Chapter 13 – Financial Ratios and Firm Performance.pptVIP

Chapter 13 – Financial Ratios and Firm Performance Learning Objectives Create common-size statements Analyze performance with internal data and financial statements Calculate and interpret some key financial ratios Compare different company performances Analyze performance from historical data Appreciate the difference across industries of financial ratios Financial Statements Review Income Statement Balance Sheet Sources and Uses of Cash Accounting Identity Assets ≡ Liabilities + Owner’s Equity Double entry bookkeeping Benchmarking – against self or competition Benchmarking Against Self Comparisons across time Growing Sales? Growing Costs? Growing Income? Against Competition Common Size Statements Comparisons of percentages not actual dollars Which firm is more efficient per sales dollar Internal Uses of Financial Statements Analyze firm performance Comparison of actual performance to forecasts (budgets) Use standard costs for comparison Breakdown performance into key areas Sales Production Labor Overhead Internal Uses of Financial Statements Example – Sales Variance Analysis Price Analysis Actual Price x Actual Quantity vs. Forecasted Price x Actual Quantity Actual Forecast, favorable variance Volume Analysis Forecast Price x Actual Quantity vs. Forecast Price x Forecast Quantity Actual Forecast, favorable variance Sum variance for total Sales Analysis Internal Uses of Financial Statements Other Variances Production Labor and Material Overhead EBIT Variance sum of Sales, Production, and Overhead Be careful with interpreting favorable and unfavorable variances Variance analysis is an aid to understanding the performance of the business… Financial Ratios Comparing accounts for analysis of firm performance or potential strengthens and weaknesses Five areas Liquidity Solvency Asset Management Profitability Market Value Financial Ratios Liquidity Ability to meet short term cash outflow Poor liquidity sign of trouble ahead in keeping operations going Common Liqu