Alternatively, we could express current year’s amount as a
percentage of the base year
.

Overall, gross profit
and net income were
up substantially.
Gross profit increased
17.1%, and net
income, 26.5%.
Quality’s profit trend
appears favorable.
Horizontal Analysis

Vertical analysis
, also called
common-size analysis
, is a
technique that expresses each financial statement item as
a percent of a base amount.
On an
income statement
, we might say that selling
expenses are 16% of net sales.
Vertical analysis is commonly applied to the
►
balance sheet and
►
income statement.
Vertical Analysis

Quality is choosing to
finance its growth
through retention of
earnings rather than
through issuing
additional debt.
Vertical Analysis

Vertical Analysis
Quality appears
to be a profitable
enterprise that is
becoming even more
successful.

Enables a comparison of companies of different sizes.
Vertical Analysis

Horizontal Analysis

Ratio analysis
expresses the relationship among selected
items of financial statement data.
Liquidity
Profitability
Solvency
Measures short-term
ability of the company
to pay its maturing
obligations and to
meet unexpected
needs for cash.
Financial Ratio Classifications
Measures the
income or operating
success of a
company for a given
period of time.
Measures the ability
of the company to
survive over a long
period of time.
Analyze a company’s performance using ratio analysis.

FOUR CATEGORIES OF
RATIOS
(TEXTBOOK)
•
Short-term liquidity ratios
•
Long-term solvency ratios
•
Profitability ratios
•
Market tests

A WORD OF CAUTION BEFORE WE BEGIN
•
While some financial ratios have established formulas, others
are quite fluid and can be computed in many different ways.
For this reason, if you look for the formulas on the internet or in
other textbooks, you may find slightly different formulas and
obtain different results.
•
For this course, we will use the Financial Ratios formulas
outlined in this PowerPoint. If you need to use formulas of
ratios that are not discussed in PowerPoint slides, then please
refer to your textbook.
•
In some cases (e.g., Inventory Turnover), the denominator
requires the average of two years. IF only one year worth of
data is available, you may simply use one year.

The discussion of ratios include the following types of
comparisons.
1.
Intracompany comparisons
for two years for Quality
Department Store.
2.
Industry average comparisons
based on median ratios
for department stores.
3.
Intercompany comparisons
based on
Macy’s, Inc.
as
Quality Department Store’s principal competitor.
A single ratio
by itself is
not very meaningful
.
Ratio Analysis