Financial Statement Analysis

Financial Statement Analysis - Financial Statement...

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Financial Statement Analysis: The reading for this topic is chapter 4 in your text. Live company. To facilitate learning, you need to download the balance sheet and income statement for a public corporation. Any will do. As you study this and some future topic, you will perform the analysis on your live company and describe its condition. Why analyze Financial Statements? - Evaluate the company’s performance. - Evaluate the company’s management. - Evaluate the company’s cash management. The way we evaluate a company is by comparing its performance with its peers. That is companies in the same industry or with its own historical performance. Procedures: First we calculate a number of financial ratios and then compare them with the industry ratios. To be acceptable, these ratios need to be better or equal to industry average. Half the industry is below average. So average is acceptable. How do we calculate the ratios? Page 88 in the text (numerical example to follow). Consider the ratios: Group 1: - Liquidity - the higher the better. - Current ratio - the higher the better. - Current assets, such as Cash, A/R, Inventory - mature in less than a year. - Current liabilities, such as A/P, Accruals, Notes payable - mature in less than a year. For this ratio, we need to be greater than 1, otherwise the probability of default on current obligations increases. Group 2: - A measure of efficiency. Due to the importance of sales. - Inventory turnover, the higher the better. - DSO, number of days needed to collect A/R. the shorter the better. - Fixed Assets turnover, the higher the better.
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Financial Statement Analysis - Financial Statement...

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