Tools and techniques used to convert financial statement data into formats that facilitate data analysis including
- Ratio analysis (19)
- Expressing relationship among data used for
- Internal comparison
- Comparison across firms
- Used to identify questions that need to answer rather than answering questions
- Aim of using the ratios
- Project future earnings and cash flow
- Evaluate firm’s flexibility (meet obligation)
- Assess management’s performance
- Evaluate changes in firm and industry over time
- Compare firm with other industry competitors
- Limitation of ratios
- Financial ratio is not useful if used in isolation, should be used when compared with those of other firms or firm’s historical performance.
- Comparison with other firms is difficult by different accounting treatment
- Different industries: Difficult to find comparable industry ratios when comparing companies in different industries
- Single ratio: hard to make conclusion, need to view in relative with others
- Determine a target or comparison value for each ratio is difficult
- Definition of ratios is widely different among analytical community
- Expressing relationship among data used for
- Common-size analysis (20)
- Normalize balance sheet and income statement
- Compare performance across firm and across time
- Quickly viewing certain financial ratios
- Gross profit margin
- Operating profit margin
- Net profit margin
- Two types:
- Common-size balance sheet(21): balance sheet accounts as a percentage of total assets
- Common-size income statement(22): income statement items as a percentage of sales
- Common-size balance sheet(21): balance sheet accounts as a percentage of total assets
- Be useful in studying trends in cost and profit margin
- Common-size analysis doesn’t tell an analyst the whole story about this company
- Point analyst right direction to find out circumstances that led to the increase in the net profit margin.
- Horizontal common-size (23) balance sheet or income statement
- Divisor is the first-year values
- Commonly used in financial analysis
- Net profit margin (24) = profit/revenues
- Financial leverage(25) = long term debt/ total assets
- Graphical analysis (26)
- Visually present performance comparisons and composition of financial statement
- Stacked column graph (27): showed change in items from year to year
- Line graph:
- Stacked column graph (27): showed change in items from year to year
- Visually present performance comparisons and composition of financial statement
- Regression analysis
- Used to identify relationships between variables
- Used for forecasting
- Use relationship between GDP and sales to prepare a sales forecast
Notes:
- Deferred tax income:
- a liability recorded on a balance sheet resulting from a difference in income recognition between tax laws and the company’s accounting methods
- It can refer to a situation where a business has overpaid taxes or taxes paid in advance on its balance sheet. These taxes are eventually returned to the business in the form of tax relief.
- Preferred equity and common equity
- yield more than common stock and can be paid monthly or quarterly.
- have limited rights which usually does not include voting.
- In the event of a liquidation, preferred stockholders claim on assets is greater than common stockholders
- Depreciation and amortization
- that amortization is used for intangible assets, while depreciation is used for tangible assets