over a specified period of years.
 Formula: Dividend Yield + Capital Gains

Measurement Period
VALUATION RATIOS
5. Q-Ratio – reflects the market’s valuation of new
investment. When the Q-ratio is greater than one (1.0),
it means that the firm is earning returns greater than
the amount invested.
 Formula: Market Value of all Securities
Replacement Cost of Assets

6. Return on Shareholders’ Investment (ROSI) –

Calculation of the return on the price of a common
share.
 Formula:

Dividends per Share + MV of Reinvested Earnings

Price per Share
GROSS PROFIT 
VARIANCE ANALYSIS
GROSS PROFIT VARIANCE 
ANALYSIS
 This technique in the analysis of Financial Statement is
used to compare actual data with budgeted data,
standard data, previous year's data, or base year data.

 There are four (4) types of Gross Profit Variance

Analysis, to wit;
 4-Way Analysis
 6-Way Analysis
 3-Way Analysis
 4-Way Analysis, Plus
4­WAY ANALYSIS
SALES VARIANCE
Price Factor
= Difference in Selling Price x Actual Units
Volume or Quantity Factor
=Difference in Units x BSPB Selling Price

COST VARIANCE
Price Factor
= Difference in Cost Price x Actual Units
Volume or Quantity Factor
=Difference in Units x BSPB Cost Price

*BSPB ­ budgeted data, standard data, previous year's data, or base year data.
4­WAY ANALYSIS
EXAMPLE
 PREVIOUS YEAR 
 ACTUAL DATA 
DATA 
SALES IN UNITS 97500 110000
                           
SELLING PRICE                          9.00 
8.80 
COST PRICE 6.00 6.40
             
SALES REVENUE             877,500.00 
968,000.00 
COST OF GOODS                 
            585,000.00 
SOLD 704,000.00 
GROSS PROFIT Php292,500.00  Php264,000.00 

Source: http://accounting­financial­tax.com/2008/10/how­does­profit­variance­gross­profit­
analysis­work/
4­WAY ANALYSIS
Explanation for the decline of Php 28,500 in the Gross
Profit:
GAINS LOSSES
Gain due to  Php 112,500
favorable sales 
volume variance
Losses due to:
Unfavorable sales  Php 22,000
price variance
Unfavorable cost  Php 44,000
price variance
Unfavorable cost  Php 75,000
volume variance
Php 112,500F Php 141,000U
Php 112,500F­ Php 141,000U = ­Php 28,500
6­WAY ANALYSIS
SALES VARIANCE
Price Factor
= Difference in Selling Price x BSPB Units
Volume or Quantity Factor
=Difference in Units x BSPB Selling Price
Price-Volume Factor
=Difference in Selling Price x Difference in Units

COST VARIANCE
Price Factor
= Difference in Cost Price x BSPB Units
Volume or Quantity Factor
=Difference in Units x BSPB Cost Price
Price-Volume Factor
=Difference in Cost Price x Difference in Units

*BSPB ­ budgeted data, standard data, previous year's data, or base year data.
6­WAY ANALYSIS
Explanation for the decline of Php 28,500 in the Gross Profit:
GAINS LOSSES
Gain due to favorable  Php 112,500
sales volume variance
Losses due to:
Unfavorable sales price  Php 19,500
variance
Unfavorable sales  Php 2,500
price­volume variance
Unfavorable cost price  Php 39,000
variance
Unfavorable cost  Php 75,000
volume variance
Unfavorable cost price­ Php 5,000
volume variance
Php 112,500F Php 141,000U
Php 112,500F­ Php 141,000U = ­Php 28,500
3­WAY ANALYSIS
Volume or Quantity Factor
=Difference in Units x BSPB Gross Profit per unit

Price Factor
= Difference in Selling Price x Actual Units

Cost Factor
=Difference in Cost Price x Actual Units

*BSPB ­ budgeted data, standard data, previous year's data, or base year data.
3­WAY ANALYSIS
Explanation for the decline of Php 28,500 in the Gross
Profit:
GAINS LOSSES
Gain due to  Php 37,500
favorable volume 
variance
Losses due to:
Unfavorable price  Php 22,000
variance
Unfavorable cost  Php 44,000
variance
Php 37,500F Php 66,000U
Php 37,500F­ Php 66,000U = ­Php 28,500
4­WAY ANALYSIS, PLUS
 Gross
Profit Variance Analysis for two or
more products
 Includes:
Sales Mix Variance
Final Sales Volume Variance
4­WAY ANALYSIS, PLUS
SALES MIX VARIANCE
Actual units @ BSPB Sales Prices
Less: Actual units @ BSPB Cost Prices
=Difference
Less: Actual units @ BSPB Average Gross Profit per unit
=Sales Mix Variance

FINAL SALES VOLUME VARIANCE

Actual units @ BSPB Average Gross Profit per unit
Less: BSPB Gross Profit
=Final Sales Volume Variance

*BSPB ­ budgeted data, standard data, previous year's data, or base year data.
4­WAY ANALYSIS, PLUS
EXAMPLE
 PREVIOUS YEAR 
 ACTUAL DATA 
DATA
PRODUCT 1 SALES IN UNITS 4,000 4,500

PRODUCT 1 SELLING PRICE 24 22

PRODUCT 1 COST PRICE 14 15
PRODUCT 2 SALES IN UNITS 6,000 3,000
PRODUCT 2 SELLING PRICE 18 20
PRODUCT 2 COST PRICE 12 11
SALES REVENUE 204,000 159,000

COST OF GOODS SOLD 128,000 100,500

GROSS PROFIT Php76,000.00  Php58,500.00 

4­WAY ANALYSIS, PLUS
Explanation for the decline of Php 17,500 in the Gross
Profit:
GAINS LOSSES

Gain due to sales  Php 6,000
mix variance
Losses due to:
Unfavorable sales  Php 3,000
price variance
Unfavorable cost  Php 1,500
price variance
Unfavorable final  Php 19,000
sale volume variance
Php 16,000F Php 23,500U
Php 16,000F­ Php 23,500U = ­Php 17,500
CASH FLOW ANALYSIS
 A detailed study of the net change in cash as a result of
OPERATING, INVESTING and FINANCING activities during
the period.
 used to evaluate the sources and uses of funds.
CASH FLOW ANALYSIS
CASH FLOW ANALYSIS