Meaning of Financial Analysis and Tools of Financial Analysis Video Lecture | Accountancy Class 12 - Commerce

I'm Larry Walter this is principles of
accounting dot-com chapter 16 this
module considers tools for financial
statement analysis now recognize that
CPAs and the Securities Exchange
Commission and so forth provides
safeguards to ensure the integrity of
reported financial information that's
entirely different than suggesting that
a particular company might be a good
investment in other words a report that
shows that a company has more depth or
than assets and is losing money that can
be reported with great integrity and
those financial statements might be a
filed and accepted with the SEC and
audited by a CPA that doesn't guarantee
that some things are good investments so
someone needs to look at financial
reports when they're considering loaning
money or making an investment in the
company
they need to look at financial
statements very carefully and see what
information is communicated and
throughout the textbook you've seen a
number of ratios that have been
Illustrated I tried to integrate each of
the ratios that are that are typical
into the textbook through the textbook
as those subjects made sense the ratios
are key metrics or key indicators that
can be used to summarize financial
position performance and so forth and
use that for a comparative basis with
other companies what I wish to do next
is review the ratios that you've been
exposed to in your studies to this point
ratios can be divided into certain types
or categories of ratio I've identified
two liquidity ratios liquidity or a
company's cash or near to cash position
its ability to meet obligations as they
come due in Chapter four
we saw the current ratio which is
current assets divided by current
liabilities on the far right are some
calculations of a current ratio for
Emerson corporation in the textbook the
financial statements for Emerson
corporation are presented you might want
to open up or look alongside in your
textbook and see if you can find the
amount for current assets current
liabilities to come up with that ratio
you can pause the video if you need to
another ratio is the quick ratio it's a
measure of liquidity also it's even tied
to a more stringent definition of
liquidity though rather than looking at
total current assets it looks at the
current assets that are very near to
which include cash short-term
receivables and account receivables
divided by the current liabilities and
there again as the value for Emerson
corporation it appears in both cases
that Emerson's corporation liquidity as
expressed to the current ratio and the
quick ratio are both in pretty good
shape another family or category of
ratios are the debt service ratios we
have debt to total assets that was
introduced in chapter 13 it's the
percentage of assets that are financed
by long term and short term debt total
debt divided by total assets a similar
ratio debt the total equity where we
divide total debt by total equity times
interest earned was also introduced in
chapter 13 it is the amount of income
before taxes and interest divided by the
interest charges now you might look at
other textbooks and finance books you'll
find this ratio calculated several
different ways but in the main what it's
an attempt to do is show how many times
you have money available to cover your
fixed interest obligation before you
would run into financial stress
emerson's apparently doing pretty good
at 1,400,000 and income before taxes and
interest their interest expense or
interest charges are a hundred thousand
for the period so they've got their
interest covered at least fourteen times
turnover ratios is another category in
Chapter seven we introduced accounts
receivable turnover ratio it measures
the frequency of the collection cycle
it's used to monitor credit policies its
net credit sales divided by average net
accounts receivable and then from
Chapter eight we introduced the
inventory turnover ratio which is the
cost of goods sold divided by the
average inventory if these ratios are
changing for a particular business that
can be indications of building credit
risk at companies not collecting their
receivables or building inventory
they're not turning their inventory on
on a consistent basis so important to
monitor those particular turnover ratios
we've got certain profitability ratios
net profit on sales was introduced in
Chapter five its net income divided by
net sales often used for comparing one
business to another companies in the
same industry you would probably expect
them to have similar profit rights but
that's not always the case
gross profit margin is gross profit
divided by the nets
of course it compares that intermediate
income number before considering
although your operating expenses a
return on assets is the net income plus
the interest expense it's how much is
being made before interest divided by
the average asset so this company is
generating a 28% return on its invested
average assets and return on equity is
somewhat similar we do need to subtract
preferred dividends so it's the net
income less the portion that needs to be
distributed as preferred dividends
divided by the average common equity and
this immersing appears to be doing quite
well with a 48 percent return on equity
there are certainly other indicators we
looked in chapter 15 in earnings per
share which is the income available to
common shareholders divided by the
weighted average number of shares we
looked at the price earnings ratio which
compares the market price of the stock
to the earnings per share the dividend
yield which are the cash dividends
divided by the market price per share of
the stock dividend payout ratio which is
what proportion of the income is being
paid out in dividends or in other words
dividends divided by earnings and then
the book value per share in common
equity divided by the number of common
shares outstanding beyond just the
ratios the textbook also presents an
illustration for Emerson corporation
using common sized financial statements
these are simply ratios for example for
200 X 5 cash with 17 percent of total
assets receivables are 21 percent of
assets and so it would go that's
interesting and probably a parent where
the numbers come from but also important
is to monitor year to year so for
example a something that jumps out at me
in this illustration is that in 2 X 5
long-term loans were 22 percent of total
liabilities plus equity whereas in the
previous year at 50 percent notice that
equity is now 71 percent of the
organization's financing the prior year
43 percent so it very much quickly at a
glance tells you you know how things
were having and flowing within an
organization in terms of its overall
financial structure we can do a similar
presentation for a common size income
statement