Chapter 3 Analyzing Financial Statement Five major areas to analyze. (1) (2) (3) (4) (5) (1) a) Liquidity Position Management of Assets Management of Debt Company's Profitability Market's View of Company Liquidity Ratios - use to investigate the relationship between a firm's current (shortterm) assets and current (short-term) liabilities. Current Ratio = Current Assets Current Liabilities Current Assets - Inventory Current Liabilities Cash + Marketable Securities Current Liabilities

b)

Quick Ratio (Acid-test) Cash Ratio

=

c)

=

(2)

Asset Management Ratios - Use to evaluate how efficiently management employs assets.

Inventory Management a) b) Inventory Turnover Days’ Sales in Inventory = = Cost of Goods Sold (or Sales) Inventory Inventory Average Sales/day

Accounts Receivable Management a) Average Collection = Period (ACP) Accounts Receivable Turnover = Accounts Receivable Average Sales/day Sales Accounts Receivable

b)

Accounts Payable Management a) Average Payment = Period (APP) Accounts Payable Turnover = Accounts Payable Cost of Goods Sold / day Cost of Goods Sold Accounts Payable

b)

Fixed Asset and Working Capital Management a) b) Fixed Asset Turnover Sales to Working Capital = Sales Net Fixed Assets Sales Net Working Capital

=

Total Asset Management a) b) Total Asset Turnover Capital Intensity = = Sales Total Assets Total Assets Sales

(3)

Debt Ratios - use to evaluate riskiness of company (remember higher risk equates to higher required return)

Debt vs. Equity Financing a) b) c) Debt Debt-toEquity Equity Multiplier = = = Total Debt Total Assets Total Debt Total Equity Total Assets Common Stock Equity

Coverage Ratios a) b) c) Times-Interest-Earned = Fixed-charge Coverage Cash Coverage = = EBIT Interest EBIT + Lease Payments Interest + Lease Payments EBIT + Depreciation Interest + Lease Payments

(4) a) b)