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Unformatted text preview: 1 Chapter 3 Financial Statement Analysis FI 311 Gregory Sabin Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Chapter 3 Financial Statement Analysis 2 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Ratio Analysis Ratios allow for better comparison through time or between companies. As we look at each ratio, ask yourself: How is the ratio computed? What is the ratio trying to measure and why? What is the unit of measurement? What does the value indicate? How can we improve the companys ratio? 3 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth 5 Areas of Financial Performance Shortterm solvency how able is the firm to meet short term cash obligations? Activity how well does the firm control its investing? Financial leverage how much debt does the firm have? Profitability how much profit does the firm make? Value the value of the firm to potential investors? 4 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Solvency or Liquidity Ratios Current Ratio = see p.44 for equation Hadlock Trends 2009: 708 / 540 = times Quick Ratio = see p.44 for equation (708  422) / 540 = times Cash Ratio = Cash / CL 98 / 540 = . times 5 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Activity  Total Asset / Fixed Asset/ AR Total Asset Turn over = see p.45 for equation 2,311 / 3,588 = times Fixed Asset Turn over (fixed asset utilization) = see p.46 for equation 2,880/2,311 = Receivables Turn over = see p.46 for equation 2,311 / 188 = imes Average collection period , or Days Sales in Receivables = see p.46 for equation 365 / 12.3 = days 6 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth More Activity  Inventory Ratios Inventory Turns = see p.47 for equation 1,344 / 422 = 3.2 times Days Sales in Inventory (Shelf Life)= see p.47 for equation 365 / 3.2 = days 7 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Average vs. Endofperiod ratios The suggested method for the CFA is to use average values for any activity ratio that includes the word turn in the definition. If the values at the end of consecutive periods are significantly different, it is wise to use the average method. For this class you can use either method, as long as you maintain consistency. 8 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Financial Leverage Ratios Total Debt Ratio = see p.48 for equation (3,588 2,591) / 3,588 = Debt/Equity = see p.48 for equation (540 + 457) / 2,591 = Equity Multiplier = see p.48 for equation = 1 + D/E 3,588 / 2,591 = 1+ 0.385 = 9 Chapter 3 Financial Statement Analysis FI 311 Elizabeth Booth Pierce Construction has a debt ratio of 0.40....
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This note was uploaded on 11/09/2011 for the course FI 311 taught by Professor Booth during the Fall '06 term at Michigan State University.
 Fall '06
 Booth
 Ratio Analysis

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