Financial Statement Analysis

Horizontal Analysis

An analysis that evaluates financial statement data over a period of time (trend/interperiod analysis) to assess changes year-over-year or against a base year.

Vertical Analysis

An analysis that expresses each financial statement item as a percentage of a base amount within the same period (Common-Size Statement Analysis).

Percentage Change (Base Year)

((Current Year Amount - Base Year Amount) / Base Year Amount) * 100

Percentage Change (Year-over-Year)

((Current Year Amount - Prior Year Amount) / Prior Year Amount) * 100

Current Ratio

Total Current Assets / Total Current Liabilities

Quick Ratio (Acid-Test Ratio)

Total Liquid Assets / Total Current Liabilities [where Liquid Assets = Cash & Cash Equivalents + Marketable Securities + Accounts Receivable]

Cash Ratio

(Cash + Marketable Securities) / Total Current Liabilities

Net Working Capital (NWC)

Current Assets - Current Liabilities

Solvency

The ability of a company to meet its long-term financial obligations.

Operating Leverage

Leverage arising from the use of fixed operating costs (e.g., PPE depreciation, property taxes) in a firm's operations.

Financial Leverage

Leverage arising from the use of fixed financial costs (debt/interest) in a firm's financing structure.

Debt-to-Equity (D/E) Ratio

Total Liabilities / Total Equity

Debt Ratio

Total Liabilities / Total Assets

Equity Ratio

Total Equity / Total Assets (or 1 - Debt Ratio)

Times Interest Earned (TIE)

Earnings Before Interest and Taxes (EBIT) / Interest Expense

Degree of Operating Leverage (DOL) - Single Period

Contribution Margin / EBIT

Degree of Operating Leverage (DOL) - Two Period

% Change in EBIT / % Change in Sales

Degree of Financial Leverage (DFL) - Single Period

EBIT / EBT (Earnings Before Taxes)

Degree of Financial Leverage (DFL) - Two Period

% Change in Net Income / % Change in EBIT

Accounts Receivable Turnover (ARTO)

Net Credit Sales / Average Accounts Receivable

Days Sales Outstanding (DSO)

365 / Accounts Receivable Turnover (or [Average Accounts Receivable / Net Credit Sales] * 365)

Inventory Turnover (ITO)

Cost of Goods Sold / Average Inventory

Days Inventory Outstanding (DIO)

365 / Inventory Turnover (or [Average Inventory / Cost of Goods Sold] * 365)

Accounts Payable Turnover (APTO)

Net Credit Purchases (or COGS) / Average Accounts Payable

Days Payable Outstanding (DPO)

365 / Accounts Payable Turnover (or [Average Accounts Payable / Net Credit Purchases] * 365)

Fixed Asset Turnover

Net Sales / Average Net Fixed Assets

Total Asset Turnover (TATO)

Net Sales / Average Total Assets

Operating Cycle

Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO)

Cash Conversion Cycle (CCC)

Operating Cycle - Days Payable Outstanding (DPO) = DIO + DSO - DPO

Gross Profit Ratio (GPR)

Gross Profit / Net Sales [where Gross Profit = Net Sales - Cost of Goods Sold]

Return on Sales (ROS) / Net Profit Margin

Net Profit (Income) / Net Sales

Operating Profit Margin

Operating Profit (EBIT) / Net Sales

Return on Assets (ROA)

Net Income / Average Total Assets

Return on Equity (ROE)

Net Income / Average Total Equity

DuPont Formula (3-Component ROE)

ROS * TATO * Financial Leverage = (Net Profit / Sales) * (Sales / Average Assets) * (Average Assets / Average Equity)

Equity Multiplier / Financial Leverage

Average Total Assets / Average Total Equity

Sustainable Growth Rate (SGR)

ROE * (1 - Dividend Payout Ratio)

Economic Profit

Accounting Profit - Implicit Costs (Opportunity Cost of Equity)

Accounting Profit

Revenue - Explicit Costs

Basic Earnings Per Share (BEPS)

(Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding

Diluted Earnings Per Share (DEPS)

(Net Income - Preferred Dividends + Dilutive Adjustments) / (Weighted Average Common Shares + Dilutive Potential Shares)

Book Value Per Share (BVPS)

(Total Common Equity - Preferred Equity) / Common Shares Outstanding

Market-to-Book Ratio

Market Price Per Share / Book Value Per Share

Price-to-Earnings (P/E) Ratio

Market Price Per Share / Earnings Per Share (EPS)

Earnings Yield

Earnings Per Share (EPS) / Market Price Per Share (or 1 / P/E Ratio)

Dividend Payout Ratio

Dividends Per Share / Earnings Per Share

Dividend Yield

Dividends Per Share / Market Price Per Share

Change in Accounting Estimate

Adjust prospectively (affect current and future periods only; do not adjust prior periods). Example: Change in useful life of PPE.

Change in Accounting Principle

Adjust retrospectively (adjust beginning Retained Earnings in the earliest period presented). Example: FIFO to Weighted Average.

Correction of Prior Period Error

Adjust retrospectively (adjust beginning Retained Earnings in the earliest period presented). Example: Mathematical errors.

Earnings Quality

The degree to which earnings are persistent, sustainable, and reflective of core operating performance rather than artificial or nonrecurring items.