FINANCIAL STATEMENT (FS) ANALYSIS
Process of evaluating
a. Risks
b. Performance
c. financial health
d. future prospects
***computational and analytical
techniques
FINANCIAL RATIO CATEGORY
•PROFITABILITY RATIO
•EFFICIENCY RATIO
•FINANCIAL HEALTH
RATIO
RATIO ANALYSIS
• Expresses direct relationship
among selected items of a
balance sheet and an
income statement data in
terms of percentage or
decimal.
PURPOSE
Provide insights into
• Profitability of operations
• Soundness of financial
condition
• Efficiency with resources
management
FINANCIAL RATIO CATEGORY
I. PROFITABILITY RATIO
• Measure the ability of the
company to generate
income from the use of its
assets and invested capital
as well as control its cost.
PROFITABILITY RATIO
• 1. GROSS PROFIT RATIO
• 2. OPERATING INCOME RATIO
• 3. NET PROFIT RATIO
• 4. RETURN ON ASSETS
• 5. RETURN ON EQUITY
FINANCIAL RATIO CATEGORY
I. PROFITABILITY RATIO
• Measure the ability of the
company to generate
income from the use of its
assets and invested capital
as well as control its cost.
PROFITABILITY RATIO
• 1. GROSS PROFIT RATIO
Reports the peso value of the
gross profit earned for every
peso of sales.
GPM = Gross profit/Net Sales
PROFITABILITY RATIO
2. Operating income ratio
-measures percent of profit
earned from each peso of
sales
OIM = Operating Income/Net
Sales
PROFITABILITY RATIO
3.Net profit ratio
-shows how much profit will
go to the owner for every
peso of sales made.
NPM = Net Income/Net Sales
PROFITABILITY RATIO
4.Return on Asset (ROA)
-measures peso value of income
generated by employing company
assets.
ROA = Net Income/Average Assets
Average Assets = beg Assets + end
Assets/2
PROFITABILITY RATIO
5.Return on Equity (ROE)
-measures return of net income
generated by owner’s capital
invested in the business.
ROE = Net Income/Average Equity
Average Equity =
begEquity+endEquity/2
Profitability ratio:
II. OPERATIONAL EFFICIENCY
RATIO
• Measure the ability of the
company to generate sales
from the utilization of its
assets
• Operational efficiency
• ASSET TURNOVER measures the peso
value of sales generated for every
peso of the company’s assets.
• Higher turnover means more
efficient the company is in using its
assets
• FORMULA: Net Sales/Ave Assets
• FIXED ASSET TURNOVER -
indicates efficiency of fixed
assets in generating sales.
• FORMULA: Net Sales/Ave Fixed
Asset
• INVENTORY TURNOVER -
measured based on cost of goods
sold and NOT sales.
• numerator and denominator
measured at cost.
• indicates how fast the company
can sell inventory. (alternative to
inventory turnover is “days in
inventory”
• measures the number of days
from acquisition to sale.
• FORMULA:
INVENTORY TURNOVER =
CGS/Ave. Inventory
DAYS IN TURNOVER =
365/INVENTORY Turnover
• ACCOUNTS RECEIVABLE
TURNOVER - measures the
number of times the company
was able to collect on its
average accounts receivable
during the year.
• alternative to accounts
receivable turnover is “days in
accounts receivable”.
• measures the company’s
collection period (number of days
from sale to collection)
FORMULA:
AR Turnover = Net Sales/Ave
Accounts Receivable
Days in Accounts Receivable =
365/ AR Turnover
OPERATIONAL EFFICIENCY RATIO
• 1. ASSET TURNOVER
• 2. FIXED ASSET TURNOVER
• 3. INVENTORY TURNOVER
• 4. ACCOUNTS RECEIVABLE
TURNOVER
OPERATIONAL EFFICIENCY RATIO
FINANCIAL HEALTH RATIO
• Look into the company’s
solvency and liquidity ratios
Solvency – capacity to go long
term
Liquidity – ability to pay
current liabilities
• DEBT RATIO- indicates the
percentage of the company’s
assets financed by debt
• FORMULA
• Total Debt/Total Assets
High ratio implies high debt
• EQUITY RATIO- indicates the
percentage of the company’s
assets financed by capital.
• FORMULA
• Total Equity/Total Assets
High ratio implies high level of
capital
• DEBT EQUITY RATIO- indicates
the company’s reliance to debt
as a source of financing relative
to equity
• FORMULA
• Total Debt/Equity
High ratio suggests high level of
debt that may result in high
interest.
• INTEREST COVERAGE RATIO-
measures the company’s ability to
cover the interest expense on its
liability with its operating income.
• FORMULA:
• Operating income/Interest Expense
*High ratio suggests that creditors
are protected that interest due them
can be paid.
• CURRENT RATIO- evaluates
company’s liquidity, measures
whether current asset is
sufficient to pay current debts
• FORMULA:
• Current Assets/Current Liabilities
*Creditors prefer current ratio of 2
• QUICK RATIO- evaluates stricter
measures of liquidity.
• Cash and accounts receivable
• FORMULA:
• Quick Assets/Current Liabilities
*Creditors prefer current ratio of 2
FINANCIAL HEALTH RATIO
• 1. DEBT TO EQUITY RATIO
• 2. DEBT RATIO
• 3. EQUITY RATIO
• 4. INTEREST COVERAGE RATIO
• 5. CURRENT RATIO
• 6. QUICK RATIO
FINANCIAL HEALTH RATIO (Liquidity/Solvency)
Let’s try this…
REQUIREMENTS:
From the given information;
1. Compute for the operating efficiency
namely, asset turnover, fixed asset
turnover, inventory turnover, days in
inventory, AR turnover, Days in AR.
2. Compute for the financial health
namely debt to equity, debt ratio,
equity ratio, interest coverage,
current ratio and quick ratio.
Let’s check your answers.
AGREEMENT:
1.What is Ratio analysis?
2. Give the three groups of how
these ratios are categorized.
Describe each.
AGREEMENT:
1.GROUP ACTIVITY:
Deliver the topic through a two (2)
minute presentation of your choice.
FINANCIAL STATEMENT ANALYSIS.
Applying the group’s talents and
skills, present it in the most creative
way you can,
2. Review. Long quiz next meeting.
Data for Ilang-Ilang Trading Company are
given below:
ACTIVITY
