# 10_FSA - Financial Analysis Techniques: - Analysis Tools...

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Financial Analysis Techniques: - Analysis Tools and Techniques: o Ratios: Ratios reduce the effects of size, which enhances comparisons between companies over time. However, difference in accounting policies can distort ratios, and a meaningful comparison may, therefore, involve adjustments to the financial data. Third, not all ratios are relevant to a particular analysis. Finally, as with financial analysis in general, ratio analysis does not stop with computation; interpretation of the result is essential. o Common Size Analysis: Balance Sheet: A vertical common-size balance sheet, prepared by dividing each item on the balance sheet by the same period’s total assets and expressing the results as a percentage. Income Statement: Divides each income statement item by revenue. Cross Sectional Analysis: Compare ratios with ratios of other companies Trend Analysis: Trends in ratios over time. An analysis of horizontal common-size balance sheet highlights structural changes that have occurred in a business. o Graphs o Regression Analysis - Common Ratios: o Activity Ratios: These measure how efficiently a company performs day- to-day tasks, such as the collection of receivables and management of inventory Activity Ratio Numerator Denominator Inventory Turnover Cost of Goods Sold Average Inventory DOH (Days of Inventory) Number of days in a period Inventory Turnover Receivables Turnover Sales/Revenue Average Receivables DSO (Days Sales) Number of days in a period Receivables Turnover Payables Turnover Purchases Average Payables # of days in payables Number of days in period Payables Turnover Working Capital Turnover Revenue Avg. Working Capital Fixed Asset Turnover Revenue Average Fixed assets Total Asset Turnover Revenue Average Total assets o Liquidity Ratios: These measure the company’s ability to meet short-term obligations. Liquidity Ratio Numerator Denominator Current Ratio Current Assets Current Liabilities Quick Ratio Cash+Investments+Rec Current Liabilities Cash Ratio Cash+Investments Current Liabilities Defensive Interval Ratio Cash+Investments+Rec Daily Cash Expenditure Cash Conversion Cycle DOH+DSO-# of days in payable

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o Solvency: These measure the company’s ability to meet long-term obligations. Subsets of these ratios are also known as leverage and long- term debt ratios. Solvency Ratio
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## This note was uploaded on 02/22/2012 for the course ACCT 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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10_FSA - Financial Analysis Techniques: - Analysis Tools...

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