Welcome to ACC10007
Financial Information for Decision Making
Presented by:
Dr John Webster and Alan J Serry
Session 7 – Video 1
Financial Statement Analysis
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We respectfully acknowledge the Wurundjeri People of the Kulin Nation, who
are the Traditional Owners of the land on which Swinburne’s Australian
campuses are located in Melbourne’s east and outer-east, and pay our
respect to their Elders past, present and emerging.
We are honoured to recognise our connection to Wurundjeri Country,
history, culture, and spirituality through these locations, and strive to ensure
that we operate in a manner that respects and honours the Elders and
Ancestors of these lands.
We also respectfully acknowledge Swinburne’s Aboriginal and Torres Strait
Islander staff, students, alumni, partners and visitors.
We also acknowledge and respect the Traditional Owners of lands across
Australia, their Elders, Ancestors, cultures, and heritage, and recognise the
continuing sovereignties of all Aboriginal and Torres Strait Islander Nations.
Acknowledgement of Country
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Learning Objectives
Video 1
1. Describe the nature and purpose of financial statement analysis
2. Define, calculate and interpret the ratios that measure liquidity
Video 2
3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis
Video 3
5. Steps to think about when performing ratio analysis
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The need for financial statement analysis
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The need for financial statement analysis
Read alone, financial statements provide some helpful information
for decision making,
but they are much more useful if compared to other data.
One commonly used tool for comparison is:
Ratio analysis
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The need for financial statement analysis
Ratio Analysis
Expresses the relationship among selected items of
financial statement data.
Data items can be selected from one, or a
combination, of
– income statement
– balance sheet
– statement of cash flows
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The need for financial statement analysis
Interpreting Ratios
§ Interpreting financial information requires the application of
judgement
§ Looking at one ratio in isolation has limited usefulness
§ Need criteria (i.e. benchmarks) against which to judge performance
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The need for financial statement analysis
Having Ratios alone is NOT enough
IF I TOLD YOU SOMEONE RAN THE
100M IN 20 SECONDS
IS THAT GOOD OR BAD?
BAD GOOD
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The need for financial statement analysis
Benchmarks
§ Consider the trend in the ratio over 2 or more years (intra-entity
basis).
§ Compare with one or more major competitors (inter-entity
basis)
§ Consider industry averages (broader economic trends) in the
analysis of each ratio
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The Categories of Financial Statement Analysis
Analysing financial statements involves evaluating four characteristics of
an entity:
Liquidity
Capital
Structure
Profitability
Short term ability of entity to pay its debts by using its
quantity of assets to generate
CASH
Long term ability of entity to pay its debts and survive
(solvency)
RISK
Operating success of the entity
EFFICIENCY
Asset
Efficiency
Efficiency (speed) with which we use our assets to
generate
CASH
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Liquidity Ratios
The survival of the entity depends on its ability to generate cash to pay its debts when they fall
due (its liquidity).
Current ratio (or working capital ratio) indicates:
$ of current assets per $ of current liabilities.
Current assets
Current liabilities
Current ratio = times
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Liquidity Ratios
The survival of the entity depends on its ability to generate cash to pay its debts when they fall
due (its liquidity).
Quick ratio (or acid-test ratio) measures:
$ of current assets available (excluding inventory) to service each $ of current liabilities.
Current assets – Inventory
Current liabilities
Quick ratio = times
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Liquidity Ratios
The survival of the entity depends on its ability to generate cash to pay its debts when they fall
due (its liquidity).
Cash flow ratio indicates an entity’s ability to cover its current obligations from
operating activity cash flows.
Net cash flows from operating activities
Current liabilities
Cash flow ratio = times
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Liquidity Analysis
• Example — analysis of liquidity of JB Hi-Fi Ltd:
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Learning Objectives
Video 1
1. Describe the nature and purpose of financial statement analysis
2. Define, calculate and interpret the ratios that measure liquidity
Video 2
3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis
Video 3
5. Steps to think about when performing ratio analysis
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Thank You
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Welcome to ACC10007
Financial Information for Decision Making
Presented by:
Dr John Webster and Alan J Serry
Session 7 – Video 2
Financial Statement Analysis
17
Learning Objectives
Video 1
1. Describe the nature and purpose of financial statement analysis
2. Define, calculate and interpret the ratios that measure liquidity
Video 2
3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis
Video 3
5. Steps to think about when performing ratio analysis
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Asset Efficiency Ratios
Efficiency (speed) with which we use our assets to generate CASH
Times Inventory Turnover:
It is common to calculate the no. of times on average that inventory turns over (ie. is sold)
during a year.
Cost of sales
Average inventory
Times inventory turnover = times
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Asset Efficiency Ratios
Efficiency (speed) with which we use our assets to generate CASH
Days Inventory:
indicates the average period of time it takes to sell inventory.
365
Times Inventory Turnover
Days Inventory = days
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Asset Efficiency Ratios
Efficiency (speed) with which we use our assets to generate CASH
Times Debtors Turnover:
It is common to calculate the no. of times on average that trade debtors turns over during a
year ie. The number of times, on average, that debtors settle their accounts during the period
Sales Revenue
Average trade debtors
Times debtors turnover = times
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Asset Efficiency Ratios
Efficiency (speed) with which we use our assets to generate CASH
Days Debtors:
indicates the average period of time it takes collect our trade debtors.
365
Times Debtors Turnover
Days Debtors = days
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The Activity Cycle (operating cycle)
Days inventory and days debtors ratios:
Days inventory and days debtors turnovers can be considered together to reflect the
entity’s activity cycle (also referred to as the operating cycle).
Days inventory Days debtors
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Asset Efficiency Analysis
• Example — analysis of asset efficiency of JB Hi-Fi Ltd:
365
6.15 times
Days Inventory =days
5384.1
(891.1 + 859.7)/2
Times Inventory Turnover
=. times 4397.5
(859.7 + 546.4)/2
Times Inventory Turnover
=. times
365
6.25 times
Days Inventory =days
365
123.72 times
Days Debtors =days
6854.3
(56.6 + 54.2)/2
Times Debtors Turnover
=. times 5628.0
(54.2 + 31.5)/2
Times Debtors Turnover
=. times
365
131.34 times
Days Debtors =days
62 days 61 days
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Linking Ratios
Liquidity Ratios Asset Efficiency Ratios
Tells us the size of the pool of
cash producing assets
Tells us the speed with which we can convert our
cash producing assets to cash
small
large
slow
fast
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Learning Objectives
Video 1
1. Describe the nature and purpose of financial statement analysis
2. Define, calculate and interpret the ratios that measure liquidity
Video 2
3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis
Video 3
5. Steps to think about when performing ratio analysis
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Thank You
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Welcome to ACC10007
Financial Information for Decision Making
Presented by:
Dr John Webster and Alan J Serry
Session 7 – Video 3
Financial Statement Analysis
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Learning Objectives
Video 1
1. Describe the nature and purpose of financial statement analysis
2. Define, calculate and interpret the ratios that measure liquidity
Video 2
3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis
Video 3
5. Steps to think about when performing ratio analysis
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Steps to think about when performing
Financial Statement Analysis
Step 1 Analyse individual ratios one at a time against available benchmarks
a Use wording such as “This ratio tells us:
the number of $’s of top line for every $1 of bottom line”
or the number of times, on average, we …..”
b All other things being equal
the bigger this ratio, the better (or worse) because
the more (or less) the Magic Word
What is the magic word?
liquidity
asset efficiency
capital structure
profitability
c Thus A is better of than B because (use figures)
Step 2 LINKS between ratios and ratio categories
Step 3 Limitations
Step 4 Conclusion
Cash (size of pool)
Cash (speed of conversion)
Risk
Efficiency
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Al and John’s DO and DON’T words
A and J’s DON’T WORDS A and J’s DO WORDS
RATIOS
INCREASE / DECREASE (NEVER!!)
GOOD / BAD
BIGGER / SMALLER
HIGHER / LOWER
GREATER / LESS
FASTER / SLOWER
BETTER / WORSE
IMPROVING /
DETERIORATING
IMPROVING /
WORSENING
CURRENT RATIO
CURRENT ASSETS/CURRENT LIABILITIES
COMPANY A 2/1 COMPANY B 6/1
INDUSTRY AVERAGE 10/1
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Learning Objectives
Video 1
1. Describe the nature and purpose of financial statement analysis
2. Define, calculate and interpret the ratios that measure liquidity
Video 2
3. Define, calculate and interpret the ratios that measure asset efficiency
4. Link liquidity and asset efficiency in your analysis
Video 3
5. Steps to think about when performing ratio analysis
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Thank You