CHAPTER%2012%20%20POWER%20POINT%202008

# CHAPTER%2012%20%20POWER%20POINT%202008 - Chapter 12...

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Chapter 12 Financial statement analysis

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Analysis -look at relationship between figures and f/s. -compare and contrast over time -compare and contrast different co’s. Who uses f/s analysis -investors determine if they want to invest in a company. -bankers decide whether or not to lend funds.
Financial Statement Analysis STEPS TO ANALYSING A BUSINESS 1) UNDERSTANDING THE company -Understand the business -Understand economic conditions -understand all aspects of businesses -find out future plans -who is on b o d -READ ANNUAL REPORT / FINANCIAL STATEMENTS -READ PAPERS , JOURNALS , INTERNET 2) RATIO ANALYSIS -ANALYSE NUMBERS ON F/S - MANIPULATE NUMBERS - COMPARE NUMBERS (FIGURES ALONE MEAN NOTHING)

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RATIO ANALYSIS WAYS TO COMPARE RATIO RESULTS TIME SERIES ANALYSIS LOOK AT PAST PERFORMANCE (YR5, YR4, YR3 YR2 YR1 …SHOWS TREND) CROSS COMPANY ANALYSIS COMPARE CO TO OTHER CO OF SAME BUSINESS COMPARE CO TO INDUSTRY AVERAGE RATIOS EVALUATE 3 AREAS OF A BUSINESS 1. PERFORMANCE 2. SHORT TERM LIQUIDITY 3. LONG TERM LIQUIDITY /solvency
Lets look at Shoppers Drug Mart Corp. Ltd. 2006 financial Statements Page 840

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Short –term liquidity ratios The ease of turning current assets into cash and then paying off current debt. 1. Current Ratios How easily can current liabilities can be paid off with current assets. Formula: Current assets Current liabilities 2006 1,821,423 / 1,577,784 = 1.15 to 1 2005 1,564,911 / 1,392,501 = 1.12 to 1 Conclusion: Should be greater than 1:1 Could be 2:1 CR has improved from 1.12 to 1 , to 1.15 to 1
Short –term liquidity ratios 2. Quick ratio Additional ratio to CR , it excludes inventory and other less liquid c.a. Formula: Cash + A/R + marketable securities Current liabilities 2006 : 62,865 + 307,779 / 1,577,784 = 370,644 / 1,577,784 = .23 to 1 2005: 24,524 + 256,504 / 1,392,501 = .20 to 1 Conclusion: Quick ratio or acid test ratio improved But if the Industry average is .55 to 1 Based on industry average weak ratio

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Performance ratios 1) R eturn on assets What is the return on the investments in the company? Formula: Net income (before int paid) Total average assets Net inc. +( int exp. x (1– tax rate)) (Total assets yr 2 + total assets yr 1 ) / 2 Net income (Total assets yr 2 + total assets yr 1 ) / 2
Performance ratios 1. Return on assets 2006: 422,491 ( 4,929,014 + 4,375,383) / 2 422,491 4,652,199 = .09 or 9% 2005: 364,494 ( 4,375,383 + ? ) / 2 364,494 4,375,383 = .08 or 8% Conclusion: Return on asset seems high and has improved from previous year.

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Performance ratios R eturn on assets What is the return on the investments break down:
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CHAPTER%2012%20%20POWER%20POINT%202008 - Chapter 12...

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