Slide

14-1

FINANCIAL STATEMENT
ANALYSIS

McGraw-Hill/Irwin

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Slide
14-2

Purpose
Purpose of
of Analysis
Analysis
Financial
Financial statement
statement analysis
analysis helps
helps users
users
make
make better
better decisions.
decisions.

Internal Users
Managers
Officers
Internal Auditors
McGraw-Hill/Irwin

External Users
Shareholders
Lenders
Customers

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Slide
14-3

Purpose
Purpose of
of Analysis
Analysis
F in a n c ia l m e a s u re s a re o fte n u s e d
to ra n k c o rp o ra te p e rfo rm a n c e .
E x a m p le m e a s u re s in c lu d e :
G ro w th
in s a le s

R e tu rn to
s to c k h o ld e r s

P r o fit
m a r g in s

R e tu r n o n
e q u ity

D e te r m in e d b y
a n a ly z in g th e
fin a n c ia l
s ta te m e n ts .
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-4

Tools
Tools of
of Analysis
Analysis

McGraw-Hill/Irwin

Dollar &
Percentage
Changes

Trend
Percentages

Component
Percentages

Ratios

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Slide
14-5

Dollar
Dollar and
and Percentage
Percentage Changes
Changes
Dollar Change:
Dollar
Change

Analysis Period
Amount

Base Period
Amount

Percentage Change:

Percent
Change

McGraw-Hill/Irwin

Dollar Change

Base Period
Amount

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Slide
14-6

Dollar
Dollar and
and Percentage
Percentage Changes
Changes
Example
Example
Lets
Lets look
look at
at the
the asset
asset section
section
of
of Clover
Clover Corporations
Corporations
comparative
comparative balance
balance sheet
sheet and
and
income
income statement
statement for
for 2003
2003 and
and
2002.
2002.
Compute
Compute the
the dollar
dollar change
change and
and
the
the percentage
percentage for
for cash.
cash.

McGraw-Hill/Irwin

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Slide
14-7

CLOVER CORPORATION
Comparative Balance Sheets
December 31,
2003
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment $ 160,000
Total assets
$ 315,000
* Percent rounded to one decimal point.
McGraw-Hill/Irwin

2002

$ 23,500
40,000
100,000
1,200
$ 164,700

Dollar
Change

Percent
Change*

40,000
85,000
$ 125,000
$ 289,700

The McGraw-Hill Companies, Inc.

Slide
14-8

CLOVER CORPORATION
Comparative Balance Sheets
December 31,
2003

2002

Dollar
Change

Percent
Change*

Assets
Current assets:
Cash and equivalents
$ 12,000 $ 23,500 $ (11,500)
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
$12,000
Total current assets
$12,000
$ 155,000 $23,500
$$23,500
164,700 == $(11,500)
$(11,500)
Property and equipment:
Land
40,000
40,000
Buildings and equipment, net
120,000
85,000
Total property and equipment $ 160,000 $ 125,000
Total assets
$ 315,000 $ 289,700
* Percent rounded to one decimal point.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-9

CLOVER CORPORATION
Comparative Balance Sheets
December 31,
2003

2002

Dollar
Change

Percent
Change*

Assets
Current assets:
Cash and equivalents
$ 12,000 $ 23,500 $ (11,500)
-48.9%
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
($11,500
$23,500)
100%
Total current assets
$ 155,000
$ 164,700
($11,500
$23,500)
100%==48.94%
48.94%
Property and equipment:
Land
40,000
40,000
Complete
Completethe
the
Buildings and equipment, net
120,000
85,000
analysis
analysisfor
for
Total property and equipment $ 160,000 $ 125,000
the
other
the
other
Total assets
$ 315,000 $ 289,700
assets.
assets.
* Percent rounded to one decimal point.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-10

CLOVER CORPORATION
Comparative Balance Sheets
December 31,
2003
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment $ 160,000
Total assets
$ 315,000
* Percent rounded to one decimal point.
McGraw-Hill/Irwin

Dollar
Change

2002

Percent
Change*

$ 23,500 $
40,000
100,000
1,200
$ 164,700

(11,500)
20,000
(20,000)
1,800
(9,700)

-48.9%
50.0%
-20.0%
150.0%
-5.9%

40,000
85,000
$ 125,000
$ 289,700 $

35,000
35,000
25,300

0.0%
41.2%
28.0%
8.7%

The McGraw-Hill Companies, Inc.

Slide
14-11

Trend
Trend Analysis
Analysis

Trend
Trend analysis
analysis is
is used
used to
to reveal
reveal patterns
patterns in
in data
data
covering
covering successive
successive periods.
periods.

Trend
Analysis Period Amount
=
Percent
Base Period Amount
McGraw-Hill/Irwin

100%

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Slide
14-12

Trend
Trend Analysis
Analysis -- Example
Example
Berry Products
Income Information
For the Years Ended December 31,
Item
Item
Revenues
Revenues
Cost
Costof
ofsales
sales
Gross
Grossprofit
profit
Item
Item
Revenues
Revenues
Cost
Costof
ofsales
sales
Gross
Grossprofit
profit

2003
2002
2001
2000
1999
2003
2002
2001
2000
1999
$$400,000
400,000 $$355,000
355,000 $$320,000
320,000 $$290,000
290,000 $$275,000
275,000
285,000
250,000
225,000
190,000
285,000
250,000
225,000 198,000
198,000
190,000
115,000
105,000
95,000
92,000
85,000
115,000
105,000
95,000
92,000
85,000
2003
2002
2001
2000
2003
2002
2001
2000
145%
129%
116%
145%
129%
116% so 105%
105%
1999
is
the
base
period
its
1999
is
the
base
period
so
its
150%
132%
118%
104%
150%
132%
118%
104%
amounts
will
100%.
135%
124%
112%
108%
amounts
will equal
equal
100%.
135%
124%
112%
108%

(290,000 275,000)
(198,000 190,000)
(92,000 85,000)
McGraw-Hill/Irwin

100% = 105%
100% = 104%
100% = 108%

1999
1999
100%
100%
100%
100%
100%
100%

The McGraw-Hill Companies, Inc.

Slide
14-13

Component
Component Percentages
Percentages
Examine the relative size of each item in the financial
statements by computing component (or commonsized) percentages.

Component
Percent

Analysis Amount
Base Amount

Financial
Financial Statement
Statement
Balance
BalanceSheet
Sheet
Income
IncomeStatement
Statement
McGraw-Hill/Irwin

100%

Base
BaseAmount
Amount
Total
TotalAssets
Assets
Revenues
Revenues

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Slide
14-14

CLOVER CORPORATION
Comparative Balance Sheets
December 31,

Complete the common-size analysis for the other

assets.
2003

2002

13-14

Common-size
Percents*
2003
2002

Assets
Current assets:
Cash and equivalents
$ 12,000 $ 23,500
3.8%
8.1%
Accounts receivable, net
60,000
40,000
Inventory
80,000
100,000
Prepaid expenses
3,000
1,200
($12,000
== 3.8%
($12,000 $315,000)
$315,000)
3.8%
Total current assets
$ 155,000 100%
$100%
164,700
Property and equipment:
($23,500
$289,700)
100%
Land
40,000
($23,50040,000
$289,700)
100%== 8.1%
8.1%
Buildings and equipment, net
120,000
85,000
Total property and equipment $ 160,000 $ 125,000
Total assets
$ 315,000 $ 289,700
100.0% 100.0%
*McGraw-Hill/Irwin
Percent rounded to first decimal point.
The McGraw-Hill Companies, Inc.

Slide
14-15

CLOVER CORPORATION
Comparative Balance Sheets
December 31,

2003
Assets
Current assets:
Cash and equivalents
$ 12,000
Accounts receivable, net
60,000
Inventory
80,000
Prepaid expenses
3,000
Total current assets
$ 155,000
Property and equipment:
Land
40,000
Buildings and equipment, net
120,000
Total property and equipment $ 160,000
Total assets
$ 315,000
*McGraw-Hill/Irwin
Percent rounded to first decimal point.

2002

13-15

Common-size
Percents*
2003
2002

$ 23,500
40,000
100,000
1,200
$ 164,700

3.8%
19.0%
25.4%
1.0%
49.2%

8.1%
13.8%
34.5%
0.4%
56.9%

40,000
85,000
$ 125,000
$ 289,700

12.7%
38.1%
50.8%
100.0%

13.8%
29.3%
43.1%
100.0%

The McGraw-Hill Companies, Inc.

CLOVER CORPORATION
13-16
Comparative Balance Sheets
December 31,
Complete the common-size analysis for the liabilities and equity
Common-size
accounts.
Percents*
2003
2002
2003
2002
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
$ 67,000 $ 44,000
21.3%
15.2%
Notes payable
3,000
6,000
1.0%
2.1%
Total current liabilities
$ 70,000 $ 50,000
22.2%
17.3%
Long-term liabilities:
Bonds payable, 8%
75,000
80,000
23.8%
27.6%
Total liabilities
$ 145,000 $ 130,000
46.0%
44.9%
Shareholders' equity:
Preferred stock
20,000
20,000
6.3%
6.9%
Common stock
60,000
60,000
19.0%
20.7%
Additional paid-in capital
10,000
10,000
3.2%
3.5%
Total paid-in capital
$ 90,000 $ 90,000
28.6%
31.1%
Retained earnings
80,000
69,700
25.4%
24.1%
Total shareholders' equity
$ 170,000 $ 159,700
54.0%
55.1%
Total liabilities and shareholders' equity
$ 315,000 $ 289,700
100.0% 100.0%
The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
* Percent rounded to first decimal point.
Slide
14-16

Slide
14-17

13-17
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31,
Compute the common-size percentages for
Common-size
revenues and expenses.
Percents*
2003
2002
2003
2002
Revenues
$ 520,000 $ 480,000
100.0% 100.0%
Costs and expenses:
Cost of sales
360,000
315,000
69.2%
65.6%
Selling and admin.
128,600
126,000
24.7%
26.3%
Interest expense
6,400
7,000
1.2%
1.5%
Income before taxes
$ 25,000 $ 32,000
4.8%
6.7%
Income taxes (30%)
7,500
9,600
1.4%
2.0%
Net income
$ 17,500 $ 22,400
3.4%
4.7%
Net income per share
$
0.79 $
1.01
Avg. # common shares
22,200
22,200
* Rounded to first decimal point.
The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin

Slide
14-18

Ratios
Ratios
A r a tio is a s im p le m a th e m a tic a l e x p r e s s io n
o f th e r e la tio n s h ip b e tw e e n o n e ite m a n d a n o th e r .

A lo n g w ith d o lla r a n d p e r c e n ta g e c h a n g e s ,
tr e n d p e r c e n ta g e s , a n d c o m p o n e n t p e r c e n ta g e s ,
r a tio s c a n b e u s e d to c o m p a r e :

P a s t p e rfo rm a n c e to
p re s e n t p e r fo r m a n c e .
McGraw-Hill/Irwin

O th e r c o m p a n ie s to
your com pany.

The McGraw-Hill Companies, Inc.

Slide
14-19

Use this
information to
calculate the
liquidity ratios
for Norton
Corporation.

McGraw-Hill/Irwin

NORTON
NORTONCORPORATION
CORPORATION
2003
2003
Cash
$$ 30,000
Cash
30,000
Accounts
Accountsreceivable,
receivable, net
net
Beginning
17,000
Beginning of
ofyear
year
17,000
End
20,000
End of
ofyear
year
20,000
Inventory
Inventory
Beginning
10,000
Beginning of
ofyear
year
10,000
End
15,000
End of
ofyear
year
15,000
Total
65,000
Total current
currentassets
assets
65,000
Total
42,000
Total current
currentliabilities
liabilities
42,000
Total
103,917
Total liabilities
liabilities
103,917
Total
Total assets
assets
Beginning
300,000
Beginning of
ofyear
year
300,000
End
346,390
End of
ofyear
year
346,390
Revenues
494,000
Revenues
494,000

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Slide
14-20

Working
Working Capital
Capital
Working
Working capital
capital is
is the
the excess
excess of
of current
current
assets
assets over
over current
current liabilities.
liabilities.

McGraw-Hill/Irwin

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Slide
14-21

Current
Current Ratio
Ratio
This
This ratio
ratio measures
measures
the
the short-term
short-term debtdebtpaying
paying ability
ability of
of the
the
company.
company.
Current
Current Assets
=
Ratio
Current Liabilities
Current
=
Ratio
McGraw-Hill/Irwin

$65,000
$42,000

= 1.55 : 1

The McGraw-Hill Companies, Inc.

Slide
14-22

Quick
Quick Ratio
Ratio
Quick
Ratio

Quick Assets
Current Liabilities

Quick
Quickassets
assets are
arecash,
cash,marketable
marketablesecurities,
securities,
and
andreceivables.
receivables.
This
Thisratio
ratio is
islike
likethe
thecurrent
current
ratio
ratiobut
but excludes
excludes current
current assets
assets
such
suchas
asinventories
inventoriesthat
thatmay
maybe
be
difficult
difficultto
toquickly
quicklyconvert
convertinto
into cash.
cash.
McGraw-Hill/Irwin

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Slide
14-23

Quick
Quick Ratio
Ratio
Quick
Ratio
Quick
Ratio

Quick Assets
Current Liabilities

=
=

$50,000
$42,000

= 1.19 : 1

This
Thisratio
ratio is
islike
likethe
thecurrent
current
ratio
ratiobut
but excludes
excludes current
current assets
assets
such
suchas
asinventories
inventoriesthat
thatmay
maybe
be
difficult
difficultto
toquickly
quicklyconvert
convertinto
into cash.
cash.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-24

Debt
Debt Ratio
Ratio
A
A measure
measure of
of creditors
creditors long-term
long-term risk.
risk.
The
The smaller
smaller the
the percentage
percentage of
of assets
assets that
that
are
are financed
financed by
by debt,
debt, the
the smaller
smaller the
the risk
risk
for
for creditors.
creditors.

McGraw-Hill/Irwin

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Slide
14-25

Uses
Uses and
and Limitations
Limitations of
of Financial
Financial
Ratios
Ratios
U ses

L im it a t io n s

R a tio s h e lp u s e r s
u n d e r s ta n d
fin a n c ia l r e la tio n s h ip s .

M a n a g e m e n t m a y e n te r
in to tr a n s a c tio n s m e r e ly
to im p r o v e th e r a tio s .

R a tio s p r o v id e fo r
q u ic k c o m p a r is o n
o f c o m p a n ie s .

R a tio s d o n o t h e lp w ith
a n a ly s is o f th e c o m p a n y 's
p r o g r e s s to w a r d
n o n fin a n c ia l g o a ls .

McGraw-Hill/Irwin

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Slide
14-26

Measures
Measures of
of Profitability
Profitability
An
Anincome
incomestatement
statementcan
canbe
beprepared
preparedin
ineither
either aa
multiple-step
multiple-step or
or single-step
single-step format.
format.

The
Thesingle-step
single-stepformat
formatis
issimpler.
simpler.
The
The multiple-step
multiple-stepformat
format provides
provides
more
moredetailed
detailed information.
information.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-27

Income
Income Statement
Statement (Multiple-Step)
(Multiple-Step)
Example
Example

Proper Heading
Gross
Margin
Operating
Expenses
Nonoperating
Items

{
{

Remember
Remember to
to
compute
computeEPS.
EPS.
McGraw-Hill/Irwin

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Slide
14-28

Income
Income Statement
Statement (Single-Step)
(Single-Step) Example
Example

Proper Heading
Revenues
& Gains

Expenses
& Losses

Remember
Remember to
to
compute
computeEPS.
EPS.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-29

Use this
information to
calculate the
profitability
ratios for
Norton
Corporation.

McGraw-Hill/Irwin

NORTON
NORTON CORPORATION
CORPORATION
2003
2003

Number
Number of
of common
common
shares
sharesoutstanding
outstanding all
all of
of
2003
2003
Net
Netincome
income
Shareholders'
Shareholders' equity
equity
Beginning
Beginning of
ofyear
year
End
End of
ofyear
year
Revenues
Revenues
Cost
Costof
ofsales
sales
Total
Total assets
assets
Beginning
Beginning of
ofyear
year
End
End of
ofyear
year

$$

27,400
27,400
53,690
53,690
180,000
180,000
234,390
234,390
494,000
494,000
140,000
140,000
300,000
300,000
346,390
346,390

The McGraw-Hill Companies, Inc.

Slide
14-30

Return
Return On
On Assets
Assets (ROA)
(ROA)
This
Thisratio
ratiois
isgenerally
generallyconsidered
considered
the
thebest
best overall
overall measure
measureof
of aa
companys
companysprofitability.
profitability.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-31

Return
Return On
On Equity
Equity (ROE)
(ROE)
This
Thismeasure
measure indicates
indicateshow
how well
wellthe
the
company
companyemployed
employed the
theowners
owners
investments
investmentsto
toearn
earnincome.
income.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Slide
14-32

Sources
Sources of
of Financial
Financial Information
Information
Annual and
q u a r te r ly
fin a n c ia l
re p o rts .

R e p o r ts file d
w ith th e S E C b y
p u b lic ly o w n e d
c o m p a n ie s .

In te r n e t a n d
o th e r fre e
s o u rc e s.

D e ta ile d
a n a ly s e s b y
fin a n c ia l
a n a ly s ts .

Can be
a u d ite d o r
u n a u d ite d .

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.