1 / 22

Statement Analysis: Measuring Profitability, Financial Strength, and Liquidity

Chapter. 24. Statement Analysis: Measuring Profitability, Financial Strength, and Liquidity. Section 1: Ratios Measuring Profitability, Operating Results, and Efficiency. Section Objectives.

ulla-berry
Download Presentation

Statement Analysis: Measuring Profitability, Financial Strength, and Liquidity

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 24 Statement Analysis: Measuring Profitability, FinancialStrength, and Liquidity Section 1: Ratios Measuring Profitability, Operating Results, and Efficiency Section Objectives • Compute and interpret financial ratios that measure profitability, operating results, and efficiency.

  2. Ratio Analysis • Financial ratios have three classifications: • Profitability, operating results, and efficiency • Financial strength • Liquidity

  3. Objective 1. Compute And Interpret Financial Ratios That Measure Profitability, Operating Results, And Efficiency.

  4. Ratios Measuring Profitability, Operating Results, and Efficiency • Rate of return on sales. • Rate of return on common stockholders’ equity. • Earnings per share of common stock (EPS). • Price-earnings ratio. • Yield on common stock. • Rate of return on total assets. • Asset turnover.

  5. $ 56,578 = Rate of return on net sales $ 2,970,200 = 1.9% Net income Net sales Rate of Return on Sales • Measures what percentage of each sales dollar is net income. • Formula: • Example: The higher the rate of return on net sales, the more satisfactory are the business operations.

  6. Return on common stockholders’ equity Income available to common stockholders = Common stockholders’ equity Rate of Return on Common Stockholders’ Equity • Measures how well the corporation is making a profit for its shareholders. • Formula: • Procedure: Step 1: Compute income available to common stockholders. Step 2: Compute the common stockholders’ equity. Step 3: Divide the income available to common stockholders by the common stockholders’ equity.

  7. Less dividend requirements onpreferred stock 4,000 Income available to common stockholders $52,578 Rate of Return on Common Stockholders’ Equity • Step 1: Compute income available to common stockholders. Net income after income taxes $56,578

  8. Preferred stockholders’ equity - 50,000 Common stockholders’ equity $265,921 Rate of Return on Common Stockholders’ Equity • Step 1: Income available to common stockholders = $52,578 • Step 2: Compute the common stockholders’ equity. Total stockholders’ equity $315,921

  9. $52,578 = 19.8% $265,921 Rate of Return on Common Stockholders’ Equity • Step 1: Income available to common stockholders = $52,578 • Step 2: Common stockholders’ equity = $265,921 • Step 3: Divide the income available to common stockholders by the common stockholders’ equity.

  10. Income available to common stockholders Earnings per share = Average number of shares of common stock outstanding during year Earnings per Share of Common Stock • Measures the profit accruing to each share of common stock owned. • Formula: Analysts, stockholders, and creditors watch the earnings per share measurement very closely.

  11. Earnings per Share of Common Stock Step 1. Compute income available to common stockholders. Step 2. Determine the average number of shares of common stock outstanding during the year. Step 3. Divide the income available to common stockholders by the average number of shares of common stock outstanding.

  12. Weighted Average 5,250 shares number of shares Earnings per Share of Common Stock • Step 1: Income available to common stockholders = $56,578 • Step 2: Determine the average number of shares of common stock outstanding during the year. 5,000 shares x 12 months = 5,000 shares 12 months 1,000 shares x 3 months = 250 shares 12 months

  13. $52,578 = $10.01 5,250 shares Earnings per Share of Common Stock • Step 1: Income available to common stockholders = $52,578 • Step 2: Average number of shares outstanding = 5,250 • Step 3: Divide the income available to common stockholders by the average number of shares of common stock outstanding Earnings per share were $10.01.

  14. Market price per share Earnings per share Price-earnings ratio = $144 $ 12 12 = Price-Earnings Ratio • Compares the current market value of common stock with the earnings per share of that stock. • Formula: • Example: PE ratio = 12 to 1 The price-earnings ratio is an indicator of the attractiveness of a stock as an investment.

  15. Dividend per share Market price per share Yield on Common Stock = $ 6 $ 60 = 10% Yield on Common Stock • Relationship between the dividends received by the stockholders and the market value of each share. • Formula: • Example:

  16. Income before interest expense and income taxesTotal assets Rate of return on total assets = Add back interest expense 11,500 Income before interest and taxes $ 92,326 Total assets $557,016 $92,326 $557,016 = 16.6% Rate of Return on Total Assets • Measures the rate of return on the assets used by the company. • Formula: • Example: Income before income taxes $ 80,826

  17. Rate of Return on Total Assets • This rate helps the analyst to: • judge managerial performance, • measure the effectiveness of the assets used, • evaluate proposed capital expenditures. • Only income from normal business operations is considered.

  18. Net salesTotal assets Asset Turnover = $ 2,970,200 $ 557,016 5.3 to 1 = Asset Turnover • Measures effective use of assets in making sales. • Formula: • Example: The higher the asset turnover, the more effectively the assets of the company are being used.

  19. R E V I E W SECTION Complete the following sentences: Ratio analysis ____________ is used to assess a company’s profitability, financial strength, and liquidity. rate of return on sales The ___________________ measures what percentage of each sales dollar is net income. The formula for earnings per share is _____________________________________ divided by average shares of common stock outstanding during the year. income available to common stockholders

  20. R E V I E W SECTION Complete the following sentences: price-earnings ratio The _________________ compares the market value of common stock with the earnings per share of that stock. yield on common stock The formula for _____________________ is dividend per share divided by market price per share. asset turnover The higher the _____________, the more effectively the assets of the company being used.

  21. Thank You for using College Accounting, 11th Edition Price • Haddock • Brock

More Related