FINANCIAL STATEMENTS

AND ANALYSIS
 Understanding
financial statements
• A financial statement is a formal record
of the financial activities of business,
person, or other entity.
• The principal financial statements of a
corporation are the balance sheet, income
statement, and statement of cash flows.
 Understanding
Financial Statements
• Balance Sheet
• statement of financial position, reports on a
company’s assets, liabilities, and owner’s equity
• As of a specified date
TOTAL ASSETS = TOTAL LIABILITIES +
SHAREHOLDERS’ EQUITY

Current Current Capital Stock

Assets Liabilities Capital Surplus
Fixed
Long-term Retained
Assets
Earnings
Liabilities
 XYZ Company
BALANCE SHEET
As of December 31, 2010
ASSETS LIABILITIES AND EQUITY
Current Assets Current Liabilities

Cash 500,000.00 Accounts Payable 1,540,000.00

Marketable Securities 2,500,000.00 Notes Payable 1,360,000.00

Accounts Receivable 2,450,000.00 Accrued Expenses/Taxes 210,000.00

Inventories 7,420,000.00 TOTAL CURRENT LIABILITIES 3,110,000.00

Supplies 130,000.00

TOTAL CURRENT ASSETS 13,000,000.00 Long-Term Liabilities

Bonds Payable 5,000,000.00
Fixed Assets Loans Payable 3,000,000.00

Land/Building 25,000,000.00 TOTAL LONG TERM LIABILITIES 8,000,000.00

Machinery/Equipment 12,000,000.00 TOTAL LIABILITIES 11,110,000.00

TOTAL FIXED ASSETS 37,000,000.00 Stockholders' Equity

Capital Stock 30,000,000.00

Surprlus Capital 3,000,000.00
Retained Earnings 5,890,000.00

TOTAL SHAREHOLDERS EQUITY 38,890,000.00

TOTAL LIABILITIES AND
TOTAL ASSETS 50,000,000.00 SHAREHOLDERS EQUITY 50,000,000.00
 Understanding
Financial Statements
• Income Statement
• Statement of Financial Performance/Profit
and Loss Statement – summarizes the results
of the corporation’s operations for a given
period of time
• Shows the revenues generated, expenses
incurred and net profits/losses earned by the
company during such period.
 Understanding
Financial Statements
XYZ COMPANY
INCOME STATEMENT
For the year ending December 31, 2010
Net Sales 12,500,000.00
Less: Cost of Goods Sold 5,200,000.00
Gross Profit 7,300,000.00
Selling and Administrative Expenses 3,350,000.00
Operating Income 3,950,000.00
Add: Other Income 40,000.00
Eearnings Before Interest and Taxes 3,990,000.00
Less: Interest Expense 880,000.00
Earnings Before Taxes 3,110,000.00
Less: Taxes (33%) 1,026,300.00
NET INCOME / (LOSS) 2,083,700.00
 Understanding
Financial Statements
• Accumulated Retained Earnings Statement
• The percentage of net earnings not paid out as
dividends, but retained by the company to be
reinvested in its core business, or to pay debt.
XYZ COMPANY
ACCUMULATED RETAINED EARNINGS STATEMENT
For the year ending December 31, 2010

Retained Earnings, Beginning of the year 5,306,300.00

Add: Net Income 2,083,700.00

Less: Cash Dividends (1,500,000.00)

Retained Earnings, End of the year 5,890,000.00

 Understanding
Financial Statements

• Statement of Cash Flows

• Summary of the cash provided and
used by operating, investing, and
financing activities of the company
and the aggregate effect of these
activities on the cash balance
during a given period.
 Financial ratio
Analysis
• Company Analysis
• 4 Main categories.

Liquidity Activity Ratios Coverage Ratios Profitability Ratios

Ratios
Asset Turnover Debt-to-equity Return on Assets
Current A/R Turnover Times Interest Return on Equity
Quick Ave. Collection Pd. Earned Gross Profit Margin
Cash Inventory Turnover Oper. Profit Margin
Net Profit Margin
Earning Per Share
Price Earning Ratio
Dividend Yield
 Financial ratio
Analysis
• Liquidity Ratios
• CURRENT RATIO
Most commonly used liquidity ratios and measures a
company’s ability to cover its short-term debts or
current liabilities.

Current Ratio = Current Assets ÷ Current Liabilities

Ex. XYZ Company has Current Assets of P13,000,000 and

Current Liabilities of P3,110,000. It’s Current Ratio is
therefore 4.18 : 1, or simply 4.18.
P13,000,000 ÷ P3,110,000 = 4.18
 Financial ratio
Analysis
• Liquidity Ratios
• QUICK RATIO or ACID TEST RATIO
A more stringent measure of solvency and only
includes a company’s more liquid assets.
Quick Ratio = Cash + Marketable Securities + Receivables
-----------------------------------------------------
Current Liabilities

Ex. XYZ Company has Cash of P500,000, Marketable

Securities of P2.5 million, Receivables of P2.45 million,
and Current Liabilities of P3,110,000.
It’s Quick Ratio is 1.75.
(P500,000 + P2.5M + P2.45M) ÷ P3,110,000 = 1.75
 Financial ratio
Analysis
• Liquidity Ratios
• CASH RATIO
The most severe test of a company’s short-term debt
paying ability and only includes cash and
marketable securities
Cash Ratio = Cash + Marketable Securities
------------------------------------
Current Liabilities

Ex. XYZ Company has Cash of P500,000, Marketable

Securities of P2.5 million, Receivables of P2.45 million,
and CL of P3,110,000. It’s Cash Ratio is 0.96.
(P500,000 + P2.5M ) ÷ P3,110,000 = 0.96
 Financial ratio
Analysis
• Activity Ratio
• ASSET TURNOVER
Measures the productivity of all assets in generating
sales.
Asset Turnover = Net Sales ÷ Total Assets

Ex. XYZ Company has Net Sales of P12.5 million and Total
Assets of P50 million. It’s Asset Turnover is 0.25.
P12,500,000 ÷ P50,000,000 = 0.25
 Financial ratio
Analysis
• Activity Ratio
• ACCOUNTS RECEIVABLE TURNOVER
Measures the company’s efficiency in collecting
receivables and managing its credit.
A/R Turnover = Credit Sales ÷ A/R

Ex. For our example, it was assumed that all of XYZ

Company’s Net Sales of P12.5 million were on credit.
It’s Accounts Receivable amounted to P2.45 million.
It’s A/R Turnover is 5.10.
P12,500,000 ÷ P2,450,000 = 5.10
 Financial ratio
Analysis
• Activity Ratio
• AVERAGE COLLECTION PERIOD
Indicates the number of days it takes on the average
to collect receivables.
Ave. Collection Period = 365 days ÷ A/R Turnover

Ex. If XYZ Company’s Net Sales amounted to 12.5 M,

Accounts Receivable isP2.45 million, what is its Ave.
Collection Period?

A/R Turnover: 12.5 M ÷ 2.45 M = 5.10

> 365 days ÷ 5.10 = 72 days
 Financial ratio
Analysis
• Activity Ratio
• INVENTORY TURNOVER
A ratio showing how many times a company's
inventory is sold and replaced over a period
Inventory Turnover = Cost of Goods Sold ÷ Ave. Inventory

Ex. If XYZ Company’s Net Sales is 12.5 M, Gross Profit is 7.3

M and Average Inventory stood at 4.6 M, what is its
Inventory Turnover?

> CGS = Net Sales - Gross Profit

> CGS = P12.5 M - 7.3 M = P5.2 M
> P5.2 M ÷ P4.6 M = 1.13
 Financial ratio
Analysis
• Coverage Ratios
• DEBT TO EQUITY
A measure of a company's financial leverage. How
much is owed vs how much is owned?
D/E ratio = Total Liabilities ÷ Total Stockholders’ Equity

Ex. XYZ Company has Total Liabilities of P11.11 million

and Stockholders’ Equity of P38.89 million. It’s D/E
ratio is 0.29.
P11,110,000 ÷ P38,890,000 = 0.29
 Financial ratio
Analysis
• Coverage Ratios
• TIMES INTEREST EARNED
A ratio that indicates how many times a company
can cover its interest charges on a pretax basis
TIE = EBIT ÷ Interest Expense

Ex. XYZ Company ’s Gross Profit is P7.3 M, Total Sales &

Admin. Expenses is P3.35 M, Other Income amounts
to P40,000 and Interest Expense amounted to
P880,000. What is the company’s interest cover?

> EBIT = Gross Profit - Expenses + Other Income

> EBIT = P7.3 M - P3.35 M + P40,000 = P3.99 M
> Interest Cover = P3.99 M ÷ P880,000 = 4.53x
 Financial ratio
Analysis
• Profitability Ratios
• RETURN ON ASSETS
Broad measure of the company’s ability to
Generate profits using all the resources of the
company.
ROA = (EBIT ÷ Total Assets) x 100%

Ex. XYZ Company has EBIT of P3,990,000 and Total Assets

of P50 million. It’s ROA is 7.98%.
(3,990,000 ÷ P50,000,000) x 100% = 7.98%
 Financial ratio
Analysis
• Profitability Ratios
• RETURN ON EQUITY
Measures the return on investment by the
Stockholders of the company.
Net Income
ROE = -------------- x 100%
Stockholders’ Equity

Ex. XYZ Company’s Net Income and Stockholders Equity

amounted to P2,083,700 & P38.89 million respectively. It’s ROE
is therefore 5.35%.
(P2,083,700 ÷ P38,890,000) x 100% = 5.35%
 Financial ratio
Analysis
• Profitability Ratios
• GROSS PROFIT MARGIN
Indicates the basic cost structure (Markup)
GPM = (Gross Profit ÷ Net Sales) x 100%

Ex. XYZ Company’s Gross Profit and Net Sales were P7.3
million and P12.5 million, respectively. It’s GPM is
therefore 58.4%.
(P7,300,000 ÷ P12,500,000) x 100% = 58.4%
 Financial ratio
Analysis
• Profitability Ratios
• OPERATING PROFIT MARGIN
Reflects cost structure and the ability to control
Other operating expenses (selling and administrative)
OPM = (Operating Profit ÷ Net Sales) x 100%

Ex. XYZ Company’s Operating Profit and Net Sales were

P3.95 million and P12.5 million, respectively. It’s OPM
is therefore 31.6%.
(P3,950,000 ÷ P12,500,000) x 100% = 31.6%
 Financial ratio
Analysis
• Profitability Ratios
• NET PROFIT MARGIN
Reflects cost structure and the ability to
control other operating expenses (selling and
administrative) and taxes are included.
NPM = (Net Profit ÷ Net Sales) x 100%

Ex. XYZ Company’s Net Profit and Net Sales were

P2,083,700.00 million and P12,500,000.00 million,
respectively. It’s OPM is therefore 31.6%.
(P2,083,700 ÷ P12,500,000) x 100% = 16.67%
 Financial ratio
Analysis
• Profitability Ratios
• EARNINGS PER SHARE
A common indicator of a company’s profitability.
A growing EPS usually indicates company growth.
_________________Net Income _______________
Outstanding No. of Shares of Common Stock

Ex. XYZ Company’s Net Income was P2,083,700 and its Number of
Common Shares Outstanding was 30 million shares. It does not
have any preferred stock. It’s EPS for 1998 is P0.07 per share.
(P2,083,700 - 0) ÷ 30,000,000 shares = P0.07/share
 Financial ratio
Analysis
• Profitability Ratios
• PRICE EARNINGS RATIO
Shows the relative value of stocks compared
To other stocks/index/industry
PER = Market Price ÷ Earnings Per Share

Ex. For our example, let us assume that XYZ Company’s

shares are trading at P1.20. Using its 1998 EPS of P0.07
per share, its PER is presently 17 x.
P1.20/share ÷ P0.07/share = 17 x
 Financial ratio
Analysis
• Profitability Ratios
• DIVIDEND YIELD
Measures earnings that are paid out as dividends.

Dividend Cash Dividends/Share

Yield = --------------------------
Market Price

Ex. XYZ Company’s declared Cash Dividends of P0.05 per

share and its Market Price is P1.20. Its Dividend Yield is
presently 4.17%.
(P0.05/share ÷ P1.20/share) x 100% = 4.17%