# Financial Analysis Part 2 Professor Eric Carstensen Mira

• Slides: 10

Financial Analysis – Part 2 Professor Eric Carstensen Mira. Costa College http: //www. miracosta. edu/instruction/accounting/index. html

Methods of Financial Analysis • Trend Analysis – Horizontal Analysis • Vertical Analysis – Common Size Statements • Comparison to Budget • Comparison to Industry Data • Ratio Analysis – Liquidity Measures – Profitability Measures – Asset Utilization Measures – Solvency Measures – Market Prospects Measures

Financials for Ratio Analyses EJ Company's Year 2 Income Statement: Sales Comparative Balance Sheets for Two (2) Years: \$ 890, 000 Assets Year 1 570, 000 Cash Gross Margin 320, 000 A/R 110, 000 130, 000 Op. Expenses 210, 000 Inventory 190, 000 170, 000 Op. Income 110, 000 Prepaids 20, 000 10, 000 340, 000 350, 000 30, 000 420, 000 550, 000 (110, 000) (120, 000) 310, 000 430, 000 Loss on Disposal 20, 000 Income Before Taxes 90, 000 Taxes Net Income 30, 000 \$ \$ Total Current Assets Long Term Investments EJ Company's Year 2 RE Statement: Accum. Depreciation Net Property, Plant & Equipment \$ 60, 000 less: Dividends 10, 000 \$ 160, 000 Total Assets \$ 680, 000 \$ 810, 000 \$ 140, 000 \$ 120, 000 Liabilities A/P Unearned Revenue Other Information: a. Equipment that had cost \$90, 000 and on which 40, 000 110, 000 add: Net Income equals: Year 2 Retained Earnings \$ 60, 000 Property, Plant & Equipment Year 1 Retained Earnings 20, 000 Year 2 COGS 20, 000 30, 000 Total Current Liabilities 160, 000 150, 000 Long Term Note Payable 160, 000 150, 000 Total Liabilities 320, 000 300, 000 there was \$40, 000 of accumulated depreciation was sold in Year 2 for \$30, 000 cash. b. Replacement equipment was purchased for \$220, 000 in cash. Equity c. Year 2 depreciation expense was \$50, 000. Common Stock 250, 000 350, 000 d. Cash dividends of \$10, 000 were paid in Retained Earnings 110, 000 160, 000 Total Owners' Equity 360, 000 510, 000 the current year. Total Liabilities & Equity \$ 680, 000 \$ 810, 000

Ratio Analysis - Liquidity Year 1 Year 2 Total Current Assets 340, 000 350, 000 - Total Current Liabilities 160, 000 150, 000 180, 000 200, 000 Total Current Assets 340, 000 350, 000 Total Current Liabilities 160, 000 150, 000 = Working Capital = Current Ratio 2. 1 2. 3 (cash + A/R + s. t. invest) 130, 000 170, 000 Total Current Liabilities 160, 000 150, 000 = Quick Ratio 0. 8 1. 1

Ratio Analysis - Profitability Year 1 Sales \$ 836, 000 \$ 890, 000 COGS 585, 000 570, 000 Gross Margin 251, 000 320, 000 Op. Expenses 190, 000 210, 000 61, 000 110, 000 - 20, 000 Income Before Taxes 61, 000 90, 000 Taxes 19, 000 30, 000 Op. Income Loss on Disposal Net Income GM% = Op. Inc. % = Profit Margin = Year 2 \$ 42, 000 Gross Margin 251, 000 Sales 836, 000 Op. Income 61, 000 Sales 836, 000 Net Income 42, 000 Sales 836, 000 \$ 30. 0% 60, 000 320, 000 36. 0% 890, 000 7. 3% 110, 000 12. 4% 890, 000 5. 0% 60, 000 890, 000 6. 7%

Ratio Analysis – Profitability Cont’d Year 2 Return on Investment (ROI) Net Income Average Assets ** = Return on Equity (ROE) Net Income Average Equity *** = Net Income = Weighted Average Shares Outstanding **** Earnings Per Share (EPS) 60, 000 (680, 000+810, 000)/2 = 8. 1% 60, 000 (360, 000+510, 000)/2 = 13. 8% 60, 000 (250, 000+350, 000)/2 = 0. 20 ** Average Assets = (beginning assets + ending assets) / 2 *** Average Owners' Equity = (beginning equity + ending equity) / 2 **** Assume Common Stock is \$1 par and there is no additional paid in capital

Ratio Analysis – Asset Utilization Year 2 A/R Turnover Net Credit Sales = Average A/R ** # Days Uncollected Ending A/R * 365 890, 000 COGS = 130, 000 * 365 Ending Inv. * 365 = 53 = 3. 2 = 109 890, 000 = Average Inventory *** # Days Sales in End. Inv. 7. 4 (110, 000+130, 000)/2 Net Credit Sales Inventory Turnover = 570, 000 (190, 000+170, 000)/2 = COGS ** Average A/R = (beginning A/R + ending A/R) / 2 *** Average Inventory = (beginning inventory + ending inventory) / 2 (170, 000 * 365) 570, 000

Ratio Analysis - Solvency Debt Ratio Year 1 Total Liabilities 320, 000 Total Assets 680, 000 Year 2 47. 1% 300, 000 37. 0% 810, 000 Equity Ratio Total Owners' Equity 360, 000 Total Assets 680, 000 Total Liabilities 320, 000 Total Owners' Equity 360, 000 52. 9% 510, 000 63. 0% 810, 000 Equity 88. 9% 300, 000 510, 000 58. 8%

Ratio Analysis – Market Prospects Year 2 Price-Earnings Ratio Market Price per Share = Earnings per Share* Dividend Yield Dividends per Share* Market Price per Share** * assumes 35, 000 shares of common stock ** assumes \$10 market price per share 10. 00 = 5. 8 1. 71 = . 29 10. 00 = 2. 9%

Financial Analysis Part 2 - Concluded • We looked at several Ratio Analysis measures as part of this presentation. • Accounting, Managerial Accounting and Finance textbooks contain additional ratios that can be applied, depending on the type of business. • Some companies tailor these standard ratios for use in their own unique business.