Accounting MEMO
Sam1409
AppendixA_Financial_Statements_and_ratios51.pptFinancial Statements
And Ratios
*
- Financial statement analysis.
- Summarize the uses and limitations of analytical measures. – Considerations with Use
- Types of Analysis
- Apply financial statement analysis to assess the solvency of a business.
- Apply financial statement analysis to assess the profitability of a business.
Objectives
*
Financial Statement Analysis
- Process of interpreting and evaluating financial statements by using data and disclosures.
*
Considerations with Use
- Ratios by themselves do not give you much information about the business
- Useful to compare against own historical performance, against competitive data and/or against standards of lending agreements.
- Apples to Apples Comparison
*
Horizontal Analysis
What is horizontal analysis?
*
Horizontal Analysis
It’s an analysis of the percentage increases and decreases of related items in comparative financial statements.
*
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
Assets
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
2006 2005 Amount Percent
Balance Sheet
Increase (Decrease)
*
Assets
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
Horizontal Analysis:
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
2006 2005 Amount Percent
Increase (Decrease)
Difference $17,000
Base year (2005) $533,000
= 3.2%
*
Assets
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
Horizontal Analysis:
Difference $(82,500)
Base year (2005) $177,500
= (46.5%)
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
2006 2005 Amount Percent
Increase (Decrease)
*
Assets
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
Horizontal Analysis:
Difference ?
Base year (2005) ?
= ?
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
2006 2005 Amount Percent
Increase (Decrease)
Okay, go to the next slide and calculate the percentage change for fixed assets.
*
Assets
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%) Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
Lincoln Company
Comparative Balance Sheet
December 31, 2006 and 2005
(5.4%)
2006 2005 Amount Percent
Increase (Decrease)
*
Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8%
Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%
Operating income $ 160,000 $ 135,600 $ 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
$ 168,500 $ 146,600 $ 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
Lincoln Company
Comparative Income Statement
December 31, 2006 and 2005
2006 2005 Amount Percent
Increase (Decrease)
Income Statement
*
Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%
Operating income $ 160,000 $ 135,600 $ 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
$ 168,500 $ 146,600 $ 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
Horizontal Analysis:
Increase amount $296,500
Base year (2005) $1,234,000
= 24.0%
Lincoln Company
Comparative Income Statement
December 31, 2006 and 2005
2006 2005 Amount Percent
Increase (Decrease)
24.0%
*
Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8% Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%
Operating income $ 160,000 $ 135,600 $ 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
$ 168,500 $ 146,600 $ 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
Horizontal Analysis:
Increase amount $298,000
Base year (2005) $1,200,000
= 24.8%
Lincoln Company
Comparative Income Statement
December 31, 2006 and 2005
2006 2005 Amount Percent
Increase (Decrease)
24.8%
*
Vertical Analysis
A percentage analysis can be used to show the relationship of each component to a total within a single statement.
*
The total, or 100% item, on the balance sheet is “total assets.”
Vertical Analysis
*
Lincoln Company
Comparative Balance Sheet
Assets
Current assets $ 550,000 48.3% $ 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1 Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000 27.2% $ 443,000 36.0%
Stockholders’ Equity
Preferred stock, 6%, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
Balance
Sheet
Vertical Analysis:
Current assets $550,000
Total assets $1,139,500
= 48.3%
48.3%
*
Lincoln Company
Comparative Balance Sheet
Assets
Current assets $ 550,000 48.3% $ 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1 Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000 27.2% $ 443,000 36.0%
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
Vertical Analysis:
Current assets $533,000
Total assets $1,230,500
= 43.3%
43.3%
*
Lincoln Company
Comparative Balance Sheet
Assets
Current assets $ 550,000 48.3% $ 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1 Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000 27.2% $ 443,000 36.0%
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
December 31, 2006 December 31, 2005
Amount Percent Amount Percent
*
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
2006 2005
Amount Percent Amount Percent
Net sales is 100.0%
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
Income
Statement
*
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
2006 2005
Amount Percent Amount Percent
Vertical Analysis:
Selling expenses $191,000
Net sales $1,498,000
= 12.8%
12.8%
*
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
2006 2005
Amount Percent Amount Percent
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
*
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
2006 2005
Amount Percent Amount Percent
Lincoln Company
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005
*
Common Size Statements
Vertical analysis with both dollar and percentage amounts is also useful in comparing one company with another or with industry averages. Such comparisons are easier to make with the use of common-size statements in which all items are expressed in percentages.
*
Common-Size Income Statement
*
Competitor Analysis Benchmarking
- Comparison with industry averages
- Use:
- EDGAR - Securities and Exchange Commission
- Hoovers
- Dun and Bradstreet
- Standard and Poor’s Industry Survey
*
Solvency Analysis
Solvency is the ability of a business to meet its financial obligations (debts) as they are due.
Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities.
This ability is normally assessed by examining balance sheet relationships.
Liquidity ratios and debt coverage ratios
*
Current Position Analysis
Current assets $550,000 $533,000
Current liabilities 210,000 243,000
Working capital $340,000 $290,000
Current ratio 2.6 2.2
Working Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
2006 2005
Divide current assets by current liabilities
*
Quick Ratio
Use: To indicate instant debt-paying ability.
2006 2005
Quick assets:
Cash $ 90,500 $ 64,700
Marketable securities 75,000 60,000
Accounts receivable (net) 115,000 120,000
Total $280,500 $244,700
Current liabilities $210,000 $243,000
Quick ratio 1.3 1.0
Current Position Analysis
*
Accounts Receivable Turnover
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average (Total ÷ 2) $ 117,500 $ 130,000
2006 2005
Accounts Receivable Analysis
Net sales on account
Average accounts receivable
*
Use: To assess the efficiency in collecting receivables and in the management of credit.
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accounts receivable turnover 12.7 9.2
2006 2005
Accounts Receivable Analysis
Accounts Receivable Turnover
*
Number of Days’ Sales in Receivables
Accounts receivable (net),
end of year $ 115,000 $ 120,000
Net sales on account $1,498,000 $1,200,000
Average daily sales on
account (sales ÷ 365) $ 4,104 $ 3,288
2006 2005
Accounts Receivable Analysis
365
Accounts Receivable Turnover Ratios
*
Number of Days’ Sales in Receivables
Use: To assess the efficiency in collecting receivables and in the management of credit.
Number of days’ sales in
receivables 28.74 36.67
Accounts receivable turnover
12.7 9.2
Divide by 365
2006 2005
Accounts Receivable Analysis
*
Inventory Turnover
2006 2005
Cost of goods sold $1,043,000 $ 820,000
Inventories:
Beginning of year $ 283,000 $ 311,000
End of year 264,000 283,000
Total $ 547,000 $ 594,000
Average (Total ÷ 2) $ 273,500 $ 297,000
Inventory Analysis
Cost of goods sold
Average inventory
Inventory turnover =
*
Inventory Turnover
Use: To assess the efficiency in the management of inventory.
2006 2005
Cost of goods sold $1,043,000 $ 820,000
Inventories:
Beginning of year $ 283,000 $ 311,000
End of year 264,000 283,000
Total $ 547,000 $ 594,000
Average (Total ÷ 2) $ 273,500 $ 297,000
Inventory turnover 3.8 2.8
Inventory Analysis
*
Use: Show the proportion of assets financed with debt
2006 2005
Total assets $444,500 $470,000
Total liabilities $100,000 $200,000
Debt Ratio .22 .42
Debt Ratio
Long-Term Solvency Ratios
*
Ratio of Liabilities to Stockholders’ Equity
Use: To indicate the margin of safety to creditors.
Total liabilities $310,000 $443,000
Total stockholders’ equity $829,500 $787,500
Ratio of liabilities to
stockholders’ equity 0.37 0.56
Long-Term Creditors
2006 2005
*
Number of Times Interest Charges Earned
2006 2005
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
Long-Term Creditors
Income before
income tax + interest expense
Interest expense
Number of Times Interest Charges Earned
=
*
Number of Times Interest Charges Earned
Use: To assess the risk to debt holders in terms of number of times interest charges were earned.
2006 2005
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
Number of times earned 4.0 4.2
Long-Term Creditors
*
Profitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.
Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.
*
Rate Earned on Total Assets
Use: To assess the profitability of the assets.
It measures the net income produced by total assets
2006 2005
Rate earned on total assets 8.2% 7.3%
Net income $ 91,000 $ 76,500
Plus interest expense 6,000 12,000
Total $ 97,000 $ 88,500
Total assets:
Beginning of year $1,230,500 $1,187,500
End of year 1,139,500 1,230,500
Total $2,370,000 $2,418,000
Average (Total ÷ 2) $1,185,000 $1,209,000
The Common Stockholder
*
Rate Earned on Common Stockholders’ Equity
2006 2005
The Common Stockholder
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
Remainder—common stock $ 82,000 $ 67,500
Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000
End of year 679,500 637,500
Total $1,317,000 $1,237,500
Average (Total ÷ 2) $ 658,500 $ 618,750
*
Use: To assess the profitability of the investment by common stockholders.
2006 2005
Rate earned on common
stockholders’ equity 12.5% 10.9%
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
Remainder—common stock $ 82,000 $ 67,500
Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000
End of year 679,500 637,500
Total $1,317,000 $1,237,500
Average (Total ÷ 2) $ 658,500 $ 618,750
The Common Stockholder
Rate Earned on Common Stockholders’ Equity
*
Earnings Per Share on Common Stock
2006 2005
Earnings per share on common stock $1.64 $1.35
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
Remainder—common stock $ 82,000 $ 67,500
Shares of common stock 50,000 50,000
Use: To assess the profitability of the investment by common stockholders.
The Common Stockholder
*
Price-Earnings Ratio
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
2006 2005
Price-earnings ratio on common stock 25 20
Market price per share of common $41.00 $27.00
Earnings per share on common ÷ 1.64 ÷ 1.35
The Common Stockholder
*
Red Flags
- Movement of Sales, Inventory and Receivables
- Earnings Problems
- Decreased Cash Flow
- Too Much Debt
- Inability to Collect Receivables
- Buildup of Inventories
*
Other Ratios
*
Users of Ratios
- Creditors – liquidity ratios and debt coverage ratios
- Owners – Profitability and turnover ratios
- Investors – Profitability, Payout and Market Share
*
The End
*
