河南理工大学2010届本科生毕业论文
firm. If, on the other hand, managers decide to raise funds by selling ownership interests, these funds never have to be paid back. However, such a sale dilutes the control of (and profits accruing to) the current owners.
Whether a financial decision involves investing, financing, or both, it also will be concerned with two specific factors: expected return and risk. And throughout your study of finance, you will be concerned with these factors. Expected return is the difference between potential benefits and potential costs. Risk is the degree of uncertainty associated with these expected returns.
Financial Analysis
Financial analysis is a tool of financial management. It consists of the evaluation of the financial condition and operating performance of a business firm, an industry, or even the economy, and the forecasting of its future condition and performance. It is, in other words, a means for examining risk and expected return. Data for financial analysis may come from other areas within the firm, such as marketing and production departments, from the firm’s own accounting data, or from financial information vendors such as Bloomberg Financial Markets, Moody’s Investors Service, Standard & Poor’s Corporation, Fitch Ratings, and Value Line, as well as from government publications, such as the Federal Reserve Bulletin.
Financial publications such as Business Week, Forbes, Fortune, and the Wall Street Journal also publish financial data (concerning individual firms) and economic data (concerning industries, markets, and economies), much of which is now also available on the Internet. Within the firm, financial analysis may be used not only to evaluate the performance of the firm, but also its divisions or departments and its product lines. Analyses may be performed both periodically and as needed, not only to ensure informed investing and financing decisions, but also as an aid in implementing personnel policies and rewards systems.
Outside the firm, financial analysis may be used to determine the creditworthiness of a new customer, to evaluate the ability of a supplier to hold to the conditions of a long-term contract, and to evaluate the market performance of competitors.
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河南理工大学2010届本科生毕业论文
Firms and investors that do not have the expertise, the time, or the resources to perform financial analysis on their own may purchase analyses from companies that specialize in providing this service. Such companies can provide reports ranging from detailed written analyses to simple creditworthiness ratings for businesses. As an example, Dun & Bradstreet, a financial services firm, evaluates the creditworthiness of many firms, from small local businesses to major corporations. As another example, three companies—Moody’s Investors Service, Standard & Poor’s, and Fitch—evaluate the credit quality of debt obligations issued by corporations and express these views in the form of a rating that is published in the reports available from these three organizations.
A. The Financial Ratios
We need to use financial ratios in analyzing financial statements.—The analysis of comparative financial statements cannot be made really effective unless it takes the form of a study of relationships between items in the statements. It is of little value, for example, to know that, on a given date, the Smith Company has a cash balance of $1oooo. But suppose we know that this balance is only -IV per cent of all current liabilities whereas a year ago cash was 25 per cent of all current liabilities. Since the bankers for the company usually require a cash balance against bank lines, used or unused, of 20 per cent, we can see at once that the firm's cash condition is exhibiting a questionable tendency.
We may make comparisons between items in the comparative financial statements as follows:
1. Between items in the comparative balance sheet
a) Between items in the balance sheet for one date, e.g., cash may be compared with current liabilities
b) Between an item in the balance sheet for one date and the same item in the balance sheet for another date, e.g., cash today may be compared with cash a year ago
c) Of ratios, or mathematical proportions, between two items in the balance sheet for one date and a like ratio in the balance sheet for another date, e.g., the ratio
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河南理工大学2010届本科生毕业论文
of cash to current liabilities today may be compared with a like ratio a year ago and the trend of cash condition noted
2. Between items in the comparative statement of income and expense a) Between items in the statement for a given period
b) Between one item in this period's statement and the same item in last period's statement
c) Of ratios between items in this period's statement and similar ratios in last period's statement
3. Between items in the comparative balance sheet and items in the comparative statement of income and expense
a) Between items in these statements for a given period, e.g., net profit for this year may be calculated as a percentage of net worth for this year
b) Of ratios between items in the two statements for a period of years, e.g., the ratio of net profit to net worth this year may-be compared with like ratios for last year, and for the years preceding that
Our comparative analysis will gain in significance if we take the foregoing comparisons or ratios and; in turn, compare them with:
I.Such data as are absent from the comparative statements but are of importance in judging a concern's financial history and condition, for example, the stage of the business cycle.
2.Similar ratios derived from analysis of the comparative statements of competing concerns or of concerns in similar lines of business What financial ratios are used in analyzing financial statements.- Comparative analysis of comparative financial statements may be expressed by mathematical ratios between the items compared, for example, a concern's cash position may be tested by dividing the item of cash by the total of current liability items and using the quotient to express the result of the test. Each ratio may be expressed in two ways, for example, the ratio of sales to fixed assets may be expressed as the ratio of fixed assets to sales. We shall express each ratio in such a way that increases from period to period will be favorable and decreases unfavorable to financial condition.
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河南理工大学2010届本科生毕业论文
We shall use the following financial ratios in analyzing comparative financial statements:
I. Working-capital ratios
1. The ratio of current assets to current liabilities 2. The ratio of cash to total current liabilities
3. The ratio of cash, salable securities, notes and accounts receivable to total current liabilities
4. The ratio of sales to receivables, i.e., the turnover of receivables
5. The ratio of cost of goods sold to merchandise inventory, i.e., the turn over of inventory
6. The ratio of accounts receivable to notes receivable 7. The ratio of receivables to inventory 8. The ratio of net working capital to inventory 9. The ratio of notes payable to accounts payable IO. The ratio of inventory to accounts payable II. Fixed and intangible capital ratios
1. The ratio of sales to fixed assets, i.e., the turnover of fixed capital 2. The ratio of sales to intangible assets, i.e., the turnover of intangibles 3. The ratio of annual depreciation and obsolescence charges to the assets against which depreciation is written off
4. The ratio of net worth to fixed assets III. Capitalization ratios 1. The ratio of net worth to debt.
2. The ratio of capital stock to total capitalization . 3. The ratio of fixed assets to funded debt IV. Income and expense ratios
1. The ratio of net operating profit to sales 2. The ratio of net operating profit to total capital 3. The ratio of sales to operating costs and expenses 4. The ratio of net profit to sales 5. The ratio of net profit to net worth
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河南理工大学2010届本科生毕业论文
6. The ratio of sales to financial expenses 7. The ratio of borrowed capital to capital costs 8. The ratio of income on investments to investments 9. The ratio of non-operating income to net operating profit 10. The ratio of net operating profit to non-operating expense 11. The ratio of net profit to capital stock
12. The ratio of net profit reinvested to total net profit available for dividends on common stock
13. The ratio of profit available for interest to interest expenses
This classification of financial ratios is permanent not exhaustive. -Other ratios may be used for purposes later indicated. Furthermore, some of the ratios reflect the efficiency with which a business has used its capital while others reflect efficiency in financing capital needs. The ratios of sales to receivables, inventory, fixed and intangible capital; the ratios of net operating profit to total capital and to sales; and the ratios of sales to operating costs and expenses reflect efficiency in the use of capital.' Most of the other ratios reflect financial efficiency.
B. Technique of Financial Statement Analysis
Are the statements adequate in general?-Before attempting comparative analysis of given financial statements we wish to be sure that the statements are reasonably adequate for the purpose. They should, of course, be as complete as possible. They should also be of recent date. If not, their use must be limited to the period which they cover. Conclusions concerning 1923 conditions cannot safely be based upon 1921 statements.
Does the comparative balance sheet reflect a seasonable situation? If so, it is important to know financial conditions at both the high and low points of the season. We must avoid unduly favorable judgment of the business at the low point when assets are very liquid and debt is low, and unduly unfavorable judgment at the high point when assets are less liquid and debt likely to be relatively high.
Does the balance sheet for any date reflect the estimated financial condition after the sale of a proposed new issue of securities? If so, in order to ascertain the
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