GROUP 7
Financial Statement Analysis
GROUP 7
MEMBERS:
Padilla, Richard Kent Perez, Joseph David
Panim, Tyron James Provido, Ariana
Parchamento, Maria Edelaine Quintos, Ace
Pedrezuela, Franchezca Lorraine Regio, Nicole
LEARNING OBJECTIVES:
01 Upon completion of this module, the student should be
able to analyze and interpret the financial statements
using
02 the evaluation of the quality of financial information,
03 Vertical and horizontal analyis,
04 Ratio analysis of liquidity, solvency, risk, and
profitability,
FINANCIAL STATEMENT
ANALYSIS
Financial statement analysis
Process of evaluating a company's financial health and
performance by reviewing its financial statements, including the
income statement, balance sheet, and cash flow statement. It
provides valuable insights for decision-making by various
stakeholders, such as investors, creditors, and management
(Vipond, 2024).
ANALYSTS SHOULD LOOK BEYOND RATIOS.
STATEMENT IN COMPARATIVE FORM & COMMON
SIZE FORM
An item on a financial Dollar and percentage changes on
statement has little statements (horizontal analysis)
meaning by itself. The Common-size statements (vertical
meaning of the numbers analysis)
can be enhanced by
Ratios
drawing comparisons.
MAJOR FINANCIAL STATEMENT
Balance sheet or Financial Position
Income Statement or Financial Performance
Statement of Cash Flow
SAMPLE DATA
BALANCE SHEET OR FINANCIAL POSITION
Statement that shows the financial position
or condition of an entity by using the ASSETS,
LIABILITIES, AND OWNER’S EQUITY (Teacher
Jade, 2020)
BASIC ACCOUNTING FORMULA
Assets = Liabilities + Equity
INCOME STATEMENT OR FINANCIAL PERFORMANCE
Statement showing firm’s revenues and expenses
during specified period.
STATEMENT OF CASH FLOWS
Statement of Cash Flows provides information about the cash receipts and cash
payments of an entity during the period. It is a formal statement that classifies
cash receipts (inflows), and cash payments (outflows) into operating, investing
and financing activities (ABM Online PH, 2020).
Revenue accounts, Expense
OPERATING ACTIVITIES
account, & A/R & A/P accounts.
Non-current assets, Note receivable
INVESTING ACTIVITIES
account, & Debt securities
Owner’s equity, Withdrawals, & Note
FINANCING ACTIVITIES
payable
STATEMENT OF CASH FLOWS
EXAMPLE:
(HORIZONTAL ANALYSIS)
DOLLAR AND PERCENTAGE CHANGES ON STATEMENTS
Horizontal analysis (or trend analysis) shows the changes between years in the
financial data in both dollar and percentage form.
PROVIDO, ARIANA B.
HORIZONTAL ANALYSIS
EXAMPLE
The following slides illustrate a horizontal analysis of Mami Pakyaw Corporation’s December 31,
2020 and 2019, comparative balance sheets and comparative income statements.
HORIZONTAL ANALYSIS
CALCULATING CHANGE IN DOLLAR AMOUNTS
HORIZONTAL ANALYSIS
CALCULATING CHANGE AS A PERCENTAGE
HORIZONTAL ANALYSIS
HORIZONTAL ANALYSIS
HORIZONTAL ANALYSIS
HORIZONTAL ANALYSIS
PROVIDO,
ARIANA B.
TREND ANALYSIS
Trend analysis is a statistical method for identifying
patterns and changes in data over time. It can be used
to predict future events, such as business performance,
consumer behavior, or market trends.
PADILLA
TREND ANALYSIS
EXAMPLE PROBLEM:
TREND ANALYSIS
EXAMPLE GIVEN:
TREND ANALYSIS
SAMPLE COMPUTATION:
TREND ANALYSIS
SAMPLE GRAPH:
Common Size
Statement
(Vertical Analysis)
P A N I M
Common Size Statement Vertical Analysis
A common-size financial statement is Vertical analysis focuses on the
a vertical analysis in which each relationships among financial
financial statement item is expressed statement items at a given point in
as a percentage. time.
P A N I M
Income
statement
In income statements, all
items are usually expressed
as a percentage of sales.
P A N I M
Gross Margin Percentage
Gross Margin
Sales
P A N I M
Balance
sheets
In balance sheets, all items
are usually expressed as a
percentage of total assets.
P A N I M
Common Size Statement
Example
P A N I M
Common Size Statement Example
MAMI PAKYAW CORPORATION
2020 2019 2020 2019
Sales is usually the
base and is
expressed as 100%.
P A N I M
Common-Size
Percentage
Formula
Item Value
Common-Size = x 100
Percentage Sales
Common Size Statement Example
MAMI PAKYAW CORPORATION Common-Size Item Value (2020)
= x 100
Percentage Sales (2020)
$360,000
Common-Size = x 100
Percentage $520,000
2020 2019 2020 2019 Common-Size
Percentage = 69.2
Common-Size Item Value (2019)
= x 100
Percentage Sales (2019)
Common-Size $315,000
= x 100
Percentage $480,000
Common-Size = 65.6
Percentage
P A N I M
Mami Pakyaw Corporation
2020 2019 2020 2019
RATIO ANALYSIS
Pedrezuela, Franchezca
Shareholder Value depends on good investment
and financing
A. Investment Decisions
Efficiency of Assets- optimally utilizes assets in
support of generating revenue
Profitability of Sales- how much of every sales
dollar the company is able to keep for profit after
paying all costs including taxes
B. Financing Decisions
Leverage- the use of various financial instruments or borrowed
capital—to increase the potential return of an investment
Liquidity- ease with which an asset, or security, can be converted
into ready cash without affecting its market price.
Financial ratios help measure the success and soundness of these
decisions; help forecast FUTURE financial position
Earnings Per Share
Earnings Per Net Income – Preferred Dividends.
Average Number of Common Shares Outstanding
Share
Whenever a ratio divides an income statement balance
by a balance sheet balance, the average for the year is
used in the denominator.
Earnings form the basis for dividend payments
and future increases in the value of shares of
stock.
Earning Per Share
Earnings Net Income – Preferred Dividends
Average Number of Common Shares Outstanding
Per Share
Earnings $53,690-$0
Per Share ($17,000+$27,400 =$2.42
Price-Earning Ratio
Price-Earnings Market Price per share
Ratio Earnings Per Share
Price Earnings $20.00 =8.26 times
Ratio $2.42
A higher price-earnings ratio means that investors are willing
to pay a premium for a company's stock
because of optimistic future growth prospects
Dividend Payout Ratio
Dividend Payout Dividends Per Share
Ratio Earnings Per Share
Dividend Payout $2.00
Ratio $2.42 82.6%
This Ratio gauges the portion of current earnings being
paid out in dividends. investors seeking dividends (market
price growth) would like this Ratio to be small, whereas
investors who seek dividends prefer it to be large
Dividend Yield Ratio
Dividend Yield Dividends Per Share
Ratio Market Price per Share
$2.00
Dividend Yield
$20.00 =10.00%
Ratio
The ratio identifies the return, in terms
of cash dividends, on the current
market price of the stock
Return On Total Assets
Return on Net Income + [Interest Expense x (1- Tax rate)]
total assets Average Total Assets
Return on $53,690 + [$7,300 x (1-.30)]
=18.19%
total assets ($300,000 + $346,390) /2
Adding interest expense back to net income enables the
return on assets to be compared for companies with different
amounts of debts or over time for a single company that has
changed it's mix of debt and equity
Return on Common Stockholders' Equity
Return on Common Net Income - Preferred Dividends
Stockholders's Equity Average Stockholders' Equity
Return on Common $53,690-$0.
Stockholders' Equity ($180,000 + $234,390) /2
=25.91%
This measure indicates how well the company
used the owners' investments to earn income
Financial Leverage
01
results from the difference between
the rate of return the company
earns on investments in its own
assets and the rate of return that
the company must pay its creditors
FINANCIAL LEVERAGE
IT RESULTS FROM THE DIFFERENCE BETWEEN:
RETURN ON INVESTMENT IN ASSETS > FIXED RATE OF
RETURN ON BORROWED FUNDS = POSITIVE FINANCIAL
LEVERAGE
-RETURN ON INVESTMENT IN ASSETS < FIXED RATE OF
RETURN ON BORROWED FUNDS = NEGATIVE FINANCIAL
LEVERAGE
Ratio Analysis: The Common Stockholder
refers to the evaluation of financial ratios that are most
relevant to common stockholders
RATIO ANALYSIS- THE SHORT TERM CREDITOR
-the short term creditor such as suppliers
want to be paid on time therefore they
focus on the company's cash flows and
working capital
2. WORKING CAPITAL
Working Capital = Current Assets - Current Liabilities
The excess of current assets over current liabilities is known as
working capital
Working capital is not free. It must be financed with long-term
debt and equity. Therefore, managers often seek to minimize
working capital
Norton Corporation’s working capital is
calculated as shown.
DECEMBER 31, 2020
If a company has enough
working capital, it can fund
Current assets P 65,000 its operations by paying its
employees and suppliers
Current Liabilities (42,000) and meeting short-term
obligations.
Working Capital P 23,000
AGREE OR DISAGREE?
A LARGE AND GROWING
WORKING CAPITAL BALANCE
MAY NOT BE A GOOD SIGN.
3. CURRENT RATIO
CURRENT RATIO The current ratio measures a
company’s short-term debt
paying ability
Current Assets
=
Current Liabilities
A declining ratio may be a sign of
deteriorating financial condition,
Acceptable: at least 2
or it might result from eliminating
obsolete inventories
A declining ratio may be a sign of
deteriorating financial condition, or it
might result from eliminating obsolete
inventories
Current Assets with Inventory of P 10,000
P 65,000
Current Ratio = = 1.55
P 42,000
Current Assets less Inventory of P 10,000
P 55,000
Current Ratio = = 1.31
P 42,000
4. ACID-TEST Acid-Test
=
Quick Assets
(QUICK) RATIO Ratio Current Liabilities
Acceptable: 0.3 to 1
It is a more rigorous measure of
short-term debt paying ability
because it only includes cash,
marketable securities, accounts Acid-Test P 50,000
= = 1.19
receivable, and current notes Ratio P 42,000
receivable.
It measures a company’s ability to
meet its obligations without having to
liquidate its inventory.
5. ACCOUNTS RECEIVABLE TURNOVER
It measures how quickly credit sales are converted to cash
This ratio measures how many times a company converts its
receivables into cash each year
Accounts Sales on Account
Receivable =
Turnover Average Accounts Receivable
Accounts P 494,000
Receivable = = 26.7 times
Turnover (P 17,000 + P 20,000)
2
6. AVERAGE
COLLECTION PERIOD
Average Collection Period
365 Days
Accounts Receivable Turnover
= 365 Days
26.7 times
= 13.67 days
This ratio measures on average,
how many days it taes to collect an
account receivable.
7. INVENTORY TURNOVER
Inventory Turnover
Cost of Goods Sold
Average Inventory
= P140,000
(P10,000 + P12,000) / 2
This ratio measures how many
= 12.73 times
times a company’s inventory has
been sold and replaced during the
year.
8. AVERAGE SALE PERIOD
ACCEPTABLE: 10 TO 90 DAYS
Average Sale Period
365 days
Long-term creditors are concerned
with a company’s ability to repay Inventory Turnover
its loans over the long run.
= 365 days
12.73 times
This ratio measures how many
days, on average, it takes to sell
inventory. = 28.67 days
9. TIMES INTEREST EARNED RATIO
ACCEPTABLE:2
Times Interest Earned Ratio
Earnings before Interest Expense and This is the most common measure
of a company’s ability to provide
Income Taxes
protection for its long term
Interest Expense creditors. A ratio of less than 1.0 is
inadequate.
= P84,000
P7, 300
= 11.51 times
10. DEBT TO EQUITY RATIO
ACCEPTABLE: 0 TO 3
Debt to Equity Ratio
Total Liabilities
Stockholder’s Equity
= P112, 000
P234, 390
= 0.48
This ratio indicates the relative proportions of debt to equity on a
company’s balance sheet.
THANK YOU
for listening
REFERENCES:
Vipond, T. (2024, September 9). Analyzing Financial Statements: Key Metrics and
Methods. Corporate Finance Institute.
https://corporatefinanceinstitute.com/resources/accounting/analysis-of-financial-
statements/#:~:text=Financial%20statement%20analysis%20is%20the,sheet%2C%
20and%20cash%20flow%20statement.
Teacher Jade. (2020, March 4). Balance sheet (Filipino) [Video]. YouTube.
https://www.youtube.com/watch?v=DzB2Rp1noYo
ABM Online PH. (2020, November 6). STATEMENT OF CASH FLOWS (Explained in
taglish by Sir RDS) [Video]. YouTube. https://www.youtube.com/watch?
v=ltG456hIc-E
