Financial

Statement
Analysis
Financial Statement Analysis
There are different users of financial
statement. Financial statement analysis can
be used by managers, equity investors,
creditors, regulators, labor unions,
employees, the public, and potential
investors and creditors. Financial
statement analysis is used for investment
and credit decisions.
Financial statement analysis is definitely used
by management for monitoring performances
and for identifying strategies to further
improve the company’s operations.

For this chapter the following financial ratios

will be discussed:

1. Profitability Ratios
2. Efficiency Ratios
3. Liquidity Ratios
4. Leverage Ratios
Profitability Ratios

The following ratios are used to measure the

profitability of a company:

1. Return on Equity (ROE)

2. Return on Assets (ROA)
3. Gross profit margin
4. Operating profit margin
5. Net profit margin
Return on Equity (ROE)

ROE is a profitability measure that should be

interest to stock market investors. It measure
the amount of net income earned in relation
to stockholders’ equity. ROE is computed as
follows:

ROE = Net Income / Stockholders’ Equity

 Exhibit 2.1: JSC Foods Corporation
Statement of Profit or loss
For the Years Ending December 31, 2010-2014
2014 2013 2012 2011 2010

Net Sales 52 501 085 47 345 223 42 174 283 38 340 257 35 336 643

Cost of Sales 41 954 730 37 988 628 33 980 174 31 439 011 29 329 413

Gross Profit 10 546 355 9 356 595 8 194 109 6 901 246 6 007 229

Operating Expenses 6 497 659 6 196 804 5 393 621 4 926 723 4 505 422

Operating Income 4 048 696 3 159 791 2 800 488 1 974 523 1 501 807

Interest Expense 250 000 250 000 250 000 450 000 300 000

Income before taxes 3 798 696 2 909 791 2 550 488 1 524 523 1 201 807

Taxes 1 139 609 872 937 765 146 457 357 360 542

Net Income 2 659 087 2 036 854 1 785 342 1 067 166 841 265
 Exhibit 2.2: JSC Foods Corporation
Statement of Financial Position
December 31, 2010-2014
2014 2013 2012 2011 2010

Assets

Current Assets

Cash 1 062 527 996 904 777 415 766 805 883 416

Trade Receivables 2 300 500 1 921 799 1 722 513 1 454 426 1 396 639

Inventories 4 849 304 4 499 998 3 797 668 3 293 030 3 351 933

Other Current Assets 1 050 000 983 746 984 786 735 608 998 763

9 262 331 8 402 447 7 282 382 6 249 869 6 630 751

Noncurrent Assets

Property, Plant, and Equipment 12 200 000 11 300 000 9 050 000 9 350 000 9 500 000

Other Noncurrent Assets 835 689 925 681 896 842 876 235 827 490

13 035 689 12 225 681 9 946 842 10 226 235 10 327 490

Total Assets 22 298 020 20 628 128 17 229 224 16 476 104 16 958 241
Liabilities and Equity

Current Liabilities

Trade Payables 5 050 810 4 746 252 4 137 815 3 298 699 2 874 911

Income Taxes Payable 433 051 283 705 267 801 149 441 115 330

Current Portion of Long-term Debt 2 250 000 2 500 000 1 000 000 2 000 000 2 000 000

Other Current Liabilities 85 600 28 700 40 990 30 688 37 890

7 819 461 7 558 657 5 446 606 5 478 828 5 028 131

Noncurrent Liabilities

Long-term Debt, Net of Current Portion 2 000 000 1 250 000 - 1 000 000 3 000 000

Total Liabilities 9 819 461 8 808 657 5 446 606 6 478 828 8 028 131

Stockholders’ Equity

Capital Stock 8 000 000 8 000 000 8 000 000 8 000 000 8 000 000

Retained Earnings 4 478 559 3 819 472 3 782 618 1 997 276 930 110

Total Stockholders’ Equity 12 478 559 11 819 472 11 782 618 9 997 276 8 930 110

Total Liabilities and Stockholders’ Equity 22 298 020 20 628 128 17 229 224 16 476 104 16 958 241
 Exhibit 2.3: JSC Foods Corporation
Statement of Cash Flow
For the Years Ending December 31, 2011-2014
2014 2013 2012 2011

Cash Flows from Operating Activities

Income before Taxes 3 798 696 2 909 791 2 550 480 1 524 523
Adjustments
Depreciation 2 600 000 2 250 000 1 800 000 1 650 000
Changes in the following Accounts
Decrease (increase) in Accounts Receivable (378 701) (199 286) (268 087) (57 787)
Decrease (increase) in Inventories (349 306) (702 330) (504 638) 58 903
Decrease (increase) in Other Current Assets (66 254) 1 040 (249 178) 263 155
Increase (decrease) in Accounts Receivable 304 558 608 437 839 116 423 788
Increase (decrease) in Other Current Liabilities 56 900 (12 290) 10 302 (7 202)
Income Taxes paid (990 262) (957 034) (646 787) (422 246)
Cash Flows from Operating Activities 4 975 631 3 998 328 3 531 216 3 432 134
Cash Flows from Investing Activities

Acquisitions of PPE (3 500 000) (4 500 000) (1 500 000) (1 500 000)

Acquisition of other Noncurrent Assets 89 992 (28 839) (20 607) (48 745)

Cash Flows from Investing Activities (3 410 008) (4 528 839) (1 520 607) (1 548 745)

Cash Flows from Financing Activities

Payment of Cash DIvidends (2 000 000) (2 000 000)

Loans, not of Payments 500 000 2 750 000 (2 000 000) (2 000 000)

Cash Flows from Financing Activities (1 500 000) 750 000 (2 000 000) (2 000 000)

Net Change in Cash 65 623 219 489 10 609 (116 611)

Cash, Beginning 996 904 777 415 766 805 883 416

Cash, Ending 1 062 527 996 904 777 415 766 805
To illustrate, let us use the financial statement of JSC
Foods Corporation in 2014

ROE = (Net Income / Stockholders’ Equity) x 100%

ROE =(2 659 087 / 12 478 559) x 100%

ROE = 21.31%

The ROE of 21.31% means that for every P1 of

stockholders’ equity, P0.2131 was earned in
2014.
Return on Assets (ROA)

Return on assets measures the ability of a

company to generate income out of its resources.
Below is the formula for computing ROA:

ROA = (Operating Income / Total Assets) x 100%

The Ration can be useful in making investment

decisions.
To illustrate, refer to Exhibit 2.1 and 2.2 and
let us compute JSC’s ROA for 2014.

ROA = (4 048 696 / 22 298 020) x 100%

ROA = 18.16%

The 18.16% ROA means that in 2014, JSC Foods

Corporation generated P0.1816 for every P1.00
of asset in the company.
Gross Profit Margin

Gross Profit Margin = (Gross Profit / Sales) x 100%

It measures the ability of a company to cover it cost

of good sold from its sales. To illustrate , let us
compute the gross profit margin of Foods
Corporation in 2014.
Gross Profit Margin = (10 546 355 / 52 501 085) x 100%

Gross Profit Margin = 20.09%

This ratio means that for every P1.00 of sale the

company generates , it earns P0.2009 in gross profit .
If the manager wants to improve its gross
profit margin, two things can be done:

1. Raise Prices
2. Find Ways to bring down production
cost. For trading or merchandising
companies, find a supplier which can
sell finished goods to the company at
low prices.
Operating Profit Margin

Operating profit margin measures the

amount of income generated from the core
business of a company. It is computed as the
difference between revenues and the sum of
cost of revenues or sales and operating
expense .

Operating Profit Margin = (Operating

Income / Sales) x 100%
Operating Profit Margin=(4 048 697 / 52 501 085) x 100%

Operating Profit Margin = 7.71%

The 7.71% operating profit margin means that out of P1.00

sales or revenues that JSC Foods Corporation generated in
2014, the company earned P0.0771 after deducting cost of
sales and operating expenses.
Net Profit Margin

Net profit margin measures how much net profit

a company generates for every peso of sales or
revenues that it generates.

Net Profit Margin = (Net Income / Sales) x 100%

Net income is the amount left after all expenses

including income taxes are deducted from sales
or revenue.
To illustrate, let us compute the net profit margin of
JSC Foods Corporation in 2014.

Net Profit Margin = (2 659 087 / 52 501 085) x 100%

Net Profit Margin = 5.06%

In 2014, JSC Foods Corporation earned P0.0506 for

every P1.00 of revenues generated
Liquidity Ratios

Liquidity ratio measure the ability of a

company to pay maturing obligations from
its current assets.

1. Current Ratio
2. Acid-Test Ratio
The formula for computing current ratio is
shown below:

Current Ratio = Current Assets / Current

Liabilities

Current Ratio = 9 262 331 / 7 819 461

Current Ratio = 1.18

The current ratio of 1.18 means that for every

P1.00 of current liabilities , it has P1.18 current
assets as of December 31, 2014.
Acid-Test Ratio or Quick Asset Ratio

Quick Asset Ratio = (Cash + Current Accounts

Receivables + Short-Term Marketable Securities) /
Current Liabilities

The quick asset ratio is a stricter measure of company’s

liquidity position. There are some textbook which
compute quick assets as:

Quick Assets Ratio = (Current Assets - Inventories) /

Current Liabilities
To illustrate, let us compute the quick asset
ratio of JSC Foods Corporation in 2014.

Quick Asset Ratio = (1 062 527 + 2 300 500)

/ 7 819 461

Quick Asset Ratio = 0.43

This ratio means that for every P1.00 current

liability, it has P0.0043 quick assets.
Thank You !!!