Professional Documents
Culture Documents
CONTENTS
CONCEPT AND METHODS OF THE FINANCIAL STATEMENT ANALYSIS
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APPENDIX
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Goal
Measurement of the firms shortterm debt-paying ability
Activity Ratios
Profitability Ratios
Examples
Current ratio
Quick ratio
Cash ratio
Liquidity index
Total asset turnover
Accounts receivable turnover
Accounts collection period
Accounts payable turnover
Days payable outstanding
Inventory turnover
Net profit margin
Return on equity
Return on assets
Times interest earned
Debt ratio
Debt to equity ratio
Debt to tangible net worth ratio
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100%
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90%
80%
37
80%
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70%
60%
50%
40%
30%
70%
60%
Are used to
finance assets
50%
90%
40%
63
55
30%
20%
20%
10%
10%
0%
ASSETS
SOURCES OF FINANCE
0%
Balance sheet is one of the most important statements of a company. Also referred a
statement of financial position, it contains information about companys total assets, liabilities
and shareholders equity as of the date stated. The information from the balance sheet is
commonly used for performing the analysis of companys liquidity, financial sustainability and
other indicators. Main information indicating firms financial condition as of the date stated
can be found in its balance sheet. It summarizes companys debts and assets, and the
stockholders equity. Actually, whole balance sheet is based on one simple equation:
Assets = Source of Finance (Liabilities + Stockholders Equity)
As creditors and company owners funds are two main sources of financing companys
assets, at any time firms assets must equal the sum of its liabilities and equity.
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TechStandard, Inc.
1600
1345
1400
1205
1200
1103
1000
800
600
513
453
499
400
200
0
2013
2014
Net Sales
2015
Total Assets
The total asset turnover for 2015 equals 1345((499 + 513) 0,5) = 2,66.
As for the year 2014 this ratio equals 1205((513 + 453) 0,5) = 2,49.
This means that the use of assets was more intense in 2015 comparing to 2014.
TechStandard produced and sold 2,66 dollars of products for every dollar of assets in 2015.
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TechStandard, Inc.
300
250
274
239
231
200
150
99
94
100
103
50
0
2013
Total Equity
2014
2015
The return on equity for 2015 equals 103((274 + 239) 0,5) 100% = 40,16%.
As for the year 2014 this ratio equals 99((239 + 231) 0,5) 100% = 42,13%.
Every dollar of shareholders' equity brought 40,16 cents of the net income in 2015. A
decline in 2015 comparing to 2014 was related to the growth of the total equity.
Summarizing everything, the purpose of the profitability ratio analysis is providing the
information about the ability of business to generate profit. Firms profitability is the biggest
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300
TechStandard, Inc.
281
264
250
200
143
130
150
100
50
0
2014
2015
Current Assets
Current Liabilities
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27
300
TechStandard, Inc.
274
274
239
250
225
200
150
100
50
0
2014
2015
Total Liabilities
Shareholders Equity
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5% =
4% =
2% x
2% x
2,5
2,0
5% =
4% =
2% x
1,6% x
2,5
2,5
This table shows the information about two companies with a similar declining trend of
return on assets. It declined from 5% in year 1 to 4% in year 2 for both of them. However, key
reasons of the decline were different. Company A slowed down the turnover of its assets, and
Company B reduced its net profit margin. Both processes have led to the same result.
Considering everything mentioned, we can assume that DuPont analysis is a form of
calculation of common business ratios, where profitability ratios, such as return on equity and
return on assets are being interpreted through other ratios. This is being done to estimate the
reasons of changes in profitability, measure the effect of companys management on it and
make appropriate business decisions.
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to
0,8
0,6
0,4
0,2
0
-0,2
-0,4
-0,6
-0,8
-1
Sign
AAA
AA
A
BBB
BB
B
CCC
CC
C
D
Table 3. Estimation grade for the financial condition of the company according to finstanon.com
The financial rating system is useful for all users of financial analysis, who are in need of
brief and clear estimation of firms financial condition. Based on the most common and
important business ratios, the calculation of the financial rating of a company is a process,
giving us an opportunity to confirm good or bad financial condition of a firm by computing a
weighted score and analyzing it.
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APPENDIX
INDEX
A
Accounts Payable ......................................................................... 8, 14
Accounts Receivable ........................................................ 7, 13, 14, 15
Acid Test Ratio ................................................................................. 23
Activity .................................................. 3, 8, 12, 13, 14, 16, 30, 33, 34
Altman ....................................................................................... 32, 33
M
Margins .................................................................................. 3, 17, 21
Marketable Securities ...................................................... 7, 15, 23, 24
C
Cash (and its equivalents) .................................................................. 7
Cash Conversion Cycle ............................................................... 15, 16
Cash flows .................................................................................... 3, 11
Cash Ratio .................................................................................. 23, 24
Cash Turnover .................................................................................. 15
Cost of Goods Sold ............................................................... 10, 14, 15
Creditors ............................................................................................ 3
Current Asset Turnover .................................................................... 13
Current Ratio........................................................................ 22, 23, 34
P
Profit and loss report ........................................................... 3, 6, 9, 10
Profitability ............................................... 3, 17, 19, 20, 30, 31, 32, 34
Q
Quick Ratio ................................................................................. 23, 34
I
Income statement ........................................................ 3, 9, 11, 18, 26
Intangible Assets .................................................................... 7, 19, 28
Inventories ......................................................................................... 7
Inventory Turnover .................................................................... 14, 15
investors........................................ 3, 4, 6, 9, 19, 21, 22, 27, 30, 31, 34
U
Unearned Income .............................................................................. 8
Liquidity ............................ 3, 6, 7, 8, 11, 13, 14, 22, 23, 24, 25, 32, 34
Long-Term Investments ..................................................................... 7
W
Working Capital.................................................................... 13, 24, 32
Working Capital Turnover .......................................................... 13, 24
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