Searching Financial Statements
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Searching Financial Statements
Searching Financial Statements
Searching Financial Statements
Searching Financial Statements
Searching Financial Statements
Searching Financial Statements
Searching Financial Statements
Requirement:
•Choose one company in manufacturing industry
• financial statements in 5 consecutive years
•Submit report at the end of the semester
Chapter 2
Basics of Analysis
COPYRIGHT ©2011 South-Western, a part of Cengage Learning.
Contents
• Ratio Analysis
• Year-to-Year Analysis
• Common-Size Analysis
• Inter-Industry Analysis
Ratio Analysis
• Financial ratios are usually expressed as a percent
or as times per period.
example: liqudity ratio=current assets/current debt
• Liquidity (chapter 3)
– Measures a firm’s ability to meet its current
obligations
• Borrowing Capacity (chapter 4)
– Measures the degree of protection for long-
term creditors
Ratio Analysis
• Profitability (chapter 5)
– Measures the earning ability of a firm
• Investor-focused (chapter 6)
- Investors are interested in a special group of ratios
• Cash flow(chapter 7)
– Indicate liquidity, borrowing capacity, and
profitability from the perspective of cash
Ratio Analysis
• compatibility issue
comparison of income statement and balance
sheet number, in the form of ratios, can create
difficulties due to the timing of the financial
statements.
applying average beginning and ending balance
sheet figure
can be misleading due to seasonal and cyclical
changes.
Comparisons
• A single figure or ratio appear meaningless unless
compared to other standards.
example:
debt ratio: 60% high or not high?
• Interpretable in comparison with certain standards
Internal Standards
--Prior ratios Year-to-year analysis
--Predetermined budgets Trend analysis
External Standards
Common-size analysis
--Competitor ratios
--Industry ratios
Inter-industry analysis
• Determine trend and variability
Year-to-Year Analysis
• Comparing financial statements over two time periods
using absolute amounts and percentages can be
meaningful.
• When performing year-to-year change analysis, follow
these rules:
When an item has value in the base year and none in the next
period, the decrease is 100%.
A meaningful percent change cannot be computed when one
number is positive and the other number is negative.
No percent change is computable when there is no figure for the
base year.
Common-Size Analysis
• Common-Size analysis expresses comparisons in
percentage, which is more preferable than absolute
amounts
• Example:
Net Earnings:
year1- $10,000 year2- $1,000 which year is more profitable?
Total equity:
year1- $1000,000 year2- $ 10,000
year1 - 10,000/1000,000=1% year2- 1,000/10,000=10%
• Common-Size analysis makes comparisons with
different sizes much more meaningful.
Common-Size Analysis
• Vertical analysis
- Compares each amount with a base amount selected from
the same year
• Horizontal analysis
– Compares each amount with a base amount for a
selected base year
Vertical Analysis
Melcher Company
Income Statement
For the Years Ended December 31
2009 2008 2007
Sales revenue $ 100,000 100.0% $ 95,000 100.0% $91,000 100.0%
Cost of goods sold 65,000 65.0% 60,800 64.0% 56,420 62.0%
Gross profit 35,000 35.0% 34,200 36.0% 34,580 38.0%
Operating expenses:
Selling expense 14,000 14.0% 11,400 12.0% 10,000 11.0%
General expense 16,000 16.0% 15,200 16.0% 13,650 15.0%
Total operating expense 30,000 30.0% 26,600 28.0% 23,650 26.0%
Operating Income before taxes 5,000 5.0% 7,600 8.0% 10,930 12.0%
Taxes related to operations 1,500 1.5% 2,280 2.4% 3,279 3.6%
Net Income $ 3,500 3.5% $ 5,320 5.6% $ 7,651 8.4%
• Each income statement element is presented as a
percentage of a designated base which is sales
revenue on the Income Statement.
Copyright 2011 South-Western, a part of Cengage Learning. All rights reserved.
Horizontal Analysis
Melcher Company
Income Statement
For the Years Ended December 31
2009 2008 2007 2009 2008 2007
Sales revenue $ 100,000 $ 95,000 $ 91,000 109.9% 104.4% 100.0%
Cost of goods sold 65,000 60,800 56,420 115.2% 107.8% 100.0%
Gross profit 35,000 34,200 34,580 101.2% 98.9% 100.0%
Operating expenses:
Selling expense 14,000 11,400 10,000 140.0% 114.0% 100.0%
General expense 16,000 15,200 13,650 117.2% 111.4% 100.0%
Total operating expense 30,000 26,600 23,650 126.8% 112.5% 100.0%
Operating Income before taxes 5,000 7,600 10,930 45.7% 69.5% 100.0%
Taxes related to operations 1,500 2,280 3,279 45.7% 69.5% 100.0%
Net Income $ 3,500 $ 5,320 $ 7,651 45.7% 69.5% 100.0%
• Each income statement element is presented as a
percentage of a base amount from 2007.
Inter-industry analysis
• how to determine the industry of the company?
• Source 1 ： The Standard Industrial Classification(SIC)
manual published by The National Technical
Information Service.
Apple Inc. IBM Corp Dell EMC -----3571
35: Industrial and Commercial Machinery and Computer
Equipment
357: Computer and Office Equipment
3571:Electronic Computers
[Link] or google
“The Standard Industrial Classification(SIC)”
Inter-industry analysis
• Source 2 ： The North American Industry
Classification System(NAICS)was created jointly by
the UnitedStates, Canada, and Mexico.
Apple Inc.
334111: Software Publishers:Microsoft Corporation
511210: Electronic Computer Manufacturing:Dell
Technologies
449210: Electronics and Appliance Stores:Best Buy
[Link] under ‘‘business and
industry’’click on NAICS or google “The North
American Industry Classification System(NAICS)”
Inter-industry analysis
• how to select the industry that best fits the
company?
• The Department of Commerce Financial Report is a
publication of the federal government for
manufacturing, mining, and trade corporations.
It includes income statement data and balance sheet
data in total industry dollars based on NAICS code.
[Link] google The Department
of Commerce Financial Report
Inter-industry analysis
• Annual Statement Studies is published by the Risk
Management, the association of lending and
credit risk professionals.
Annual Statement Studies groups the data by
industry, using the SIC code, and the NAICS code.
Annual Statement Studies is one of the most
extensively used sources of industry data.
Annual Statement Studies is available in two
books, Financial Ratio Benchmarks and Industry
Default Probabilities and Cash Flow Measures.
Inter-industry analysis
• Several other financial services:
Standard & Poor’s Industry Surveys
Almanac of Business and Industrial Financial
Ratios
Industry Norms and Key Business Ratios
Value Line Investment Survey
Review of Descriptive Information
Review of Descriptive Information
• Management Discussion and Analysis (MDA)
• might discuss the role of research and
development in producing future sales, present
data on capital expansion and the goals related
thereto, discuss aspects of employee relations
such as minority hiring or union negotiations,or
help explain the dividend policy of the firm.