# Financial Statements Analysis and Financial Models Please go through the attached presentations of Chapters 3 and 4, read the Corporate Finance textbook to

Financial Statements Analysis and Financial Models Please go through the attached presentations of Chapters 3 and 4, read the Corporate Finance textbook to write a summary of the assigned chapters in no less than three pages.Let me know if you have any questions. Chapter 3
Financial Statements Analysis and Financial
Models

Know how to standardize financial statements for
comparison purposes
Know how to compute and interpret important
financial ratios
Be able to develop a financial plan using the
percentage of sales approach
Understand how capital structure and dividend
policies affect a firm’s ability to grow
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3-1
Financial Statements Analysis
Ratio Analysis
Financial Models
External Financing and Growth
Some Caveats Regarding Financial Planning
Models
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3-2

Common-Size Balance Sheets
◦ Compute all accounts as a percent of total assets
Common-Size Income Statements
◦ Compute all line items as a percent of sales
Standardized statements make it easier to compare
financial information, particularly as the company
grows.
They are also useful for comparing companies of
different sizes, particularly within the same industry.
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3-3

Net Income (the bottom line) Revenues minus
expenses.
EPS – Earnings per share (net income/number
of common stock shares outstanding)
EBIT – Earnings before interest and taxes
(income from operations). It is income before
unusual items, discontinued operations, or
extraordinary items.
EBITDA – Earnings before interest, taxes,
depreciation and amortization. It is a better
measure of before tax cash flow.
3-4

Financial Ratios also allow for better comparison
through time or between companies.
These ratios are ways of comparing and investigation
the relationships between different pieces of
information
As we look at each ratio, ask yourself:

How is the ratio computed?
What is the ratio trying to measure and why?
What is the unit of measurement?
What does the value indicate?
How can we improve the company’s ratio?
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3-5

Short-term solvency or liquidity ratios
Long-term solvency or financial leverage ratios
Asset management or turnover ratios
Profitability ratios
Market value ratios
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3-6

Current Ratio = CA / CL (best known and widely used
for short term liquidity) (what if it is less than 1) (How
strong is the ratio)
◦ 708 / 540 = 1.31 times

Quick Ratio = (CA – Inventory) / CL (also called acid –
test) uses the most liquid of assets
◦ (708 – 422) / 540 = .53 times

Cash Ratio = Cash / CL
◦ 98 / 540 = .18 times
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3-7

Can the company meets its long run ability to meet its
obligation
Total Debt Ratio = (TA – TE) / TA (TA =Total Assets,
TE = Total Equity)
◦ (3588 – 2591) / 3588 = 28%

Debt/Equity = TD / TE (TD = Total Debt)
◦ (3588 – 2591) / 2591 = 38.5%

Equity Multiplier = TA / TE = 1 + D/E
◦ 1 + .385 = 1.385
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3-8

Times Interest Earned = EBIT / Interest
◦ 691 / 141 = 4.9 times (Interest coverage ratio)

Cash Coverage = (EBIT + Depreciation +
Amortization) / Interest
◦ (691 + 276) / 141 = 6.9 times
◦ This is a basic measure of the firms ability to
generate cash from operations and is frequently
used as a measure of cash flow to meet financial
obligations.
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3-9

These are asset management ratios or utilization ratios
to check and see how efficent the firms uses it assets

Inventory Turnover = Cost of Goods Sold / Inventory
◦ 1344 / 422 = 3.2 times ( we turned over the entire
inventory 3.2 times in a year)

Days’ Sales in Inventory = 365 / Inventory Turnover
◦ 365 / 3.2 = 114 days ( we have 114 days of
inventory on hand to sell).
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3-10

How fast do we collect our Receivables

Receivables Turnover = Sales / Accounts Receivable
◦ 2311 / 188 = 12.3 times ( we collected our outstanding
credit and lent the money our again 12.3 times during the
year)

Days’ Sales in Receivables = 365 / Receivables
Turnover
◦ 365 / 12.3 = 30 days (On average we collect our credit sales
In 30 days, called the average collection period)