| Financial Statement Analysis |
Involves analysis of the firm's financial data to determine
its:
|
| Who is interested and does this using the firm's Profit and Loss and Balance Sheet statements. |
| 1. | Creditors |
| 2. | Lenders |
| 3. | Investors |
| 4. | Its employees |
| 5. | Its management |
| 6. | Potential Strategic Partners |
| 7. | Competitors |
| Assumption is the figures presented, are correct and represent
the true picture. As far as public enterprises are concerned the SEC requires that there is an annual audit done by CPA's who warrant that the statements follow standard accounting principles. Impossible to get absolute exactness. |
| Reason |
| Put into wrong account |
| Wrong bad debt allowance |
| Inventory count and valuation |
| Incorrect |
| Market value of assets |
| Depreciation
method employed. |
| Satisfactory if accounting practice is consistent and
conservative. Computer facilitates faster
statement preparation and more rapid response. Can
cause report and information overload. Internal management reports to provide information are prepared form this same data
|
| Inventory level |
| Sales by product customer territory |
| Labor expense by category |
| Rework costs |
| Material costs |
| Overtime costs |
| Any kind of report desired by management can prepared. To make a meaningful analysis, need to compare performance trend. Can be done by comparing financial statements over
time. Financial analysis involves analysis of the past figures. Management is concerned with improving future
decision making. Useful for indicating
where changes should be made and the future is often not so different than the past. The most widely used technique is ratio analysis. They are:
|
| 1. Liquidity | Current Ratio |
| Acid Test Ratio | |
| Receivable Turnover Ratio | |
| Average Collection Period | |
| Inventory Turnover | |
| 2. Debt Ratios | Debt to Net Worth |
| Long Term Debt to Total Capital | |
| Cash Flow to Total Liabilities | |
| 3. Coverage Ratios | Interest Coverage |
| 4. Profitability Ratio | Gross Margin |
| Net Profit on Sales | |
| Asset Turnover | |
| Return on Investment | |
| Price Earnings Ratio | |
| Dividend Yield Ratio | |
| Earnings per Share Ratio | |
| 5. Operating Ratios | Overtime Cost/Total Labor Cost |
| Rejects/1000 units produced | |
| Maintenance Expense/per operating hour | |
| Employee Turnover | |
| Returns/Sales Revenue | |
| Travel Expense/Engineer |
| Often firms have developed benchmarks that are set up as goals to be met and against which performance is measured. These can be financial and non financial. |