Analysis of Financial Statements

Financial Ratio Analysis - Part I

Common Size Statements

Common size statements normalize balance sheets and income statements and allow the analyst to more easily compare performance across firms and for a single firm over time.

A vertical common size balance sheet express all balance sheet accounts as a percentage of total assets. A vertical common size income statement expresses all income statement items as a percentage of sales.

Liquidity Ratios
Current Ratio:- Current Assets / Current Liabilities

Quick Ratio:-

Current Assets Inventory Current Liabilities

Cash Ratio:-

Cash + marketable securities Current Liabilities Cash + MS + A/c Rec Projected Expenditure

Defensive Interval = 365 x

Activity Ratios
Receivable Turnover = Annual Sales / Average Receivables Days Sales Outstanding = 365 / Receivable Turnover

Inventory Turnover = COGS / Average Inventory Days of Inventory on Hand = 365 / Inventory Turnover

Activity Ratios
Payables Turnover = Purchases / Average Trade Payables

Number of days of payables = 365 / payables turnover

Cash Conversion Cycle = Days Inventory on Hand + Days Sales Outstanding Number of Days Payables

Activity Ratio
Total Asset Turnover = Net Sales / Average Total Assets

Fixed Asset Turnover = Net Sales / Average Net Fixed Assets

Working Capital Turnover = Net Sales / Average Working Capital

Solvency Ratios
Long Term Debt to Equity = Total Long Term Debt / Total Equity Debt to equity Ratio = Total Debt / Total Equity

Total debt ratio = Total debt / Total assets

Financial Leverage Ratio = Average Total Assets / Average Total Equity

Solvency Ratios
Interest Coverage Ratio = EBIT / Interest Payments Effective Interest Rate = Interest Expense Total Liabilities
Fixed Charge coverage = EBIT + Lease Payment Interest Payments + Lease Payments

Profitability Ratios
Gross profit margin = Gross Profit / Net Sales Net Profit Margin = Net Income / Net Sales

Operating Profit Margin = Operating Income / Net Sales

ROA = Net Income / Average Total Assets ROE = Net Income / Average Total Equity

ROE using DuPont & Extended DuPont

Original DuPont
ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier)

Equity multiplier = Asset/Equity

Extended DuPont

ROE = Net Income x EBT x

EBT EBIT

EBIT
Net Sales

x Net Sales x Total Assets

Total Assets Total Equity

Example - Dupont
Revenues EBIT Interest Expense EBT Taxes Net Income Total Assets Total Debt Owners Equity
Company A 500 35 5 30 10 20 250 100 150 Company B 900 100 0 100 40 60 300 50 250

Sustainable Growth
Dividend Payout Rate = DPS EPS Retention Rate (B) = 1 Dividend Payout Rate Growth Rate (g) = Retention Rate x Return on
Equity

Or g=BxR

Example
Company Earnings Per Share Dividends Per Share ROE A 3.00 1.50 14% B 4.00 1.00 12% C 5.00 2.00 10%

Company A = 7.0% Company B = 9.0% Company C = 6.0%