FINANCIAL STATEMENT ANALYSIS: The quality of financial information determines the value of analysis.

lysis. Financial information must be accurate, timely and comprehensive to be useful in the financial management Financial statements compares the company against itself to evaluate strengths and weakness Requires at least three years of historical financial information to identify operating records Use industry standards as one of the measures but not the only measure of performance Financial analysis raises the questions to be answered and the issues to be addressed

Analyzing The Profit and Loss Statement: Four Credit Questions Is the Business Growing? a) Quality Indicator: % of sales growth/decline b) Are sales increasing at a growth greater than the inflation rate? Does the business control its Direct Cost? a) Quality Indicator: COGS/Sales b) Beware of sudden changes in relationship of COGS to Sales Does the Business Control Overhead Cost a) Quality Indicator: Operating and Administrative Exp./Sales b) Is the relationship of operating and administrative exp to sales stable or falling over time? Is the Business Truly Profitable? a) Quality indicator: i) EBT (Earnings before taxes)/Sales ii) Operating Profit/Sales b) Is the percentage of OP/Sales and EBT/Sales increasing with growth?

Analyzing The Balance Sheet: The Six Credit Questions Does the Business Collect its Bills? a) Quality indicator: Account Receivables/Sales*360dys b) Measures the average number of days it takes to collect bills c) Compare the term a company offers to customers to days receivables to measure quality Does the business control its inventory? a) Quality Indicator: Inventory/COGS*360 days b) Measures the average number of days worth of inventory on hand c) Compare the companys inventory cycle: ordering time, production time, warehousing Does the Business Pay its Bills? a) Quality indicator: Accounts Payables/COGS*360 b) Measures the average number of days its takes to pay suppliers Have the owners invested in the business? a) Reinvested profits, investment in common stock, deferred officers salary Has the business produced a positive net worth? a) Positive retained earnings indicate that the company has been profitable and has reinvested profits into operations b) Negative retained earnings indicates the company has experienced losses

Analyzing The Balance Sheet: The Six Credit Questions Does the business match its sources and uses of funds? a) Is there adequate short-term debt financing for short-term or seasonal working capital needs b) Are fixed assets financed by long- term debts? c) What is the quality of debts?

Another Financial Ratios: Working Capital: Current Ratios: Debt and Equity Short term and Long term debt/Net worth Measures the percent of the company financed by lenders relative to owner Fact: Most private sector lender wont finance companies with more than 2:1 ratio: public lenders may go up to 5:1 Current Assets/Current Liabilities A variation on the working capital measure of liquidity Lenders look for a 2:1 ratio which indicates that there are twice as many current liabilities to satisfy current short-term obligations Current Assets-Current Liabilities Measures of liquidity: excess of current assets over current liabilities Lenders look for a positive and growing amount of the working capital as a sign that a company can handle its short-term obligation

Contact: Chris Pavlides, Executive Director, Innovation & Entrepreneurship Institute, 201 Speakman Hall (006-00), Philadelphia PA 19122-6083. Phone: 215-204-1035 or 215-204-3080. Email: iei@temple.edu. Web: www.fox.temple.edu/iei.