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fs analysis summary.docx - Horizontal analysis or trend...

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Horizontal analysis (or trend analysis) shows the changes between years in the financial data in both dollar andpercentage form.The following slides illustrate a horizontal analysis of Clover Corporation’s December 31, 2005 and 2004, comparativebalance sheets and comparative income statements.Calculating Change in Dollar Amounts$ Change/Change in DollarCurrent YearFigure-Base Year Figure% Change$ Change/Base Year FigureX 100%Trend percentages state several years’ financial data in terms of a base year, which equals 100 percent.Trend %Current Yr amt/Base Yr amtX 100Look at the income information for Berry Products for the years 2001 through 2005. We will do a trend analysis onthese amounts to see what we can learn about the company.Base Yr = 2001, amt=100%
By analyzing the trends for Berry Products, we can see that cost of goods sold is increasing faster than sales, which isslowing the increase in gross margin.Vertical analysis focuses on the relationships among financial statement items at a given point in time.A common-sizefinancial statement is a vertical analysis in which each financial statement item is expressed as a percentage.In income statements, all items are usually expressed as a percentage of sales.Gross Margin %Gross Margin/SalesThis measure indicates how muchof each sales dollar is left after deducting the cost of goods sold to cover expensesand provide a profit.In balance sheets, all items are usually expressed as a percentage of total assets.Common-size financial statements are particularly useful when comparing data from different companies.Common Size %Year Amt/Sales of that yrX 100
The ratios that are of the most interest to stockholders include those ratios that focus on net income, dividends, andstockholders’ equities.Pref – 0Earnings per share (EPS)($)Net Income– Preferred Dividends/Ave. No. of CShares Outstanding((Beg+End)/2)Whenever a ratio divides an income statement balance by a balance sheet balance, the average for the year is used inthe denominator.Earnings form the basis for dividend payments and future increases in the value of shares of stock.This measure indicates how muchincome was earned for each share of common stock outstanding.Price-Earnings Ratio (times)Market Price per share/EPS
A higher price-earnings ratio means that investors are willing to pay a premium for a company’s stock because ofoptimistic future growth prospects.Dividends Payout Ratio (%)Dividends per share/EPSx100This ratio gauges the portion of current earnings being paid out in dividends.Investors seeking dividends (marketprice growth) would like this ratio to be large (small).Dividends Yield Ratio (%)Dividends per share/MPSx100This ratio identifies the return, in terms of cash dividends, on the current market price of the stock.

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Term
Summer
Professor
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Tags
Balance Sheet, Financial Ratio, Generally Accepted Accounting Principles

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