Analysis of Financial Statements PDF

Ahmed Azizieh 99010549  Ch.4 Analysis of Financial Statements Importance of Ratios 1- Ratios standardize numbers and facilitate comparisons. 2- Ratios are used to highlight weaknesses and strengths. Categories of Ra...

Ahmed Azizieh 99010549  Ch.4 Analysis of Financial Statements Importance of Ratios 1- Ratios standardize numbers and facilitate comparisons. 2- Ratios are used to highlight weaknesses and strengths. Categories of Ratios 1) Liquidity Ratios ‫هل فينا نغطي التكاليف قصيرة االمد ؟‬ 2) Asset Management ‫هل عم نستعمل االصول تبعنا بشكل صحيح لنطلع عوائد ؟‬ 3) Long Term Solvency (Debt Management ) ‫امكانية وقدرة الشركة انه تغطي التكاليف طويلة االمد‬ 4) Profitability Ratios ‫مدى ربحية الشركة وقدرتها انه تطلع ارباح ؟‬ 5) Market Value Ratios ‫نظر المستثمرين للشركة ومقارنتها بسعرها‬ Liquidity Ratios 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 ‫الى اي مدى تستطيع الشركة على تغطية‬ 1) Current Ratio = Current ( ‫التزاماتها اللي اقل من سنة‬ 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 ‫) عن طريق اصول يمكن تحويلها‬liabilities 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔 −𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 )Current Assets( ‫الى كاش بشكل سريع‬ 2) Quick Ratio = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 Inventory is the least liquid current asset Higher ratios is better Asset Management Ratios 𝑺𝒂𝒍𝒆𝒔 1) Inventory Turnover Ratio = ‫كم مرة بيتغير ويتبدل المخزون وبجيب مخزون جديد‬ 𝑰𝒏𝒗𝒆𝒔𝒏𝒕𝒐𝒓𝒊𝒆𝒔 𝑨𝒄𝒄𝒐𝒖𝒏𝒕 𝑹𝒆𝒄𝒆𝒊𝒗𝒂𝒃𝒍𝒆𝒔 ‫عدد االيام اللي بحتاجها لما ابيع المنتج‬ 2) Day Sales Outstanding (DSO) = 𝑺𝒂𝒍𝒆𝒔 ‫مشان احصل الفلوس‬ 𝟑𝟔𝟓 Ahmed Azizieh 99010549  𝑺𝒂𝒍𝒆𝒔 3) Fixed Asset Turnover Ratio = ‫ انها تطلعلي عوائد‬fixed asset ‫كفاءة ال‬ 𝑵𝒆𝒕 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔 𝑺𝒂𝒍𝒆𝒔 4) Total Asset Turnover Ratio = ‫كفاءة االصول بشكل عام انها تطلعلي عوائد‬ 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 Higher is better in all above ratios except DSO Debt Management Ratios Debt Ratio = 𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕 ‫نسبة الدين لالصول بالشركة‬ 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 In general, the more levered, the less likely a firm is to repay its debt 𝑬𝑩𝑰𝑻 ‫ارباحي قبل ما ادفع للفوائد والضرائب‬ Times Interest earned Ratio (TIE) = 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝑬𝒙𝒑𝒆𝒏𝒔𝒆 ‫بتغطي كم مرة الفوائد اللي الزم ادفعها ؟‬ Higher is better Profitability Ratios 𝑬𝑩𝑰𝑻 ‫كم ربحي كنسبة من اجمالي العوائد قبل ما ادفع فوائد القروض‬ 1) Operating Margin = ‫والضرائب‬ 𝑺𝒂𝒍𝒆𝒔 2) Profit Margin = 𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 ‫كم صافي الدخل كنسبة من اجمالي الدخل‬ 𝑺𝒂𝒍𝒆𝒔 𝑬𝑩𝑰𝑻 3) Basic Earning Power = ‫قدرة اصول الشركة انها تطلعلي عوائد‬ 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕 𝑵𝑰 4) Return on Assets (ROA) = ‫ انها تطلعلي ارباح‬asset‫كفاءة ال‬ 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕 𝑵𝑰 5) Return on Equity (ROE) = ‫تقيس نسبة العائد للمستثمرين بالشركة‬ 𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 Think of ROA as a measure of Efficiency not Profitability ROE: Increase profit by increasing efficiency or increasing leverage Efficiency has two components: Increasing Sales and Decreasing Expenses Ahmed Azizieh 99010549 Problems with ROE ROE does not consider risk. ROE does not consider the amount of capital invested. Might encourage managers to make investment decisions that do not benefit shareholders. ROE focuses only on return, and a better measure would consider risk and return. Market Value Ratios 1) Price to Earnings (P/E) = 𝑷𝒓𝒊𝒄𝒆 ‫ من االرباح‬$1 ‫كم المستثمرين مستعدين يدفعوا لكل‬ 𝑬𝒂𝒓𝒏𝒊𝒏𝒈 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 𝑴𝒂𝒓𝒌𝒆𝒕 𝑷𝒓𝒊𝒄𝒆 2) Market to Book Ratio (M/B) = $1 ‫كم المستثمرين مستعدين يدفعوا لكل‬ 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 book value equity ‫من‬ Higher is Better P/E ratio and M/B is high for firms with high growth prospects P/E and M/B are high if ROE is high and risk is low The DuPont Equation 𝑵𝑰 ROE = 𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 𝑵𝑰 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 ROE = ROA ( ) × Equity Multiplier ( ) 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 ROA = profit margin * total asset turnover ROE = Profit Margin × Total Asset Turnover × Equity Multiplier 𝑵𝑰 𝑺𝒂𝒍𝒆𝒔 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 ROE = 𝑺𝒂𝒍𝒆𝒔 × 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 × 𝑻𝒐𝒕𝒂𝒍 𝑬𝒒𝒖𝒊𝒕𝒚 Ahmed Azizieh 99010549 ROE = Profitability ROA = Efficiency EM = Leverage Profitability = Efficiency × Leverage It shows the relationships among asset management, debt management, and profitability ratios. Using Financial Ratios to asses performance 1- Comparison to industry average Compare the key ratios to the industry average. 2- Benchmarking Comparing with top competitors (benchmark companies). 3- Trend analysis ◦ An analysis of a firm’s financial ratios over time. Potential Problems and Limitations ❖ Comparison with industry averages is difficult for companies that operates in many different divisions. ❖ “Average” performance is not necessarily good, perhaps the firm should aim higher ❖ Seasonal factors can distort ratios. ❖ Different accounting practices can distort comparisons ❖ Sometimes it is hard to tell if a ratio is “good” or “bad.” Ahmed Azizieh 99010549 Qualitative Factors ❖ Are the firm’s revenues tied to one key customer, product, or supplier? ❖ What percentage of the firm’s business is generated overseas? ❖ The firm’s competitive environment ❖ Future prospects ❖ Legal and regulatory environment Calculate all Ratios From this information Ahmed Azizieh 99010549