Financial Statement & Ratio

Analysis
 Financial Analysis

• Assessment of the coop’s past,

present and future financial
conditions
• Done to find coop’s financial
strengths and weaknesses
 Financial Analysis
• Necessary to optimize profit and,
at the same time, reduce risks.
• Primary Tools:
– Financial Statements
– Comparison of financial ratios to past,
industry, sector and all coops
 Financial Statements
• Balance Sheet
• Income Statement
• Cashflow Statement
• Statement of Changes in
Equity
Balance Sheet
• Also known as the Statement of
Financial Condition
• This provides the value of the
following on a particular date:
- asset (what are the coop’s
resources)
- liabilities (what the coop owes)
- equity (what the members own)
ASSETS= LIABILITIES + EQUITY
INCOME STATEMENT
• Also known as the Statement of
Earnings (Profit & Loss Statement)

• The income statement provides

information on the various revenue
and expense items during a certain
period. Thus this statement shows
the total income generated in a
certain period.
CASH FLOW STATEMENT

• It shows how the company obtained

cash (SOURCES) and for what
purpose they were utilized (USES).
 Objectives of Ratio Analysis
• Standardize financial information
for comparisons
• Evaluate current operations
• Compare performance with past
performance
• Compare performance against other
coops or industry standards
• Study the efficiency of operations
• Study the risk of operations
Financial Ratios Analysis
FOUR BASIC FACTORS:
1. Liquidity

2. Leverage

3. Profitability

4. Efficiency
Liquidity
LIQUIDITY RATIOS
• MEASURES THE ABILITY OF THE
COOP TO MEET ITS SHORT-TERM
MATURING OBLIGATIONS.

• Liquid assets are those that can be

converted into cash quickly.
 Current Ratio
• Looks at the ratio between Current Assets and
Current Liabilities

Formula:
Current Ratio = Current Assets
---------------------
Current Liabilities
 Current Ratio
- Current Assets (Cash, Accts Receivable,
and Inventory)

- Current Liabilities (Short-term Loans

Payable, Accounts Payable)
Current Ratio

• Ideal level? – 1.5 : 1

• A ratio of 1.5 : 1 would imply

the coop has P1.5 of assets to
cover every P1 in liabilities
Current Ratio

• The minimum acceptable

level is 1.25 : 1

• Short –term creditors prefer

a HIGH current ratio since it
reduces their RISKS.
Current Ratio

• A ratio of 0.75 : 1 would suggest the

coop has only P0.75 in assets
available to cover every P1 it owes

• A less than 1 current ratio like this

one would mean that the coop is not
very liquid and may find it hard to
settle current maturing obligations.
Current Ratio

• Too high – Might suggest that too

much of its assets are tied up in
unproductive activities – too much
inventory stocks, for example.
• Too low - risk of not being able to
pay current obligations and working
capital might be impaired, meaning
available funds are not enough as
operating capital.
Quick Ratio
• Also referred to as the ‘ACID TEST’

Formula:
• (Current Assets – Inventories)
------------------------------------
Current Liabilities
Quick Ratio

• Does not include INVENTORY in the

Current Assets since the Current
Ratio may include items in the
Inventory that are difficult to
LIQUIDATE quickly.
Quick Ratio

• A ratio of 3:1 therefore would suggest

the coop has 3 times as much cash as
it owes – very healthy!

• (BUT, it may also mean that current

assets may not be fully utilized which
may result to low profitability).
Quick Ratio
• A ratio of 0.5:1 would suggest the
coop has twice as many liabilities as it
has cash to pay for those liabilities.

• This might put the coop under

pressure but is not in itself the end of
the world!
 LEVERAGE RATIOS

Show the extent to which a coop is

relying on debt to support its
assets and to finance its
operation; and how well it can
manage its debt obligations.
Gearing
 LEVERAGE
• Debt-to-Equity Ratio :

Formula:
Total Liabilities
-------------------------
Total Members’ Equity
 LEVERAGE
• Debt-to-Equity Ratio :

Measures the extent to which the coop

is using DEBT and EQUITY to support its
assets and to finance its operations.
LEVERAGE
• A D:E ratio of 1:1 indicates a
50:50 claim of both members and
creditors on the assets.
• The higher the ratio, the greater
the RISKS.
• Acceptable level for D:E Ratio is
3.0x
 LEVERAGE
• Interest Coverage Ratio:

Formula: EBIT*
-------------------
Interest Charges

*(EBIT= Earnings before Interest and Taxes)

 LEVERAGE
• Interest Coverage Ratio:

- Indicates how well the coop’s

earnings can cover the interest
payments on its (short-term and
long-term) debts.
Profitability
PROFITABILITY RATIOS
• Profitability measures look at how
much profit the firm generates
from sales or from its capital
assets
• Different measures of profit –
based on GROSS and NET
 Profitability
• Gross Profit Margin =
Gross Profit
----------------
Sales

• Gross Profit= Sales – Cost of Goods Sold

 Profitability

• The higher the better

• Enables the firm to assess the impact of

its sales and how much it cost to
generate (produce) those sales
 Profitability – Gross

• A gross profit margin of 45% means

that for every P1 of sales, the coop
makes P0.45 in gross profit
Profitability (Net)
• Net Profit or Net Surplus Margin =

Net Surplus
--------------------
Sales or Gross Revenue

• Measures profitability which

considers Cost of Goods Sold,
Operating Costs, and Other Costs.
Profitability
• Return on Assets = Net Surplus
----------------
Total Assets

• Measure of how effectively the

coop’s assets are being used to
generate profits.
 EFFICIENCY RATIOS
• Inventory Turnover =
Cost of Goods Sold
----------------------
Average Inventory

Where Average Inventory=

Inventory, Beg. + Inventory, End
----------------------------
2
 EFFICIENCY RATIOS

• Shows how quickly the inventory is

being turned over (or SOLD) to
generate sales.

• A higher ratio implies the coop is more

efficient in managing its inventories by
minimizing investment in inventories.
 EFFICIENCY RATIOS

• Thus, a ratio of 12 would mean

that the inventory turns over
12 times, or the average
inventory is sold in a month.
EFFICIENCY RATIOS
• Average Days Inventory =

Average Inventory
---------------------- x 360
Cost of Sales

Where Average Inventory=

Inventory, Beg. + Inventory, End
----------------------------
2
EFFICIENCY RATIOS

Average Days Inventory shows the

average no. of days the company’s
inventory stays in the warehouse or
on the shelves before these are sold.
Average Days Inventory

• Increasing trend means:

- Movement of stocks are becoming

slow, i.e, orders decreasing
- Stocking up because of anticipated
price increase (speculative)
Average Days Receivable
• Average Days Receivable =

Average Accts. Receivable

------------------------------- x 360
Sales

Where Average Accts. Receivable =

(AR, Beg. + AR, end)

-------------------------
2
Average Days Receivable

Indicates the length of time it

takes to collect on credit sales.
Also considered the actual credit
terms given by the company to
its customers.
 Average Days Receivables

• Increasing trends means slower

collections:

- Deteriorating collection efficiency

- Extending credit terms to customers
due to competition
- Quality of Accounts Receivable
suffering
Before looking at the ratios there are a
number of cautionary points
concerning their use that need to be
identified :

a.The dates and duration of the financial

statements being compared should be
the same. If not, the effects of
seasonality may cause erroneous
conclusions to be drawn.
b. The accounts to be compared should have
been prepared on the same bases.
Different treatment of stocks or
depreciations or asset valuations will distort
the results.

c.In order to judge the overall performance of

the coop, a group of ratios, as opposed to
just one or two should be used. In order to
identify trends at least three years of ratios
are normally required.
SOME IMPORTANT NOTES
• Liabilities have Credit balance and Assets
have Debit balance
• Current Liabilities are those which have
either become due for payment or shall fall
due for payment within 12 months from the
date of Balance Sheet
• Current Assets are those which undergo
change in their shape/form within 12
months. These are also called Working
Capital or Gross Working Capital
SOME IMPORTANT NOTES

• Net Worth & Long Term Liabilities are also

called Long Term Sources of Funds
• Current Liabilities are known as Short Term
Sources of Funds
• Long Term Liabilities & Short Term Liabilities
are also called Outside Liabilities
• Current Assets are Short Term Use of
Funds
Summary of Financial Ratios
• Ratios help to:
– Evaluate performance
– Structure analysis
– Show the connection between
activities and performance
• Benchmark with
– Past for the coop/ company
– Industry
• Ratios adjust for size differences
 Limitations of Ratio Analysis
• A coop’s industry category is often
difficult to identify
• Published industry averages are only
guidelines
• Accounting practices differ across
coops or firms
• Sometimes it is difficult to interpret
deviations in ratios
• Industry ratios may not be desirable
targets
• Seasonality affects ratios
Thank You!