4/1/22
Welcome to ACC10007
Financial Information for Decision Making
Session 8 – Video 1
Financial Statement Analysis
Presented by:
Dr John Webster and Alan J Serry
Acknowledgement of Country
We respectfully acknowledge the Wurundjeri People of the Kulin Nation, who
are the Traditional Owners of the land on which Swinburne’s Australian
campuses are located in Melbourne’s east and outer-east, and pay our
respect to their Elders past, present and emerging.
We are honoured to recognise our connection to Wurundjeri Country,
history, culture, and spirituality through these locations, and strive to ensure
that we operate in a manner that respects and honours the Elders and
Ancestors of these lands.
We also respectfully acknowledge Swinburne’s Aboriginal and Torres Strait
Islander staff, students, alumni, partners and visitors.
We also acknowledge and respect the Traditional Owners of lands across
Australia, their Elders, Ancestors, cultures, and heritage, and recognise the
continuing sovereignties of all Aboriginal and Torres Strait Islander Nations.
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Learning Objectives
Video 1
1. Define, calculate and interpret the ratios that measure capital structure (solvency)
Video 2
2. Define, calculate and interpret the ratios that measure asset profitability
3. Linking – The DuPont relationship
Video 3
5. Steps to think about when performing ratio analysis
6. Limitations of Financial Statement Analysis
The Categories of Financial Statement Analysis
Analysing financial statements involves evaluating four characteristics of
an entity:
Liquidity Short term ability of entity to pay its debts by using its
quantity of assets to generate
CASH
Asset Efficiency (speed) with which we use our assets to
generate
Efficiency CASH
Capital Long term ability of entity to pay its debts and survive
Structure (solvency)
RISK
Profitability Operating success of the entity
EFFICIENCY
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Capital Structure Ratios
Long term ability of entity to pay its debts and survive (solvency)
The debt to equity ratio indicates:
$’s of debt per $ of equity
(stated as a percentage)
Debt to equity ratio
𝐓𝐨𝐭𝐚𝐥 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
×𝟏𝟎𝟎 = 𝒙%
𝐓𝐨𝐭𝐚𝐥 𝐞𝐪𝐮𝐢𝐭𝐲
Capital Structure Ratios
Long term ability of entity to pay its debts and survive (solvency)
The debt ratio (gearing ratio) indicates:
$’s of debt per $ of assets
(stated as a percentage)
Debt ratio
𝐓𝐨𝐭𝐚𝐥 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬
×𝟏𝟎𝟎 = 𝒙%
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬
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Capital Structure Ratios
Long term ability of entity to pay its debts and survive (solvency)
The equity ratio indicates:
$’s of equity per $ of assets
(stated as a percentage)
Equity ratio
𝐓𝐨𝐭𝐚𝐥 𝐞𝐪𝐮𝐢𝐭𝐲
×𝟏𝟎𝟎 = 𝒙%
𝐓𝐨𝐭𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬
Capital Structure Ratios
Long term ability of entity to pay its debts and survive (solvency)
The interest servicing (interest coverage OR times interest earned) ratio indicates:
$’s of earnings available to cover our interest
is there sufficient slack to meet additional interest obligations? Risk?
It aids us in assessing the financial risk of the entity.
Interest coverage ratio
𝐄𝐁𝐈𝐓
= 𝒙 times
𝐍𝐞𝐭 𝐟𝐢𝐧𝐚𝐧𝐜𝐞 𝐂𝐨𝐬𝐭𝐬
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Capital Structure Ratios
Long term ability of entity to pay its debts and survive (solvency)
The debt coverage ratio indicates:
$’s of long term debt per $ of operating cash flows
Debt coverage ratio
Non−current liabili0es
= 𝒙 times
Net cash flows from opera0ng ac0vi0es
Capital Structure Analysis
• Example — analysis of capital structure of JB Hi-Fi Ltd:
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Learning Objectives
Video 1
1. Define, calculate and interpret the ratios that measure capital structure (solvency)
Video 2
2. Define, calculate and interpret the ratios that measure asset profitability
3. Linking – The DuPont relationship
Video 3
5. Steps to think about when performing ratio analysis
6. Limitations of Financial Statement Analysis
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Thank You
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Welcome to ACC10007
Financial Information for Decision Making
Session 8 – Video 2
Financial Statement Analysis
Presented by:
Dr John Webster and Alan J Serry
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Learning Objectives
Video 1
1. Define, calculate and interpret the ratios that measure capital structure (solvency)
Video 2
2. Define, calculate and interpret the ratios that measure asset profitability
3. Linking – The DuPont relationship
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Profitability Ratios
Operating success of the entity ie. its efficiency
Return on Equity (ROE):
How efficient the entity is in using its equity to earn profit.
- $’s of profit for every $ of average shareholder’s equity
After interest and tax
Return on equity (ROE)
Profit available to owners
× 100 = 𝒙%
Average equity
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Profitability Ratios
Operating success of the entity ie. its efficiency
Return on Assets (ROA):
How efficient the entity is in using its assets to earn profit.
- $’s of profit for every $ of average assets
Return on assets (ROA)
Profit (loss) before interest and tax
× 100 = 𝒙%
Average total assets
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Profitability Ratios
Operating success of the entity ie. its efficiency
Gross Profit Margin Ratio:
How efficient the entity is in turning its sales revenue into gross profit.
- $’s of gross profit earned from every $ of sales revenue
Gross profit margin
Gross profit
× 100 = 𝒙%
Sales revenue
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Profitability Ratios
Operating success of the entity ie. its efficiency
Profit Margin (Net Profit Margin) Ratio:
How efficient the entity is in turning its sales revenue into net profit.
- $’s of net profit earned from every $ of sales revenue
Net profit margin
Net profit
× 100 = 𝒙%
Sales revenue
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Profitability Ratios
Operating success of the entity ie. its efficiency
Cash Flow to Sales Ratio:
How efficient the entity is in turning its sales revenue into operating cash flows.
- $’s of operating cash flows produced from every $ of sales revenue
Cash flow to sales ratio
Cash flow from operating activities
× 100 = 𝒙%
Sales revenue
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Profitability Analysis
• Example — analysis of profitability of JB Hi-Fi Ltd:
$351.1 $269.9
14.2% 15.6%
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Introducing the DuPont relationship
Focus on the DuPont Relationship
Return on Assets = Profit Margin X Asset Turnover
✔ ✔ ✖
Net profit Net profit
= X
.
Average assets Sales
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Profitability Ratios
Operating success of the entity ie. its efficiency
Asset Turnover Ratio:
How efficient the entity is in generating sales revenue from its (average) assets
- $’s of sales revenue generated from every $ of assets
Asset turnover ratio
Sales revenue
= 𝒙 times
Average total assets
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Introducing the DuPont relationship
Named after one of the first companies to introduce ratio analysis
into performance measurement for purpose of evaluating
management
Explains the relationship between sales volume and profit margin
as well as how they jointly determine ROA
We could just calculate ROA but decomposing ROA into its two
components gives us insights into WHY performance has changed
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Introducing the DuPont relationship
Focus on the DuPont Relationship
Return on Assets = Profit Margin X Asset Turnover
Net profit Net profit Sales
= X
. .
Average assets Sales Average assets
Tigers 60,000/580,000 = Tigers 60,000/800,000 = Tigers 800,000/580,000 =
10.34% 7.5% 1.38:1
Pies 42,000/500,000 = Pies 42,000/720,000 = Pies 720,000/500,00 =
8.40% 5.83% 1.44:1
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Learning Objectives
Video 1
1. Define, calculate and interpret the ratios that measure capital structure (solvency)
Video 2
2. Define, calculate and interpret the ratios that measure asset profitability
3. Linking – The DuPont relationship
Video 3
5. Steps to think about when performing ratio analysis
6. Limitations of Financial Statement Analysis
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Thank You
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4/1/22
Welcome to ACC10007
Financial Information for Decision Making
Session 8 – Video 3
Financial Statement Analysis
Presented by:
Dr John Webster and Alan J Serry
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Learning Objectives
Video 1
1. Define, calculate and interpret the ratios that measure capital structure (solvency)
Video 2
2. Define, calculate and interpret the ratios that measure asset profitability
3. Linking – The DuPont relationship
Video 3
5. Steps to think about when performing ratio analysis
6. Limitations of Financial Statement Analysis
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Steps to think about when performing
Financial Statement Analysis
Step 1 Analyse individual ratios one at a time against available benchmarks
a Use wording such as “This ratio tells us:
the number of $’s of top line for every $1 of bottom line”
or the number of times, on average, we …..”
b All other things being equal
the bigger this ratio, the better (or worse) because
the more (or less) the Magic Word
What is the magic word?
liquidity Cash (size of pool)
asset efficiency Cash (speed of conversion)
solvency Risk
profitability Efficiency
c Thus A is better of than B because (use figures)
Step 2 LINKS between ratios and ratio categories
Step 3 Limitations
Step 4 Conclusion
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Links
In presenting liquidity, asset efficiency, capital structure and
profitability ratios, we attempt to link ratios to describe the
financial health of the firm.
Linking:
Within categories eg. DuPont
Between categories
eg. Liquidity (size of pool) and
Asset Efficiency (speed)
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Steps to think about when performing
Financial Statement Analysis
Step 1 Analyse individual ratios one at a time against available benchmarks
a Use wording such as “This ratio tells us:
the number of $’s of top line for every $1 of bottom line”
or the number of times, on average, we …..”
b All other things being equal
the bigger this ratio, the better (or worse) because
the more (or less) the Magic Word
What is the magic word?
liquidity Cash (size of pool)
asset efficiency Cash (speed of conversion)
solvency Risk
profitability Efficiency
c Thus A is better of than B because (use figures)
Step 2 LINKS between ratios and ratio categories
Step 3 Limitations
Step 4 Conclusion
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Benchmarks
Ratio analysis is valuable because it helps to interpret
and explain why ratios may be different from those of:
Previous years
Competitors
Industry averages
Credit terms
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Limitations of Financial Statement Analysis
• Differing accounting policies and estimation
• Historical data
• Atypical data
• Diversification of entities
• Does not provide all of the answers and serves to highlight areas
which may require further enquiries to be conducted
• Indicators of performance other than economic indicators
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Is it all about economic performance?
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Learning Objectives
Video 1
1. Define, calculate and interpret the ratios that measure capital structure (solvency)
Video 2
2. Define, calculate and interpret the ratios that measure asset profitability
3. Linking – The DuPont relationship
Video 3
5. Steps to think about when performing ratio analysis
6. Limitations of Financial Statement Analysis
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Thank You
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