IENG 215
Financial Analysis
Financial Statement
Analysis
 Liquidity Measures
 current
ratio
 quick ratio
 working capital
 Long Term Credit Risk
 debt
to assets ratio
 debt to equity
Financial Statement
Analysis
 Profitability Measures
 return
on assets
 return on equity
 net profit margin
 earnings per share
 Activity Ratios
 accounts
receivable turnover
 inventory turnover
Liquidity
 Working Capital
WC = Current Assets - Current Liabilitie s
= 123,300 - 67,400
= 55,900
Liquidity
 Working Capital
WC = Current Assets - Current Liabilitie s
= 123,300 - 67,400
= 55,900
Q: Is $55,900 sufficient working capital to
cover
2-3 months of expenses?
Liquidity
 Current Ratio (Industry > 2.0)
Current Assets
CR =
Current Liabilitie s
123,300
=
67,400
= 1.83
Liquidity
 Quick Ratio
(Industry > 1.0)
Current Assets - Inventory
QR =
Current Liabilities
123,300 - 54,200
=
67,400
=1.03
Long Term Credit Risk
 Debt to Assets (Industry < 33%)
Total Liabilities
DA =
Total Assets
193,200
=
387,100
= 0.50
Long Term Credit Risk
 Debt to Assets (Industry < 33%)
Total Liabilities
DA =
Total Assets
193,200
=
387,100
= 0.50
1996
0.54
Long Term Credit Risk
 Debt to Equity Ratio
(Industry 33-50%)
Total Liabilities
DE =
Owner ' s Equity
193,200
=
193,900
= 0.996
Long Term Credit Risk
 Debt to Equity Ratio
(Industry 33-50%)
Total Liabilities
DE =
Owner ' s Equity
193,200
=
193,900
= 0.996
1996
1.182
Profitability Measures
 Return on Assets
ROA =
(Industry 8-10%)
Net Income
Total Average Assets
18,000
=
387,100 + 383,800
2
= 0.047
Profitability Measures
 Debt to Equity
(Industry 12-15%)
Net Income
ROE =
Average Owner Equity
18,000
=
(193,900 + 175,900) / 2
= 0.097
Profitability Measures
 Net Profit Margin
(Industry 4-6%)
(Industry Specific)
Net Income
NPM =
Net Sales
18,000
=
574,800
= 0.031
Profitability Measures
 Earnings per Share
(Industry Specific)
Net Income
EPS =
Common Shares Outs tan ding
18,000
=
1,000
= 18
Activity Ratios
 Accounts Receivable Turnover (Industry Specific)
Net Sales
ART =
Avg Accounts Re ceivable
ART =
574,800
=
(46,800 + 38,600) / 2
= 13.46
Activity Ratios
 Inventory Turnover
Cost of Goods Sold
IT =
Average Inventory
428,300
=
(54,200 + 48,200) / 2
= 8.365
(Industry > 10)
Financial Leverage
Firm with No Leverage
Balance Sheet
Assets
Liabilities
Owner Equity
Total Liability &
Owner Equity
Income from Operations
Interest Expense
Net Income
$100,000
$0
100,000
$100,000
$18,000
0
$18,000
Financial Leverage
Firm with No Leverage
Balance Sheet
Assets
Liabilities
Owner Equity
Total Liability &
Owner Equity
Income from Operations
Interest Expense
Net Income
$100,000
$0
100,000
ROA =
$100,000
18,000
= 0.18
ROE =
100,000
$18,000
0
$18,000
18,000
= 0.18
100,000
Financial Leverage
Firm with Leverage
Balance Sheet
Assets
Liabilities
Owner Equity
Total Liability &
Owner Equity
Income from Operations
Interest Expense
Net Income
$100,000
$50,000
50,000
$100,000
$18,000
4,000
$14,000
Financial Leverage
Firm with Leverage
Balance Sheet
Assets
Liabilities
Owner Equity
Total Liability &
Owner Equity
Income from Operations
Interest Expense
Net Income
$100,000
$50,000
50,000
$100,000
$18,000
4,000
$14,000
ROA =
14,000
= 0.14
100,000
14,000
= 0.28
ROE =
50,000
Financial Leverage
Firm with Leverage
Balance Sheet
Assets
Liabilities
Owner Equity
Total Liability &
Owner Equity
Income from Operations
Interest Expense
Net Income
$100,000
$50,000
50,000
$100,000
$18,000
4,000
$14,000
Note: ROI = 18,000/100,000
ROA =
14,000
= 0.14
100,000
14,000
= 0.28
ROE =
50,000