After you have mastered the material in this chapter, you will be able to: Differentiate between horizontal and vertical analysis, calculate ratios for assessing a company's liquidity, calculate ratios for assessing a company's solvency, calculate ratios for assessing company management's effectiveness. | Chapter Nine Financial Statement Analysis © 2015 McGraw-Hill Education. 1 Methods of Analysis 9-2 2 Horizontal and Percentage Analysis Horizontal analysis (or trend analysis) refers to studying the behavior of individual financial statement items over several accounting periods. Absolute Amounts Percentage Analysis 9-3 3 Milavec Company Horizontal Analysis 2015 2014 9-4 4 Vertical Analysis Vertical analysis uses percentages to compare individual components of financial statements to a key statement figure. A common-size financial statement is a vertical analysis in which each financial statement item is expressed as a percentage. 9-5 5 Milavec Company Vertical Analysis 2012 2011 9-6 6 2012 2011 9-7 7 Ratio Analysis Ratio analysis involves studying various relationships between different items reported in a set of financial statements. 9-8 8 Liquidity Ratios Liquidity ratios indicate a company’s ability to pay short-term debts. They focus on current assets and current liabilities. Working Capital Current Ratio Quick Ratio Accounts Receivable Ratios Inventory Ratios 9-9 9 Solvency Ratios Solvency ratios are used to analyze a company’s long-term debt-paying ability and its financing structure. Debt to Assets Ratio Debt to Equity Ratio Number of Times Interest Earned Plant Assets to Long-Term Liabilities 9-10 10 Profitability Ratios Profitability ratios measure a company’s ability to generate earnings. Net Margin (or Return on Sales) Asset Turnover Ratio Return on Investment Return on Equity 9-11 11 Stock Market Ratios Stock market ratios analyze the earnings and dividends of a company. Earnings Per Share Book Value Price-Earnings (PE) Ratio Dividend Yield 9-12 12 Earnings Per Share Earnings per Share Net Earnings Available for Common Stock Average Number of Outstanding Common Shares = This measure indicates how much income was earned for each share of common stock outstanding. 9-13 13 Earnings Per Share $25,000 (net income) - $3,000 (preferred dividend) = $ per share (15,000 + 12,500)/2 (average outstanding common shares) 9-14 14 Book Value Per Share This ratio measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off. Book Value per Share Stockholders’ Equity - Preferred Dividends Outstanding Common Shares = 9-15 15 Book Value Per Share $362,000 - $50,000 15,000 = $ per share 9-16 16 Price-Earnings Ratio Price-Earnings Ratio Market Price Per Share Earnings Per Share = This ratio compares the earnings of a company to the market price for a share of the company’s stock. 9-17 17 Dividend Yield Dividend Yield Dividends Per Share Market Price Per Share = This ratio identifies the return, in terms of cash dividends, on the current market price of the stock. 9-18 18 Limitations of Financial Statement Analysis Different Industries Changing Economic Environment Accounting Principles 9-19 19 End of Chapter Nine 9-20 20
