Course Hero Logo

REVIEWER.docx - REVIEWER Financial Statement Analysis There...

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 1 - 3 out of 16 pages.

REVIEWERFinancial Statement AnalysisThere are different users of financial statements. Financial statement analysis can be used bymanagers, equity investors, creditors, regulators, labor unions, employees, the public, and potentialinvestors and creditors. Financial statement analysis is used for investment and credit decisions. It isalso used for regulating companies such as what the Energy Regulatory Commission does for powerdistribution companies and other energy companies.Financial statement analysis is definitely used by management for monitoring performance and foridentifying strategies to further improve the company's operations.For this chapter, the following financial ratios will be discussed:1. Profitability ratios2. Efficiency ratios3. Liquidity ratios4. Leverage ratiosVertical and horizontal analysis will also be discussed. How to evaluate the quality of earnings of acompany shall likewise be discussed in this chapter.Profitability RatiosThe following ratios are used to measure the profitability of a company:1. Return on equity (ROE)2. Return on assets (ROA)3. Gross profit margin4. Operating profit margin5. Net profit marginReturn on Equity (ROE)ROE is a profitability measure that should be of interest to stock market investors. It measures theamount of net income earned in relation to stockholders' equity. ROE is computed as follows:ROE = Net Income + Stockholders' EquityIn computing ROE, different approaches are observed. There are analysts who use the average of thestockholders' equity for two accounting periods while others simply use the year-end balances.Whichever formula is used, consistency must be applied.To illustrate, let us use the financial statements of JSC Foods Corporation in 2014.ROE = (Net Income Stockholders' Equity)* 100%ROE = (2 659 087 + 12 478 559) × 100%ROE = 21.31%The ROE of 21.31% means that for every P1 of stockholders' equity, P0.2131 or $21.31 was earned in2014. To be more meaningful, this rate of return is compared with the returns on alternativeinvestments such as the returns on time deposits and other fixed income instruments. For example, ifthe interest on time deposits is only 2%, then the 21.31% ROE seems better. However, before a
conclusion is made that the 21.31% ROE is better than the time deposit rate of 2%, the risksassociated with this company earning 21.31% have to be assessed. Unless a bank will experience abank run, the 2% time deposit rate is guaranteed while the 21.31% ROE is not. In 2014, ROE of JSCFoods was high, but what if previously, it earned negative ROE? Is this possible for a company? Nomanager of any company who is in his sound mind will guarantee a specific rate of return, especiallywhen that rate is relatively high. Why? Because in business, there are always risks. A company which isdoing so well this year may find itself with too many competitors in the future and these competitorsmay eat its share of the business in the market and can make a profitable company today and a losingcompany in the future.

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 16 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Fall
Professor
Maxine
Tags
Balance Sheet, Generally Accepted Accounting Principles, JSC Foods Corporation

Newly uploaded documents

Show More

Newly uploaded documents

Show More

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture