Financial Statement Analysis Gathering Insights from Accounting Data Accounting 215 Winter 2026 Steph Grant Plan for Today Review of last class In the News Aeromexico secures financial future with 1 1 billion bond offering Review characteristics of bonds and the accounting Today we will learn 1 What is financial statement analysis 2 What is ratio analysis 1 2 Optional Writing Assignment Due Thursday 3 12 at 11 59 p m Dissemination of Corporate Disclosures in the 21st Century If you complete the assignment I will reduce the weight of your lowest midterm exam score by 5 moved to your final Can only help you If your final exam is your lowest score then exam weights will remain the default 3 4 In the News Nov 2 2024 Grupo Aerom xico AM M xico City International has made essential moves to strengthen its financial position through a recent 1 1 billion bond issuance This strategy focuses on refinancing existing debt enhancing its liquidity and improving its credit profile Under Barclays the bond issuance is structured into two segments It consists of 500 million in five year bonds maturing in 2029 with a yield of approximately 8 375 and will pay cash interest payments at a rate of 8 250 1 What is the face value of the bonds Coupon rate Term 2 How will Aeromexico account for the bonds on the issuance day What other info do you need to answer that question 3 Comparing the yield and the coupon rates what does that mean for the cash Aeromexico will receive Remember What is Accounting Identifying measuring and communicating financial information to help users make informed decisions How Financial Statement Analysis The process of analyzing a company s financial statements for decision making purposes Three Steps of Financial Statement Analysis FSA Step 1 Step 2 Understanding the Past Forecasting the Future Step 3 Valuation 1 Income Statement 2 Balance Sheet 1 Cost of Capital 2 Valuation Models 1 Information Collection 2 Understanding the Business 3 Accounting Analysis 4 Ratio Analysis 5 Cash Flow Analysis Start learning in Acctg 215 Learn in Acctg 301 and 440 Learn in Acctg 440 5 6 Understand the Business Walmart and LVMH How do they generate revenue What are their strategies Louis Vuitton Mo t Hennessy 7 8 Polls Do You Agree Disagree Not Sure 1 In 2023 Walmart s net income is 15 511 million Is this good 2 In 2023 LVMH s net income is EUR 15 174 million Is this good 3 In 2023 LVMH is less profitable than Walmart Raw numbers are hard to interpret How Do We Compare Performance Common Size Financial Statements Express each line item as a percent of a base amount Income Statement of net revenues Balance Sheet of total assets Financial Ratios Benefits Controls for size and growth when comparing two firms Analyzing a single firm across time Common Size Financial Statements Balance Sheet Express each line as a of Total Assets Cash 3 9 Total Assets 100 9 10 Common Size Financial Statements Balance Sheet Express each line as a of Net Sales Common Size Financial Statements Income Statement Net Sales 100 Gross Margin 24 4 11 12 Common Size Financial Statements Income Statement 13 14 What Are Ratios Used For Across time analysis time series analysis Compares the same firm over time Across firms analysis cross sectional analysis Compares different firms at the same point in time Benchmark comparisons Comparing firms to industry norms Critical that you understand how the industry norms were created garbage in garbage out Common Ratios You will be given these formulas on the exam Formulas Net income Average Stockholders Equity Net Income Average Total Assets Gross Profit Revenues Net Income Revenues Ratio Profitability Ratios Return on Equity ROE Return on Assets ROA Gross Margin Net Profit Margin Turnover and Activity Ratios Liquidity and Solvency Ratios Working Capital Current Ratio Debt to Assets Leverage Asset Turnover Inventory Turnover Average Days to Sell Inventory Average Days to Collect on Receivables Revenues Average Total Assets COGS Average Inventory 365 COGS Average Inventory 365 Net Sales Average Net Accounts Receivables Ending Current Assets Ending Current Liabilities Ending Current Assets Ending Current Liabilities Ending Total Liabilities Ending Total Assets Credit Risk Ratios Financial creditors have a different set of objectives They gain only their contracted interest and principal payments and nothing beyond They just want to know whether the company will make those payments Liquidity company s ability to make cash payments coming due in the short term Solvency having assets that are worth more than liabilities over the long run 15 16 Working Capital Working Capital Ending Current Assets Ending Current Liabilities Excess of firm s current assets over current liabilities Most financially healthy firms have a positive working capital Working capital accounts actively managed to achieve a balance Want WC 0 but not too positive If too positive firm is inefficiently holding non productive short term assets 17 18 Credit Risk Ratios Current Ratio Ending Current Assets Ending Current Liabilities Measure of liquidity Trend of current ratio useful to determine bill paying ability Higher the current ratio number higher the liquidity Debt to Assets Ending Total Liabilities Ending Total Assets Measure of solvency For each dollar of assets how many cents are financed by debt Higher ratio highly leveraged Financial Statement Excerpts Financial Statement Excerpts 19 20 Calculate Liquidity and Solvency Ratios for Walmart versus LVMH Who has Less Credit Risk Debt to Assets Current Ratio Current Assets Current Liabilities 76 877 92 415 0 83 Total Liabilities Total Assets 162 050 252 399 0 64 Walmart does not have enough current assets to cover current liabilities 0 64 of each 1 of Walmart s assets are financed with debt 21 22 Gross Margin Operating Margin Profit Margin Gross Margin Operating Margin Gross Profit Revenue Operating Income Revenue Profit Margin Net Income Revenue Gross Profit Revenue COGS Net Income Revenues Expenses What revenue can the firm retain after accounting for inventory cost COGS What revenue can the firm retain after accounting for all the expenses Operating Income Revenue COGS Operating Expenses D A SG A etc What revenue can the firm retain after accounting for COGS and operating expenses Margins 23 24 Calculate Profitability Ratios for Walmart versus LVMH Who is More Profitable Return on Equity ROE Return on Assets ROA Net Income Average Total Equity How effectively is the