CHAPTER

Financial Statement Analysis

4 ANALISIS PENYATA KEWANGAN

Financial
Management
LEARNING OBJECTIVES

LEARNING OBJECTIVES
1. Read the financial statement of corporation
2. Perform the financial statement analysis on corporation
3. Provide decision on firms financial position based on the
computed financial ratios
CONCEPTS

Relevance: information that has a direct effect on a

decision or makes a difference in the analysis of a
companys performance
Predictive value: information that helps users make
decisions about future actions
Comparability: presenting information in a way that
enables users to recognize similarities, differences,
and trends over different periods in the same
company and among different companies
Timeliness: receiving information in time to influence a
decision
Concepts Underlying Financial Performance
Measurement
Financial statement analysis (or financial performance
measurement) is used to show how items in a companys
financial statements relate to the companys financial
performance objectives.
Users want measures of financial performance that meet these
underlying concepts:
Relevance: The measures need to make a difference in the analysis of
a companys performance.
Predictive value: The measures need to help users make decisions
about future actions.
Comparability: The measures need to make useful comparisons of one
period of the companys performance with another and of the
companys performance to other companies.
Timeliness: The measures need to enable users to make decisions in
time to have the desired effects.
Rule-of-Thumb Measures

When analyzing financial statements, decision makers must

judge whether the relationships they find in the statements
are favorable or unfavorable.
Current ratio: The higher the ratio, the more likely the company will
be able to meet its liabilities. A ratio of 2 to 1 (2.0) or higher is
desirable.
Past Performance

Comparing financial measures or ratios of the same

company over time is an improvement over using rule-of-
thumb measures.
Such a comparison gives the analyst some basis for judging
whether the measure or ratio is getting better or worse,
which can be helpful in showing future trends.
However, such projections must be made with care because
trends reverse over time, and a companys needs may
change.
In addition, using a companys past performance as a
standard of comparison is not helpful in judging its
performance relative to that of other companies.
ACCOUNTING APPLICATIONS

Analyzing financial Evaluating Liquidity

statements Cash flow yield
Horizontal analysis Cash flows to sales
Trend analysis Cash flows to assets
Vertical analysis Free cash flow
Ratio analysis Evaluating financial risk
Evaluating profitability Debt to equity ratio
and total asset Return on equity
management Interest coverage ratio
Profit margin
Asset turnover
Return on assets
ACCOUNTING APPLICATIONS

Evaluating operating asset Evaluating market strength

management Price/earnings (P/E)
Inventory turnover Dividend yield
Days inventory on hand
Receivable turnover
Days sales uncollected
Payables turnover
Days payable
Financing period
Current ratio
Quick ratio
Financial Ratio Analysis

Financial ratio analysis identifies key relationships

between the components of the financial statements.
To interpret ratios correctly, the analyst must have:
A general understanding of the company and its environment
Financial data for several years or for several companies
An understanding of the data underlying the numerator and
denominator
Ratios can be expressed in several ways. For example, a ratio of
net income of RM100,000 to sales of RM1,000,000 can be stated
as:
Net income is 1/10, or 10 percent, of sales.
The ratio of sales to net income is 10 to 1 (10:1).
For every dollar of sales, the company has an average net income of
10 cents.
Evaluating Profitability and
Total Asset Management

Investors and creditors use profit margin to evaluate a

companys ability to earn a satisfactory income
(profitability).
They use asset turnover to determine whether the company
uses assets in a way that maximizes revenue (total asset
management).
The combined effect of these two ratios is overall earning
powerthat is, return on assets.
Starbucks profit margins, asset turnover, and return on
assets in 2010 and 2011 are computed.
Using Financial Ratios

Financial ratios provide a second method for

standardizing the financial information on the
income statement and balance sheet.

A ratio by itself may have no meaning. Hence, a

given ratio is generally compared to:
(a) ratios from previous years; or
(b) ratios of other firms in the same industry.
Using Financial Ratios
Profit Margin

Profit margin measures the net income produced by each

dollar of sales.
Income Statement Statement of Cash
Numbers Flows Numbers

Cash
Net Flows from Total Total Total
Revenues Income Operating Assets Liabilities Equity
Activities

Net Income
Profit Margin =
Net Revenue
2010
Net Income
Net Revenue
Asset Turnover

Asset turnover measures how efficiently assets are used to

produce sales.
Income Statement Statement of Cash
Numbers Flows Numbers

Cash
Net Flows from Total Total Total
Revenues Income Operating Assets Liabilities Equity
Activities

Net Revenue
Asset Turnover =
Average Total Assets
2011 2010
Return on Assets

Return on assets measures a companys overall earning

power, or profitability.
Income Statement Statement of Cash
Numbers Flows Numbers

Cash
Net Flows from Total Total Total
Revenues Income Operating Assets Liabilities Equity
Activities

Return on Assets = Net Income

Average Total Assets
2011 2010
Evaluating Financial Risk

Financial risk refers to a companys ability to survive in

good times and bad.
The aim of evaluating financial risk is to detect early signs that a
company is headed for financial difficulty through its use of debt,
or financial leverage, to finance part of the company.
Increasing amounts of debt in a companys capital structure can
mean that the company is becoming heavily leveraged and runs
the risk of not earning a return on assets equal to the cost of
financing the assets.
Ratios related to financial risk include debt to equity, return on
equity, and interest coverage.
Starbucks debt to equity, return on equity, and interest coverage
ratios in 2010 and 2011 are computed on the next three slides.
Debt to Equity Ratio

The debt to equity ratio shows the amount of assets provided by creditors in
relation to the amount provided by stockholders.

Income Statement Statement of Cash

Numbers Flows Numbers

Cash
Net Flows from Total Total Total
Revenues Income Operating Assets Liabilities Equity
Activities

Total Liabilities
Debt to Equity =
Stockholders Equity
2011 2010
Return on Equity

Return on equity measures the return to stockholders, or the

profitability of stockholders investments.
Income Statement Statement of Cash
Numbers Flows Numbers

Cash
Net Flows from Total Total Total
Revenues Income Operating Assets Liabilities Equity
Activities

Net Income
Return on Equity =
Average Stockholders Equity
2011 2010
Interest Coverage

The interest coverage ratio is a supplementary ratio that

measures the degree of protection creditors have from
default on interest payments.
Starbucks interest coverage ratios in 2010 and 2011 are
computed as follows.
Inventory Turnover

Inventory turnover measures the relative size of

inventories.
Starbucks inventory turnover ratios in 2010 and 2011 are
computed as follows.
Days Inventory on Hand

Days inventory on hand measures the average

number of days that it takes to sell inventory.
Starbucks days inventory on hand ratios in 2010 and
2011 are computed as follows.
Receivables Turnover

Receivables turnover measures the relative size of

accounts receivable and the effectiveness of credit policies.
Starbucks receivables turnover ratios in 2010 and
2011 are computed as follows.
Days Sales Uncollected

Days sales uncollected measures the average

number of days it takes to collect receivables.
Starbucks days sales uncollected ratios in 2010 and
2011 are computed as follows.
Payables Turnover

Payables turnover measures the relative size of accounts

payable and the credit terms extended to a company.
Starbucks payables turnover ratios in 2010 and 2011
are computed as follows.
Days Payable

Days payable measures the average number of

days it takes to pay accounts payable.
Starbucks days payable ratios in 2010 and 2011 are
computed as follows.
Current Ratio

The current ratio measures short-term debt-paying ability by

comparing current assets with current liabilities.
Income Statement Statement of Cash
Numbers Flows Numbers

Cash
Net Flows from Total Total Total
Revenues Income Operating Assets Liabilities Equity
Activities

Current Assets
Current Ratio =
Current Liabilities
2011 2010
Quick Ratio

The quick ratio differs from the current ratio in that the
numerator of the quick ratio excludes inventories and
prepaid expenses.
Starbucks quick ratios in 2010 and 2011 are
computed as follows.
Relationships of Financial Ratios