Financial Analysis Liquidity

Financial Statement Analysis
● The analysis of financial statements

is a process of evaluating the
relationships between component
parts of financial statements to
obtain a better understanding of the
firm’s position and performance.
● Vertical Analysis
● Horizontal Analysis
● Ratio Analysis
Vertical Analysis
● Uses percentages and compares each
financial statement item with key financial
statement figure.
● This analysis focuses on the relationship
between various financial statement items
for a specific time period.
● This allows better comparison of companies
with significantly different level of sales
and assets
ABC Merchandising
Comparative Income Statement
for the year ended Dec.31
2014 2013 Peso Percentage

Change change
Sales P1,000,000 P700,000 P300,000 42.86%
Less: COGS 689,500 444,500 245,000 55.12%
Gross Profit 310,500 255,500 55,000 21.53%
Less: OpEx 120,000 75,000 45,000 60%
EBIT 190,500 180,500 10,000 5.54 %
Less: Int. 2,500 2,500 - -
Exp
Earnings 188,000 178,000 10,000 5.62%
before tax
Income Tax 60,160 56,900 3,200 5.62%
Expense
NET 127,840 121,040 6,800 5.62%
INCOME
Assets 2014 2013 Peso value change %
Current Asset
Cash P75,000 P64,000 P11,000 17.19
Marketable securities 30,000 30,000
AR 45,000 50,000 (5,000) (10)

Inv 41,000 30500 10500 34.43
Prepaid Expense 5,000 5000 -
Total Current Assets 196,000 179500 16500 9.19
Non-current Assets
PPE 350,000 320000 30000 9.38

Total Assets 546,000 499500 46500 9.31
Liabilities and Owner’s Equity
Current Liabilities
AP 29,000 20,000 9,000 45
Salaries Payable 25,000 16,000 9,000 56.25

Utilities Payable 12,000 7,000 5,000 71.43
Taxes Payable 30,000 30,000 -
Total Current Liabilities 96,000 73,000 23,000 31.51
Non-Current Liabilities
Notes Payable due in 2020 200,000 200,000 -
Total Liabilities 296,000 273,000 23,000 8.42

Capital 250,000 226,500 23,500 10.38
Total Liabilities and Owner’s Equity 546,000 499,500 46,500 9.31
HORIZONTAL ANALYSIS
● Examines the behavior of individual

financial statement items over different
periods of time.
● It highlights what items have changed and
how these items have changed from one
period to another and whether the change
was favorable or not.
Ratio Analysis
● Tools that help us determine the
financial health/performance of a
company.
● We can compare a company’s
financial ratios with its ratios in
previous years (trend analysis).
● We can compare a company’s
financial ratios with those of its
industry.
We will want to answer
questions about the firm’s
ratio analysis
● Liquidity
● Solvency
● Profitability
● Activity
● Liquidity: ratios designed to measure the ability of the
firm to meet its short-term liabilities as they come due.
● A company is liquid if it has enough current assets,
usually cash, to finance its short term liability.
Example:
Cyber-Dragon
Corporation
Cyber-Dragon’s
Balance Sheet (‘000)
Liabilities & Owners' Equity: Assets:

Accounts Payable 9,721 Cash 2,540
Bills Payable 8,500 Marketable securities 1,800
Accrued taxes payable 3,200 Accounts Receivable 18,320
Other current liabilities 4,102 Inventories 27,530
Total Current Liabilities 25,523 Total Current Assets 50,190
Long-term debt (bonds) 22,000 Plant and Equipment 43,100
Total Liabilities 47,523 less accum deprec. 11,400
Common Stock 23,000 Net Plant & Equip. 31,700
Retained earnings 11,367 Total Assets 81,890
Total stockholders' equity 34,367
Total liabilities & equity 81,890
Cyber-Dragon’s
Income Statement
Sales (all credit) 112,760

Cost of Goods Sold 85,300
Gross Profit 27,460
Operating Expenses:
Selling 6,540
General & Administrative 9,400
Total Operating Expenses 15,940
Earnings before interest and taxes (EBIT) 11,520
Interest charges:
Interest on loan: 850
Interest on bonds: 2,310
Total Interest charges 3,160
Earnings before taxes (EBT) 8,360
Taxes 3,344
Net Income 5,016
Cyber-Dragon
Other Information
Dividends paid on common stock 2,800

Earnings retained in the firm 2,216
Shares outstanding (000) 1,300
Market price per share 20
Book value per share 26.44
Earnings per share 3.86
Dividends per share 2.15
1. Liquidity Ratios
● Do we have enough liquid assets

to meet approaching obligations?
Liquidity
▪ Measure the firm’s ability to meet recurring financial
obligations
▪ Net Working capital:

▪ Current assets - Current liabilities
company A company B
Current assets Rs. 1,80,000 30,000
Current Liabilities 1,20,000 10,000
NWC 60,000 20,000
● Current ratio:A higher current ratio indicates greater
liquidity (2 : 1 considered satisfactory)
Current assets / Current liabilities
Company A Company B
Current assets Rs. 1,80,000 30,000
Current Liabilities 1,20,000 10,000
CR 1.5 : 1 3:1
What is Cyber-Dragon’s Current
Ratio?
What is Cyber-Dragon’s Current
Ratio?
50,190
= 1.97
25,523
What is CyberDragon’s Current
Ratio?
50,190
= 1.97
25,523
If the average current ratio for the

industry is 2.4, is this good or not?

Financial Analysis Liquidity

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Financial Statement Analysis

● The analysis of financial statements

2014 2013 Peso Percentage

AR 45,000 50,000 (5,000) (10)

PPE 350,000 320000 30000 9.38

Salaries Payable 25,000 16,000 9,000 56.25

Total Liabilities 296,000 273,000 23,000 8.42

● Examines the behavior of individual

Liabilities & Owners' Equity: Assets:

Sales (all credit) 112,760

Dividends paid on common stock 2,800

● Do we have enough liquid assets

▪ Net Working capital:

Current assets / Current liabilities

If the average current ratio for the

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