1 Financial Statements Analysis Financial Statements Analysis
2 Learning objectives Learning objectives Learning objectives Learning objectives Identify the ways that firms obtain and use cash as reported in the Cash Flow Statement. Calculate and interpret key financial ratios. Discuss the Du Pont identity as a method of financial analysis. Understand the use of financial information for comparative purposes. Outline the problems associated with using financial ratios.
3 Sources and Uses of Cash Sources and Uses of Cash Sources and Uses of Cash Sources and Uses of Cash At the most fundamental level, firms do two things: generate cash and spend cash. Cash is generated by selling a product or service, asset or security. Cash is spent by paying for materials and labor to produce a product or service and by purchasing assets.
4 Sources and Uses of Cash Sources and Uses of Cash Sources and Uses of Cash Sources and Uses of Cash Activities that bring in cash are called sources of cash . Activities that involve spending cash are called uses (or applications) of cash . An increase in an asset account or a decrease in a liability or equity account is a use of cash . A decrease in an asset account or an increase in a liability or equity account is a source of cash .
5 Financial Ratio Analysis Financial Ratio Analysis A Financial ratios is an index that relates two accounting numbers and is obtained by dividing one number by the other . Used to compare and investigate relationships between different pieces of financial information, either over time or between companies. Types of Types of Comparisons: Comparisons: Internal Comparisons and Internal Comparisons and External External Comparisons Comparisons Ratios eliminate the size problem.
6 Ratio Analysis: Questions Ratio Analysis: Questions to Consider for Each Ratio to Consider for Each Ratio How is it computed? What is it intended to measure, and why might we be interested? What is the unit of measurement? What might a high or low value be telling us? How might such values be misleading? How could this measure be improved?
7 Liquidity Ratios Leverage ratios (Capital Structure Ratios) Profitability ratios Valuation ratios Turnover Ratios Categories of Financial Categories of Financial Ratios Ratios
8 Liquidity Ratios Liquidity Ratios Current Ratio Quick Ratio Profit before depreciation and amortization to current liabilities (PDACL) Operating cash flow to current liabilities (OCFCL) Cash balance to total liabilities (CBTL)
9 Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).
- Summer '18
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Financial Statement Analysis.ppt