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    Material 1.1 Additional Notes

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    Cristine Joy Benitez
    The document discusses various types of financial ratio analysis used to analyze a firm's performance and financial position. It defines different types of ratio analysis including liquidity, activity, debt, and profitability ratios. It provides examples of specific ratios calculated, such as the current ratio, quick ratio, inventory turnover, accounts receivable turnover, gross profit margin, operating profit margin, and return on assets. The document also includes illustrative financial statements for a sample company.

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    Material 1.1 Additional Notes

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    Cristine Joy Benitez
    26 views2 pages
    The document discusses various types of financial ratio analysis used to analyze a firm's performance and financial position. It defines different types of ratio analysis including liquidity, activity, debt, and profitability ratios. It provides examples of specific ratios calculated, such as the current ratio, quick ratio, inventory turnover, accounts receivable turnover, gross profit margin, operating profit margin, and return on assets. The document also includes illustrative financial statements for a sample company.

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    Financial Analysis

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    The document discusses various types of financial ratio analysis used to analyze a firm's performance and financial position. It defines different types of ratio analysis including liquidity, activity, debt, and profitability ratios. It provides examples of specific ratios calculated, such as the current ratio, quick ratio, inventory turnover, accounts receivable turnover, gross profit margin, operating profit margin, and return on assets. The document also includes illustrative financial statements for a sample company.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    26 views2 pages

    Material 1.1 Additional Notes

    Uploaded by

    Cristine Joy Benitez
    The document discusses various types of financial ratio analysis used to analyze a firm's performance and financial position. It defines different types of ratio analysis including liquidity, activity, debt, and profitability ratios. It provides examples of specific ratios calculated, such as the current ratio, quick ratio, inventory turnover, accounts receivable turnover, gross profit margin, operating profit margin, and return on assets. The document also includes illustrative financial statements for a sample company.

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    NOTES: FINANCIAL ANALYSIS

    RATIO ANALYSIS. Involves methods of calculating and


    interpreting financial ratios to analyze and monitor the
    firm’s performance

    TYPES OF RATIO ANALYSIS

    CROSS-SECTIONAL ANALYSIS Comparison of different AVERAGE AGE OF ACOOUNTS PAYABLE.


    firms’ financial ratios at the same point in time; involves AVERAGE PAYMENT PERIOD The average amount of
    comparing the firm’s ratios to those of other firms in its time needed to pay accounts payable
    industry or to industry averages.
    ACCOUNTS PAYABLE TURNOVER.
    BENCHMARKING A type of cross-sectional analysis in
    which the firm’s ratio values are compared to those of a
    key competitor or group of competitors that it wishes to
    emulate

    TIME-SERIES ANALYSIS Evaluation of the firm’s financial


    performance over time using financial ratio analysis.

    LIQUIDITY

    LIQUIDITY A firm’s ability to satisfy its short-term


    obligations as they come due.

    CURRENT RATIO A measure of liquidity calculated by


    TOTAL ASSET TURNOVER Indicates the efficiency with
    dividing the firm’s current assets by its current liabilities
    which the firm uses its assets to generate sales.
    QUICK (ACID-TEST) RATIO A measure of liquidity
    calculated by dividing the firm’s current assets minus
    inventory by its current liabilities.

    ACTIVITY RATIOS

    ACTIVITY RATIOS Measure the speed with which


    various accounts are converted into sales or cash—
    inflows or outflows.

    INVENTORY TURNOVER Measures the activity, or


    liquidity, of a firm’s inventory.

    DEBT POSITION
    - financial analyst is most concerned with long-
    term debts
    - more debt a firm has, the greater its risk of
    being unable to meet its contractual debt
    payments
    financial leverage
    - the more debt a firm uses in relation to its total
    assets
    FINANCIAL LEVERAGE RATIO
    - Amount of total assets financed by equity. The
    AVERAGE AGE OF INVENTORY Average number of days’ higher the ratio, the greater is the leverage, and
    sales in inventory greater the risk
    - Interest expenses is tax deductible, leverage
    AVERAGE COLLECTION PERIOD. increases the company’s return when it is
    AVERAGE AGE OF ACOOUNTS RECEIVABLE. The profitable.
    average amount of time needed to collect accounts
    receivable. PROFITABILITY

    GROSS PROFIT MARGIN


    ACCOUNTS RECEIVABLE TURNOVER.
    - Measures the percentage of each sales dollar
    remaining after the firm has paid for its goods.

    OPERATING PROFIT MARGIN


    - Measures the percentage of each sales dollar ILLUSTRATION 1.
    remaining after all costs and expenses other JA K Co m p a n y
    than interest, taxes, and preferred stock Co m p a r a ti v e Sta te m e n t o f F i n a n ci a l Po si ti o n
    As o f Y e ar Ende d
    dividends are deducted; the “pure profits” Asse ts 2022 2021
    earned on each sales dollar. C urre nt Asse ts
    Cash 363,000.00 288,000.00
    NET PROFIT MARGIN Marketable Securities 68,000.00 51,000.00
    Accounts Receivable 503,000.00 365,000.00
    Inventory 289,000.00 300,000.00
    - Measures the percentage of each sales dollar To ta l C urre nt Asse ts 1,223,000.00 1,004,000.00
    remaining after all costs and expenses, including N o n-curre nt Asse ts
    Land and Building 2,072,000.00 1,903,000.00
    interest, taxes, and preferred stock dividends, Machinery and Equipment 1,866,000.00 1,693,000.00
    have been deducted. Furniture and Fixture 358,000.00 316,000.00
    Vehicle 275,000.00 314,000.00
    EARNINGS PER SHARE (EPS) Others 98,000.00 96,000.00
    Accumulated Depreciation (2,295,000.00) (2,056,000.00)
    To ta l N o n-C urre nt Asse ts 2,374,000.00 2,266,000.00
    - is generally of interest to present or prospective To ta l Asse ts 3 ,5 9 7 ,0 0 0 .0 0 3 ,2 7 0 ,0 0 0 .0 0
    stockholders and management. As we noted Lia bilitie s a nd Ow ne r's Equity

    earlier, EPS represents the number of dollars C urre nt Lia bilitie s


    Accrued Expenses 382,000.00 270,000.00
    earned during the period on behalf of each Accounts Payable 79,000.00 99,000.00
    outstanding share of common stock. Notes Payable 159,000.00 114,000.00
    To ta l C urre nt Lia bilitie s 620,000.00 483,000.00
    N o n-C urre nt Lia bilitie s
    RETURN ON TOTAL ASSETS (ROA) Long-term Debt 1,023,000.00 967,000.00
    To ta l N o n-C urre nt Lia bilitie s 1,023,000.00 967,000.00
    - Measures the overall effectiveness of Sha re ho lde r's Equity
    management in generating profits with its Preferred Stock 200,000.00 200,000.00
    Ordinary Stock - Capital 191,000.00 190,000.00
    available assets; also called the return on Share Premuim 428,000.00 418,000.00
    investment (ROI). Retained Earnings 1,135,000.00 1,012,000.00
    To ta l Sha re ho lde r's e quity 1,954,000.00 1,820,000.00
    RETURN ON COMMON EQUITY (ROE) To ta l Lia bilitie s a nd SHE 3 ,5 9 7 ,0 0 0 .0 0 3 ,2 7 0 ,0 0 0 .0 0

    JA K Co m p a n y
    - Measures the return earned on the common I n co m e Sta te m e n t
    stockholders’ investment in the firm. A s o f Y e a r En d e d
    2022 2021
    PRICE/EARNINGS (P/E) RATIO Sales 3,074,000.00 2,567,000.00
    Cost of Good Sold (2,088,000.00) (1,711,000.00)
    - Measures the amount that investors are willing Gro ss Pro fit 9 8 6 ,0 0 0 .0 0 8 5 6 ,0 0 0 .0 0
    Operating Expenses
    to pay for each dollar of a firm’s earnings; the Selling Expenses (100,000.00) (108,000.00)
    higher the P/E ratio, the greater the investor General and Admin. Expenses (194,000.00) (187,000.00)
    Lease Expenses (35,000.00) (35,000.00)
    confidence. Depreciation Expenses (239,000.00) (223,000.00)
    N e t Inco m e 4 1 8 ,0 0 0 .0 0 3 0 3 ,0 0 0 .0 0
    MARKET/BOOK (M/B) RATIO Interest Expese (93,000.00) (91,000.00)
    N e t Inco m e be fo re Tax e s 3 2 5 ,0 0 0 .0 0 2 1 2 ,0 0 0 .0 0
    - Provides an assessment of how investors view Taxes (94,000.00) (64,000.00)
    the firm’s performance. Firms expected to earn N e t Inco m e Afte r Tax s 2 3 1 ,0 0 0 .0 0 1 4 8 ,0 0 0 .0 0
    Preferred Stock Dividend (10,000.00) (10,000.00)
    high returns relative to their risk typically sell at Earnings Available fo r 2 2 1 ,0 0 0 .0 0 1 3 8 ,0 0 0 .0 0
    higher M/B multiples. C o m m o n sto ck ho lde r

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