Financial Statement

Analysis
Tools
and
Techniqu
es
 Financial Statement Analysis
Tools and Techniques
Objectives:
1. Review of the financial statements
2. Users of financial statements
3. Limitations of financial statements
4. Horizontal and vertical analysis
5. Trend analysis and common size
statements
6. Activity, leverage, liquidity,
profitability and market value ratios
 Financial Statements
1. Statement of Financial
Position
2. Statement of
Comprehensive Income
3. Statement of Cash Flow
4. Statement of Changes
in Equity
5. Notes to the Financial
Statements
 Users of Financial Statements
Internal External
1. Board of 1. Investors
Directors
2. Governmen
2. Managers
t Agencies
3. Employees
3. Creditors
4. Community
5. Consumers
1. Variations in application
of accounting principles

2. Financial statements are

interim by nature

3. Financial statements does

not reflect changes in the
purchasing power of the
peso

4. Financial statements do
not contain all the
significant facts about the
business
1. focus on determining a
company's financial strength
2. liquidity
3. safety of investment
4. effectiveness of management
and profitability growth rates
in order to ascertain its value
or creditworthiness.
1) Accounts from Statement of Financial
Position – Real accounts

Current Ratio = Current assets

Current liabilities

2) Accounts from Statement of Comprehensive

Income – Nominal accounts

Return on Sales = Net Income

Net Sales

3) Combination of Accounts - Real and Nominal

accounts

Asset Turnover = Net Sales

Ave. Total Assets

 4-8

 Ratios standardize numbers and facilitate

comparisons.
 Ratios are used to highlight weaknesses
and strengths.
 Ratio comparisons should be made through
time and with competitors.
 Industry analysis
 Benchmark (peer) analysis
 Trend analysis
Financial ratios provide two types of comparisons:
1. Industry comparison - financial ratios are computed
and compared with
the industry average.

Ex. RCBC vs. Bank Industry

RCBC Bank Industry Analysis

Current ratio 1.32 1.50 under
performance

2.Trend analysis – the firm’s financial ratios are

computed and compared
with their past performance.

Ex. RCBC
2018 2019 2020 Analysis
Current ratio 1.25 1.27 1.32
improving
Working Capital
= Current assets – Current liabilities

Current Ratio
= Current assets/Current liabilities

Acid-Test Ratio
= Cash + Accts. Rec. + Marketable securities
Current liabilities

Cash Position Ratio

= Cash + Marketable securities
Current liabilities
Accounts Receivable Turnover (ART)
= Net credit sales / Average accts. receivable

Average Age of Receivable (DSO)

= 360/ART

Inventory Turnover (IT)

= Cost of goods sold/Ave. inventory

Average Age of Inventory

= 360/IT
Accounts Payable Turnover (APT)
= Net purchase/Average accounts payable

Age of Payable
= 360/APT

Cash Conversion Cycle

= Age of receivables + Age of inventories -
Age of payables

Asset Turnover
= Sales/Average total assets
Debt Ratio
= Total liabilities/Total assets

Debt Equity Ratio

= Total Liabilities/Total equity

Times Interest-Earned Ratio

= Net income before interest and taxes

Interest expense
Gross Profit Margin
= Gross profit
Net sales

Operating Margin
= EBIT
Sales

Profit Margin
= Net income after tax
Net sales
Return on Total Assets
= Net income/Average total assets

Return on Equity
= Net income/Average equity

Return on Invested Capital (ROIC)

= EBIT(1-T)
Total Invested Capital
(Debt + Equity)
Earnings per Share
= Net income – Preferred stock dividend
Common shares outstanding

Price/Earnings Ratio
= Market price/Earnings per share

Book Value per Share

= Stockholder’s equity – Preferred stock
Common shares outstanding

Dividend Payout
= Dividends paid/Net income
 4-17

Profit Total assets Equity

ROE   
margin turnover multiplier

ROE  (NI/Sales)  (Sales/TA)  (TA/Equity )

Focuses on expense control (PM), asset

utilization (TA TO), and debt utilization
(equity multiplier).
Free cash flow is the available cash produced by the
company from its operating activities after considering
the capital expenditures and changes in working capital.

The current liabilities do not include short-term interest

bearing liabilities.

Free cash flow is a good indicator of how efficient the

company is in generating cash.

Free Cash Flow (FCF)

= EBIT(1 – T) + DA – (CAPEX + ΔNOWC)
 4-19

 Repurchase stock
 Expand business
 Reduce debt
 All these actions would likely
improve the stock price.
It is computed as:
Outstanding shares x (Market value of the stock – book
value of the stock)

It is a performance indicator showing the difference

between the market value of the equity and the total
amount of capital supplied by the investors.
EVA is computed as:

EBIT(1 – T) – ( Total invested capital x WACC)

It shows not just the accounting profit but the firm’s

economic profit by deducting the required return
from the net operating profit of the company.
1. Variation in the practices and methods in the
application of accounting from one firm to
another may result to a meaningless comparison
of financial ratios.
2. Although financial ratio has a predictive value,
ratios are still static and a mere estimate of the
future.
3. Does not consider the effects of inflation.
4. Firms whose activities are well diversified are
too difficult to be identified to which industry the
firm is classified.