FIM01- FINANCIAL MANAGEMENT

03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

FINANCIAL STATEMENT ANALYSIS involves careful selection of data from financial

statements in order to assess and evaluate the firms past performance, its present
condition and future business potentials.
OBJECTIVE OF FS ANALYSIS
1. Profitability of the firm
2. Ability to meets its obligation
3. Safety of the investment in the business
4. Effectiveness of management in running the firm
PROBLEMS/LIMITATION IN FS ANALYSIS
1. Comparison of financial data
2. The need to look beyond the ratio
TRADITIONAL TECHNIQUES OF INTERPRETING FS
1. Horizontal Analysis
2. Trend Analysis
3. Vertical Analysis
4. Ratio Analysis

HORIZONTAL ANALYSIS
- Presents the differences in absolute amount and in percentage between two
periods.
- % of change = Amount of Change / Base
SAMPLE PROBLEM 1

DAVID Corporation
Balance Sheet
Comparative figures of December 31, 2015 and 2016
Increase (Decrease)
Assets 2015 2016 Amount Percenta
ge
Cash and Cash Equivalents 400 600
Trade and other receivables 2,600 2.900
Inventories 1,200 1,000
Long term investments 2,000 2,200
Property and equipment 4,000 4,400
Other assets 0 400
Total Assets 10,2 11,50
00 0
LIABILITIES & EQUITY
Trade and other payables 3,000 3,500
Bond Payable 500 400
Discount on bonds payable (20) (18)
Ordinary Share Capital 3,100 3,200
Share Premium 2,000 2,200
Retained Earnings 1,620 2,218
Total Liabilities and Equity 10,2 11,50
00 0

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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

TREND ANALYSIS
- The purpose of trend analysis is to track down what happened in the past and
provide a pattern on what may happen in the coming years.
SAMPLE PROBLEM 2

2010 2011 2012 2013 2014 2015 2016

Net P22,980, P23,600, P28,998, P22,766, P29,765, P34,675, P38,512,
Sal 000 890 879 550 876 239 235
es

2010 2011 2012 2013 2014 2015 2016

Indexes

Ratio

VERTICAL ANALYSIS
- Gets the proportional component of each of the variables in the financial
statements in relation to a chosen base (100%).
- By expressing the financial data in percentage using a particular base, the size
of different companies is brought to a common expression.

SAMPLE PROBLEM 3
Let us assume the following income statement data of two companies, Alden
and Maine Corporation.

Comparative Income Statement

For the year ended December 31, 2016
(in thousands)
Alden Corporation Maine Corporation
Net sales 200,000 3,000
Cost of goods sold (160,000) (1,000)
Selling and admin expenses (10,000) (500)
Interest expense (3,000) (200)
Profit before income tax 27,000 1,300
Income tax (10,800) (520)
Net Profit 16,200 780

Comparative Vertical Analysis of Income Statement

For the year ended December 31, 2016
Alden Corporation Maine Corporation

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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

SAMPLE PROBLEM 4

DAVID Corporation
Balance Sheet
Comparative figures of December 31, 2015 and 2016
COMMON SIZE
Assets 2015 2016
ANALYSIS
2015 2016
Cash and Cash Equivalents 400 600
Trade and other receivables 2,600 2.900
Inventories 1,200 1,000
Long term investments 2,000 2,200
Property and equipment 4,000 4,400
Other assets 0 400
Total Assets 10,2 11,50
00 0
LIABILITIES & EQUITY
Trade and other payables 3,000 3,500
Bond Payable 500 400
Discount on bonds payable (20) (18)
Ordinary Share Capital 3,100 3,200
Share Premium 2,000 2,200
Retained Earnings 1,620 2,218
Total Liabilities and Equity 10,2 11,50
00 0

RATIO ANALYSIS
1. Profitability Ratios
2. Growth Ratios
3. Liquidity Ratios
4. Leverage Ratios

PROFITABILITY RATIOS
Return on Sales (ROS) =
Return on Asset (ROA)=
Return on Equity (ROE) =
Return on Ordinary Equity=
Earnings per Share (EPS) =
Profit/Net Sales
Profit/ Average Total Assets
Profit/Average Equity
Profit - Preference Dividends
Average Ordinary SHE
Profit-Preference Dividends
Average shares outstanding

PROFITABILITY RATIO Ability of the business to generate

PROFIT.

Return on Sales This ratio measures the ability of the

management to produce return to
OWNERS for every peso of net sales.
Return on Asset / Return on This ratio measures the ability of the
Investment management to generate return on every
peso of resources employed in
operating the business.
Return on Equity This ratio measures the effectiveness of
management in generating wealth from the
normal business operations in relation to
the amount invested by the owners.
Return on Ordinary Equity This measures the ability of the
management to produce return on every
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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

peso of investment by ORDINARY

SHAREHOLDERS.
Earnings per Share This is computed for ORDINARY SHARES
only. It is the most important ratio in
measuring profitability. It captures all of the
four ratios above.

SAMPLE PROBLEM 5
The following selected data were taken from the financial records of GMA
Corporation.
Net Income P 1,000,000
Average total assets 12,000,000
Net Sales 20,000,000
10% cumulative preference shares, P100 par,
Liquidation value, P120, 20,000 shares issued 2,000,000
Ordinary Shares, P30 par, 220,000 shares issued, 6,600,000
treasury Shares, 20,000

Determine the following:

1. Return on Sales
2. Return on Asset
3. Return on Equity
4. Return on Ordinary Equity
5. Earnings per Share

GROWTH RATIOS
Price Earnings Ratio = Market Price per share / EPS
Dividend yield ratio = Dividend per share / Market price per share
Dividend payout ratio = Dividend per share / EPS

Book Value per ordinary share = Ordinary Shareholders

Equity
Ordinary Shares Outstanding
Book Value per preference share = Preference Shareholders Equity
Preference Shares Outstanding

GROWTH RATIOS These ratios indicate the

organizations potential and
attractiveness as an
INVESTMENT OPTION.
Price Earnings Ratio Indicates the ability of the The Higher the Better.
firm to recover investments (It takes longer years
from earnings. to recover their
investment)
Dividend yield ratio Indicates the ability of the
firm to RETURN investments
to owners in terms of cash
and dividends, and not the
accrued net income.
Dividend payout ratio Indicates how generous the
management in distributing
its earnings to owners.
Book Value of Ordinary Measures the companys
Shares wealth based on the VALUE
of its net assets/ equity.
Book Value of Preference It does not reflect the
Shares potential of the companys
growth.

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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

SAMPLE PROBLEM 6
ABS-CBN Corporation provided the following selected financial data of GMA
NEWS-TV Corporation on December 31, 2016. The company did not declared
dividends in 2015.
Earnings per share P 25
Market dividend per share 125
Dividend per common shares 10
Net shareholders equity 4,200,000
12% Preference share, P60 par
200,000 shares issued and outstanding
Liquidation value, P90 1,200,000
Ordinary shares outstanding 80,000
Determine the following:
1. Price Earnings Ratio
2. Dividend yield ratio
3. Dividend payout ratio
4. Book Value of Ordinary and
Preference

LIQUIDITY RATIOS
Inventory Turnover = Cost of Sales / Average inventories
Receivable Turnover = Net credit sales / Average trade receivables
Payable Turnover = Net credit purchases / Average trade payables
Age = Days in a year / Turnover
Operating Cycle = Age of Inventory + Age of Receivable
Net cash cycle = Operating cycle Age of Payable
Current Ratio = Current Asset / Current Liabilities
Quick Asset Ratio = Quick Assets / Current Liabilities

LIQUIDITY RATIO The ability of the business Focal point of liquidity

to pay its obligations in analysis is CASH. Ability
cash as they mature to convert assets to cash,
to receive the receivable,
the ability to sell its
merchandise.
Inventory Turnover Effectiveness of the
business in SELLING its
inventories.
(Number of times the
entire inventory is sold in
a given period)
Age of Inventory Measures the average
number of days that
inventory is held before
sale.
Receivable Turnover Effectiveness of the
business in using the
investment in

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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

RECEIVABLES TO NET
CREDIT SALES.
Age of Receivable Measures the average
number of days to collect
its receivable.
Payable Turnover Reflects how effective the
business in utilizing the
trade credit line offered by
supplier.
Age of Payable Determines whether the
firm is paying its invoices
on a timely basis.
Operating cycle Measures the average
number of days to convert
inventories to cash.
Net cash cycle Measures the average
number of days is
available before payment
to creditors.
SECONDARY RATIOS
Current Ratio The ability to meet its
current obligation in
relation to its current
assets.
Ability in paying short
term obligations.
Quick Ratio Measures the ability of the
firms to pay its ST debts
from its most liquid asset.
Working Capital The amount needed in the
firms business to operate.

SAMPLE PROBLEM 7
The following selected financial data from the records of David Corporation and
Dean Corporation as of and for the year ended December 31, 2016.
David Corp. Dean Corp.
Net credit sales P60M 120M
Cost of goods sold 20M 45M
Net credit purchases 20M 43M
Average trade receivables 4M 4M
Average inventories 2M 2M
Average trade payables 3.5M 3.5M
Sales credit terms 2/10, n/30 2/10, n/30
Purchase credit terms 3/30, n/60 3/30, n/60

Determine the following:

Ratios Computations David Corp. Dean Corp.

1. Inventory Turnover

2. Age of Inventory

3. Receivable Turnover

4. Age of Receivable

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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

5. Payable Turnover

6. Age of Payable

7. Operating Cycle

8. Net Cash Cycle

FINANCIAL LEVERAGE RATIOS

Debt Ratio = Total Debt / Total Equity
Debt to Equity Ratio = Total debt / Total Shareholders equity
Times interest earned = EBIT / Interest Expense

FINANCIAL LEVERAGE RATIOS Refers to the use of debt to increase

shareholders equity. Using debt to finance
business activities would mean greater
exposure to financial risk.
Measures the relative share of creditors over
Debt Ratio the total resources of the firm.

Measures the use of debt to finance

Debt to Equity Ratio operations.
Measures the long term ability of the firm to
Times interest earned meet interest payments. If profitable, the
business is more capable of meeting its
interest payments.

SAMPLE PROBLEM 8
Say, we have two companies with the same total equity of P200 million pesos.
However, they raised the money needed to finance investments differently as
follows:
A. Co. B. Co.
Debt, 10% 40,000,000 160,000,000
Shareholders Equity 160,000,000 40,000,000
EBIT 50,000,000 50,000,000

Determine the following:

Ratios Computation A. Co B. Co.

Debt Ratio

Debt to Equity Ratio

Times interest earned

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 FIM01- FINANCIAL MANAGEMENT
03 FINANCIAL STATEMENT
ANALYSIS
J. VILLENA, CPA

-END OF FSA-

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