FINANCIAL STATEMENT ANALYSIS

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PROJECT NOTES


Type of Analysis	Financial Statement	Description
Horizontal	Income Statement	When performing horizontal financial statement analysis on the
		income statement, all income statement items are expressed
		in terms of their corresponding revenue or expense category in
		the base year.
		Horizontal income statement analysis allows a user to see how
		well a company is doing in terms of revenues, expenses and
		profits over time.
		The base year for the series is the oldest year, and the change
		in each revenue, expense and profit line in subsequent years is
		expressed as a percentage change from the previous year.
		Ideally, a company would be able to grow its revenue at a
		faster rate than its expenses. If this is the case, then that
		company's profits would increase over time. If a company's
		expenses are increasing faster than its revenues, then
		that company's profits would decline over time.
Horizontal	Balance Sheet	When performing horizontal financial statement analysis on the
		balance sheet, all balance sheet items are expressed
		in terms of their corresponding asset, liability or owner's equity
		item in the base year.
		Horizontal balance sheet analysis allows a user to see how
		well a company is doing in terms of assets, liabilities and
		owner's equity over time.
		The base year for the series is the oldest year, and the change
		in each asset, liability and owner's equity line in subsequent
		years is expressed as a percentage change from the previous
		year. Ideally, a company would be able to grow its assets at a
		faster rate than its liabilities. If this is the case, then that
		company's owners' equity would increase over time. If on the
		other hand a company's liabilities are increasing faster than its
		assets, then that company's owners' equity would decline
		over time.
	Purpose of	The purpose of performing horizontal financial statement
	Horizontal Financial	analysis is to see how well a company is doing over time, and
	Statement Analysis	in relation to its peers (other companies in the same industry),
		over that same period. An industry analyst is looking for
		companies that do better than their competitors over time.
Vertical	Income Statement	When performing vertical financial statement analysis on the
		income statement, all income statement items for a given year
		are expressed as a percentage of net sales.
		Although vertical income statement analysis is performed for a
		given year, it can be performed for more than one year. One
		of the benefits of doing vertical income statement analysis over
		more than one year is that you can see how consistent a
		company is in terms of managing costs and expenses relative
		to sales.
		When performing vertical financial statement analysis on the
		income statement for a single year, an analyst might compare
		a company's cost and expense percentages relative to those
		same percentages for its peers. A company that has better
		control of its costs and expenses relative to its peers
		is likely to be better managed, and make a better investment.
Vertical	Balance Sheet	When performing vertical financial statement analysis on the
		balance sheet, all balance sheet items for a given year
		are expressed as a percentage of total assets.
		Like vertical income statement analysis, vertical balance sheet
		analysis is performed for a given year, but can also be
		performed for more than one year.
		Analysts look a individual companies in an industry to
		determine how a company is managing its assets and liabilities
		relative to its peers. A company that has lowers liabilities
		(as a percentage) relative to its peers, is probably less risky,
		compared to a company that has more liabilities (as a
		percentage of assets).
		The most important asset to look at for any company in any
		industry is how much cash they have relative to total assets,
		expressed as a percentage of total assets. Cash is the most
		important asset for any company to have, because cash can
		buy any other asset or pay any liability.
		Another item to look for when performing vertical financial
		statement analysis on the balance sheet is owners' equity.
		Companies that have more liabilities (as a percentage of assets)
		will have smaller owner's equity (as a percentage of assets)
		because liabilities and owners' equity are on the same side of
		the balance sheet. Paradoxically, this can make a company
		with more debt (liabilities) relative to assets more profitable
		because of the use of leverage. However too much debt
		exposes the company to a greater risk of bankruptcy.
	Purpose of	Vertical financial statement analysis allows a user to see express
	Vertical Financial	all income statement items as a percentage of sales, and
	Statement Analysis	compare companies in the same industry, that might be
		completely different in size, by the same metrics.
		Vertical financial statement analysis allows a user to express all
		balance sheet items as a percentage of assets to compare
		companies in the same industry, that might be
		completely different in size, by the same metrics.
Ratio		As the name would imply, ratio analysis involves (for the most)
		creating ratios by dividing a number in one financial statement
		by another number in the same financial statement, or dividing
		a number in one financial statement, by a number in another
		financial statement. (Working capital calculations typically
		are part of ratio analysis, but working capital is not a ratio.)
	Purpose of	Again, the primary purpose of performing ratio anaysis is to
	Ratio Analysis	allow an analyst to compare a company in an indsutry, to other
		companies in the same industry, regardless of size. (When we
		compare the same ratios of companies of different sizes, in the
		same industry, the size of one company compared to its peers
		is not important.)

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INCOME STATEMENT - 1


Vertical Financial Statement Analysis
	All Figures in Thousands		All Figures in Thousands		All Figures in Thousands
	Year Ending December 31		Year Ending December 31		Year Ending December 31
	2010		2011		2012
	Dollars	Percentage	Dollars	Percentage	Dollars	Percentage
Sales	$1,250,000		$1,500,000		$1,650,000
-Cost of Sales	750,000		950,000		975,000
Gross Profit	$500,000		$550,000		$675,000
Expenses
Business Insurance	15,000		15,000		15,000
Depreciation Expense	5,000		5,000		5,000
Employee Health Insurance	25,000		27,500		30,000
Manager Salaries	100,000		125,000		135,000
Incentive Pay	5,000		15,000		1,875
Interest Expense	35,000		30,000		25,000
Office Rent	50,000		50,000		50,000
Outside Consultants	25,000		50,000		75,000
Travel and Entertainment	12,500		15,000		17,500
Voice and Data	15,000		17,500		20,000
Total Expenses	$287,500		$350,000		$374,375
Pre-Tax Net Income	$212,500		$200,000		$300,625
Taxes (@35.0%)	$74,375		$70,000		$105,219
After-Tax Net Income	$138,125		$130,000		$195,406

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INCOME STATEMENT - 2


Horizontal Financial Statement Analysis
	All Figures in Thousands	All Figures in Thousands		All Figures in Thousands
	Year Ending December 31	Year Ending December 31		Year Ending December 31
	2010	2011		2012
	Dollars	Dollars	Percentage	Dollars	Percentage
Sales	$1,250,000	$1,500,000		$1,650,000
-Cost of Sales	750,000	950,000		975,000
Gross Profit	$500,000	$550,000		$675,000
Expenses
Business Insurance	15,000	15,000		15,000
Depreciation Expense	5,000	5,000		5,000
Employee Health Insurance	25,000	27,500		30,000
Manager Salaries	100,000	125,000		135,000
Incentive Pay	5,000	15,000		1,875
Interest Expense	35,000	30,000		25,000
Office Rent	50,000	50,000		50,000
Outside Consultants	25,000	50,000		75,000
Travel and Entertainment	12,500	15,000		17,500
Voice and Data	15,000	17,500		20,000
Total Expenses	$287,500	$350,000		$374,375
Pre-Tax Net Income	$212,500	$200,000		$300,625
Taxes (@35.0%)	$74,375	$70,000		$105,219
After-Tax Net Income	$138,125	$130,000		$195,406

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BALANCE SHEET - 1


Vertical Financial Statement Analysis
	All Figures in Thousands		All Figures in Thousands		All Figures in Thousands
	December 31, 2010		December 31, 2011		December 31, 2012
	Dollars	Percentage	Dollars	Percentage	Dollars	Percentage
Assets
Current Assets
Cash	100,000		147,500		150,000
Accounts Receivable	125,000		175,000		295,000
Inventory	225,000		235,000		240,000
Total Current Assets	$450,000		$557,500		$685,000
Long Term Assets
Fixtures	50,000		50,000		55,000
Tools and Equipment	125,000		135,000		130,000
Vehicles	155,000		150,000		145,000
Accumulated Depreciation	-35,000		-40,000		-45,000
Total Long Term Assets	$295,000		$295,000		$285,000
Total Assets	$745,000		$852,500		$970,000
Liabilities
Current Liabilities
Accounts Payable	75,000		85,000		95,000
Notes Payable	50,000		47,500		45,000
Total Current Liabilities	$125,000		$132,500		$140,000
Long Term Liabilities
Long Term Debt (Due December 31, 2015)	125,000		120,000		115,000
Long Term Debt (Due December 31, 2020)	0		50,000		44,594
Total Long Term Debt	$125,000		$170,000		$159,594
Total Liabilities	$250,000		$302,500		$299,594
Owner's Equity
Paid in Capital	200,000		200,000		200,000
Beginning Retained Earnings	231,875		295,000		350,000
Net Income	138,125		130,000		195,406
-Dividends to Shareholders	75,000		75,000		75,000
=Retained Earnings	295,000		350,000		470,406
Total Owner's Equity	495,000		550,000		670,406
Total Liabilities and Equity	745,000		852,500		970,000
Out of Balance	0		0		-0

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BALANCE SHEET - 2


Horizontal Financial Statement Analysis
	All Figures in Thousands	All Figures in Thousands		All Figures in Thousands
	December 31, 2010	December 31, 2011		December 31, 2012
	Dollars	Dollars	Percentage	Dollars	Percentage
Assets
Current Assets
Cash	100,000	147,500		150,000
Accounts Receivable	125,000	175,000		295,000
Inventory	225,000	235,000		240,000
Total Current Assets	$450,000	$557,500		$685,000
Long Term Assets
Fixtures	50,000	50,000		55,000
Tools and Equipment	125,000	135,000		130,000
Vehicles	155,000	150,000		145,000
Accumulated Depreciation	-35,000	-40,000		-45,000
Total Long Term Assets	$295,000	$295,000		$285,000
Total Assets	$745,000	$852,500		$970,000
Liabilities
Current Liabilities
Accounts Payable	75,000	85,000		95,000
Notes Payable	50,000	47,500		45,000
Total Current Liabilities	$125,000	$132,500		$140,000
Long Term Liabilities
Long Term Debt (Due December 31, 2015)	125,000	120,000		115,000
Long Term Debt (Due December 31, 2020)	0	50,000		44,594
Total Long Term Debt	$125,000	$170,000		$159,594
Total Liabilities	$250,000	$302,500		$299,594
Owner's Equity
Paid in Capital	200,000	200,000		200,000
Beginning Retained Earnings	231,875	295,000		350,000
Net Income	138,125	130,000		195,406
-Dividends to Shareholders	75,000	75,000		75,000
=Retained Earnings	295,000	350,000		470,406
Total Owner's Equity	495,000	550,000		670,406
Total Liabilities and Equity	745,000	852,500		970,000
Out of Balance	0	0		-0

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Ratio Formulas


	LIQUIDITY RATIOS		The ability of the firm to meet its short-term obligations
	NET WORKING CAPITAL		CURRENT ASSETS - CURRENT LIABILITIES
	CURRENT RATIO		CURRENT ASSETS/CURRENT LIABILITIES
	QUICK RATIO		(CURRENT ASSETS - INVENTORY)/CURRENT LIABILITIES
	ACTIVITY RATIOS		The firm's ability to generate revenues in excess of expenses and earn an adequate rate of return
	INVENTORY TURNOVER		COST OF GOODS SOLD/INVENTORY
	AVERAGE COLLECTION PERIOD		ACCOUNTS RECEIVABLE/AVERAGE SALES PER DAY
	AVERAGE PAYMENT PERIOD		ACCOUNTS PAYABLE/AVERAGE PURCHASES PER DAY
	DAYS IN RECEIVABLES		ACCOUNTS RECEIVABLES/360
	FIXED ASSET TURNOVER		SALES/NET FIXED ASSETS
	TOTAL ASSET TURNOVER		SALES/TOTAL ASSETS
	DEBT RATIOS		The extent to which a firm relies on debt financing
	(DEGREE OF INDEBTEDNESS)
	DEBT RATIO		TOTAL LIABILITIES/TOTAL ASSETS
	DEBT-EQUITY RATIO		LONG TERM DEBT/STOCKHOLDER'S EQUITY
	(ABILITY TO SERVICE DEBT)
	TIMES INTEREST EARNED		EARNINGS BEFORE INTEREST AND TAXES/INTEREST
	FIXED-PAYMENT COVERAGE RATIO		(EARNINGS BEFORE INTEREST AND TAXES + LEASE PAYMENTS)/ INTEREST + LEASE PAYMENTS {(PRINCIPAL + PREFERRED DIVIDENDS) X [1/(1-T)]}
	PROFITABILITY RATIO		The effectiveness of the firm's use of resources
	GROSS PROFIT MARGIN		GROSS PROFITS/SALES
	OPERATING PROFIT MARGIN		OPERATING PROFITS/SALES
	NET PROFIT MARGIN		NET AFTER TAX PROFIT/SALES
	PRETAX NET INCOME TO SALES		PRE TAX PROFIT/SALES
	RETURN ON TOTAL ASSETS		NET AFTER TAX PROFIT/TOTAL ASSETS
	RETURN ON EQUITY		NET AFTER TAX PROFIT/STOCKHOLDER'S EQUITY
	ASSET UTILIZATION
	SALES TO CASH
	SALES TO ACCOUNT RECEIVABLES
	SALES TO INVENTORY
	SALES TO WORKING CAPITAL
	SALES TO FIXED ASSETS
	SALES TO TOTAL ASSETS
	MARKET UTILIZATION
	PRICE TO EARNINGS RATIO
	PRICE TO BOOK VALUE RATIO
	EARNINGS YIELD RATIO
	DIVIDEND YIELD RATIO
	DIVIDEND PAYOUT RATIO

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Ratios


LIQUIDITY RATIOS	2010	2011	2012
NET WORKING CAPITAL
CURRENT RATIO
QUICK RATIO
ACTIVITY RATIOS
INVENTORY TURNOVER
AVERAGE COLLECTION PERIOD
AVERAGE PAYMENT PERIOD
DAYS IN RECEIVABLES
FIXED ASSET TURNOVER
TOTAL ASSET TURNOVER
DEBT RATIOS
(DEGREE OF INDEBTEDNESS)
DEBT RATIO
DEBT-EQUITY RATIO
(ABILITY TO SERVICE DEBT)
TIMES INTEREST EARNED
FIXED-PAYMENT COVERAGE RATIO
PROFITABILITY RATIO
GROSS PROFIT MARGIN
OPERATING PROFIT MARGIN
NET PROFIT MARGIN
PRETAX NET INCOME TO SALES
RETURN ON TOTAL ASSETS
RETURN ON EQUITY
ASSET UTILIZATION
SALES TO CASH
SALES TO ACCOUNT RECEIVABLES
SALES TO INVENTORY
SALES TO WORKING CAPITAL
SALES TO FIXED ASSETS
SALES TO TOTAL ASSETS
MARKET UTILIZATION
PRICE TO EARNINGS RATIO
PRICE TO BOOK VALUE RATIO
EARNINGS YIELD RATIO
DIVIDEND YIELD RATIO
DIVIDEND PAYOUT RATIO

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