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In this chapter, you will know how to standardise financial statements for comparison purposes, know how to compute and interpret important financial ratios, know the determinants of a firm’s profitability and growth, understand the problems and pitfalls in financial statement analysis. | 3- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 3- Key Concepts and Skills Know: How to standardize financial statements for comparison purposes How to compute and interpret important financial ratios The determinants of a firm’s profitability and growth Understand the problems and pitfalls in financial statement analysis 3- Chapter Outline 3.1 Standardized Financial Statements 3.2 Ratio Analysis 3.3 The Du Pont Identity 3.4 Internal and Sustainable Growth 3.5 Using Financial Statement Information 3- Standardized Financial Statements Common-Size Balance Sheets All accounts = percent of total assets (%TA) Common-Size Income Statements All line items = percent of sales or revenue (%SLS) Standardized statements are useful for: Comparing financial information year-to-year Comparing companies of different sizes, particularly within the same industry Return to Quiz 3- Prufrock Corporation Balance Sheets - Table . | 3- McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 3- Key Concepts and Skills Know: How to standardize financial statements for comparison purposes How to compute and interpret important financial ratios The determinants of a firm’s profitability and growth Understand the problems and pitfalls in financial statement analysis 3- Chapter Outline 3.1 Standardized Financial Statements 3.2 Ratio Analysis 3.3 The Du Pont Identity 3.4 Internal and Sustainable Growth 3.5 Using Financial Statement Information 3- Standardized Financial Statements Common-Size Balance Sheets All accounts = percent of total assets (%TA) Common-Size Income Statements All line items = percent of sales or revenue (%SLS) Standardized statements are useful for: Comparing financial information year-to-year Comparing companies of different sizes, particularly within the same industry Return to Quiz 3- Prufrock Corporation Balance Sheets - Table 3.1 3- Prufrock Corporation Common-Size Balance Sheets Table 3.2 3- Prufrock Corporation Income Statement Table 3.3 3- Prufrock Corporation Common-Size Income Statement Table 3.4 Tells us what happened to each dollar of sales 3- Ratio Analysis Allow for better comparison through time or between companies Used both internally and externally For each ratio, ask yourself: What the ratio is trying to measure Why that information is important 3- Categories of Financial Ratios Liquidity ratios or Short-term solvency Financial leverage ratios or Long-term solvency ratios Asset management or Turnover ratios Profitability ratios Market value ratios 3- Table 3.5 Return to Quiz 3- Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA – Inventory) / CL “Acid Test” (708-422) / 540 = 0.53 times Cash Ratio = Cash / CL 98/ 540 = .18 times 3- Financial Leverage Ratios Total Debt Ratio = (TA – TE) / TA (3588-2,591)
