Financial Statement Analysis

Prepared by Muhammad Syukran bin Jamil

Introduction

"When I started out, I thought that CEOs ran businesses with the help of their top executives. What I didn't realize is that a business is a living entity with needs of its own, and unless the leaders pay attention to those needs, the business will fail. So how do you know what those needs are? There's only one way: by looking at the numbers and understanding the relationships between them. They will tell you how good your sales are, whether you can afford to hire a new employee, or if you need to cut operational costs."

Learning Outcomes

  • 1 Describe the purpose and content of an income statement
  • 2 Explain the purpose and content of a balance sheet
  • 3 Explain how viewing the income statement and balance sheets together gives a more complete picture of a firm's financial position
  • 4 Use the income statement and balance sheets to compute a company's cash flows
  • 5 Analyze the financial statements using ratios to see more clearly how decisions affect a firm's financial performance

Transaction Journey

Step 1 of 5: Jan 1, 2011

Initial Investment

Description goes here...

Assets

Cash $0
Accounts Receivable $0
Inventory $0
Total Assets $0

Liabilities & Equity

Liabilities
Accounts Payable $0
Interest Payable $0
Long-term Debt $0
Equity
Common Stock $0
Retained Earnings $0
Total Liab. & Equity $0
Assets ($0) = Liabilities + Equity ($0)

Donahoo Inc.

Income Statement

For the Month Ended Jan 31, 2011

Sales Revenue ($250k + $500k) $750,000
Cost of Goods Sold ($200k + $400k) $600,000
Gross Profit $150,000
Operating Expenses $0
Earnings Before Interest & Taxes (EBIT) $150,000
Interest Expense $5,000
Taxes $0
Net Income $145,000

Donahoo Inc.

Balance Sheet

As of Jan 31, 2011

Assets

Current Assets
Cash
Accounts Receivable
Inventory
Total Assets

Liabilities & Equity

Current Liabilities
Accounts Payable
Interest Payable
Long-Term Liabilities
Long-term Debt
Total Liabilities
Stockholders' Equity
Common Stock
Retained Earnings
Total Equity
Total Liab. & Equity

Financial Ratio Analysis

Measuring Donahoo Inc.'s performance and financial health

Liquidity & Leverage

Current Ratio

Current Assets ÷ Current Liabilities

Measures the company's ability to pay short-term obligations. A ratio above 1.0 indicates good short-term financial health.

Debt-to-Equity

Total Liabilities ÷ Total Equity

Indicates the relative proportion of shareholders' equity and debt used to finance the company's assets.

Profitability

Gross Margin

Gross Profit ÷ Sales

The percentage of revenue exceeding the cost of goods sold.

Net Margin

Net Income ÷ Sales

Shows how much of each dollar earned translates into profit.

Return on Assets (ROA)

Net Income ÷ Total Assets

Indicates how profitable a company is relative to its total assets.

Return on Equity (ROE)

Net Income ÷ Total Equity

Measures the profitability of a business in relation to the equity.