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How to Use Ratio Analysis to Compare Companies

Ratio analysis helps investors compare companies' financial performance

When investors wish to compare the financial performance of different companies, a highly valuable tool at their disposal is ratio analysis . Ratio analysis can provide insight into companies' relative financial health and future prospects. It can yield data about profitability, liquidity, earnings, extended viability, and more. The results of such comparisons can mean more powerful decision-making when it comes to selecting companies in which to invest.

It's important that investors understand that a single ratio from just one company can't give them a reliable idea of a company's current performance or potential for future financial success. Use a variety of ratios to analyze financial information from various companies that interest you in order to make investment decisions.

Key Takeaways

• Ratio analysis is a method of analyzing a company's financial statements or line items within financial statements.
• Many ratios are available, but some, like the price-to-earnings ratio and the net profit margin, are used more frequently by investors and analysts.
• The price-to-earnings ratio compares a company's share price to its earnings per share.
• Net profit margin compares net income to revenues.
• It's useful to compare various ratios of different companies over time for a reliable view of current and potential future financial performance.

What Is Ratio Analysis?

Ratio analysis is the analysis of financial information found in a company's financial statements . Such analysis can shed light on financial aspects that include risk, reward (profitability), solvency, and how well a company operates . As a tool for investors, ratio analysis can simplify the process of comparing the financial information of multiple companies.

There are five basic types of financial ratios :

• Profitability ratios (e.g., net profit margin and return on shareholders' equity)
• Liquidity ratios (e.g., working capital)
• Debt or leverage ratios (e.g., debt-to-equity and debt-to-asset ratios)
• Operations ratios (e.g., inventory turnover)
• Market ratios (e.g. earnings per share (EPS))

Some key ratios that investors use are the net profit margin and price-to-earnings (P/E) ratios.

Net Profit Margin

Net profit margin, often referred to simply as profit margin or the bottom line, is a ratio that investors use to compare the profitability of companies within the same sector. It measures the amount of net profit (gross profit minus expenses) earned from sales. It's calculated by dividing a company's net income by its revenues.

Instead of dissecting financial statements to compare how profitable companies are, an investor can use this ratio instead. For example, suppose company ABC and company DEF are in the same sector. They have profit margins of 50% and 10%, respectively. An investor can easily compare the two companies and conclude that ABC converted 50% of its revenues into profits, while DEF only converted 10%.

Another ratio that can help when comparing companies is the company's gross profit divided by its operating expenses . By not deducting taxes, you can compare two businesses that might pay different state tax rates due to their location.

One metric alone will not give a complete and accurate picture of how well a company operates. For example, some analysts believe that the cash flow of a company is more important than the net profit margin ratio.

Price-to-Earnings Ratio (P/E)

Another ratio investors often use is the price-to-earnings ratio. This is a valuation ratio that compares a company's current share price to its earnings per share. It measures how buyers and sellers price the stock per $1 of earnings.

The P/E ratio gives an investor an easy way to compare one company's earnings with those of other companies. Using the companies from the above example, suppose ABC has a P/E ratio of 100, while DEF has a P/E ratio of 10. An investor can conclude that investors are willing to pay $100 per $1 of earnings that ABC generates and only $10 per $1 of earnings that DEF generates.

A high P/E ratio can indicate that a company's stock is overvalued or that investors may be expecting high future earnings growth. A low P/E ratio can indicate that a stock is undervalued or that future earnings are in doubt.

Other Factors to Consider

As mentioned, it's important to take into account a variety of financial data and other factors when doing research on a possible investment.

• The return on assets ratio can help you determine how effectively a company is using its assets to generate profit. The higher the ratio, the more profit each dollar in assets produces. It's calculated by dividing net income by total assets.
• The operating margin ratio uses operating income and revenue to determine the profit a company is getting from its operations. This ratio, along with net profit margin, can give investors a good feel for the profitability of a company as a whole. The operating margin ratio is calculated by dividing net operating income by total revenue.
• The return on equity ratio is another way to gauge profitability. It measures how well a company generates profit using money that's been invested in it (shareholder equity). It's calculated by dividing net profit by total equity.
• Inventory ratios can show how well companies manage their inventories . Inventory turnover and days of inventory on hand are often used. Bear in mind that the inventory method that a company employs can affect the financial data that underlie ratios. So, when comparing companies be sure that they use comparable methods.
• Take note of ratio analysis results over time to spot trends in company performance and to predict potential future financial health.
• Compare companies not just in the same industry, but with similar product types, years in operation, and location, as well. These factors can affect financial results.

What Are the 5 Categories of Ratio Analysis?

Ratio analysis includes these five types of financial ratios: profitability ratios, liquidity ratios, debt or leverage ratios, operations ratios, and market ratios.

How Do You Compare the Ratios of 2 Companies?

Start by choosing companies in the same industry. Narrow this down to companies with similar products, inventory methods, business longevity, and location. Then, compare the same financial ratios for both. Consider looking at a big picture of results over time rather than just one year-end snapshot.

Where Can You Find a Company's Financial Information?

Company information is available in many places, including news and financial publications and websites. However, to be sure of its credibility, look for financial information in audited company annual reports. In addition, the Securities and Exchange Commission (SEC) maintains financial and business information about publicly held companies in the online database called EDGAR . Access is free of charge.

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Financial Ratio Analysis Tutorial With Examples

The Balance Sheet for Financial Ratio Analysis

The income statement for financial ratio analysis, analyzing the liquidity ratios, the current ratio, the quick ratio, analyzing the asset management ratios accounts receivable, receivables turnover, average collection period, inventory, fixed assets, total assets, inventory turnover ratio, fixed asset turnover, total asset turnover, analyzing the debt management ratios, debt-to-asset ratio, times interest earned ratio, fixed charge coverage, analyzing the profitability ratios, net profit margin, return on assets, return on equity, financial ratio analysis of xyz corporation.

While it may be more fun to work on marketing efforts, the financial management of a firm is a crucial aspect of owning a business. Financial ratios help break down complex financial information into key details and relationships. Financial ratio analysis involves studying these ratios to learn about the company's financial health.

Here are a few of the most important financial ratios for business owners to learn, what they tell you about the company's financial statements , and how to use them.

Key Takeaways

• Some of the most important financial ratios for business owners include the current ratio, the inventory turnover ratio, and the debt-to-asset ratio.
• These financial ratios quickly break down the complex information from financial statements.
• Financial ratios are snapshots, so it's important to compare the information to previous periods of data as well as competitors in the industry.

Here is the balance sheet we are going to use for our financial ratio tutorial. You will notice there are two years of data for this company so we can do a time-series (or trend) analysis and see how the firm is doing across time.

Here is the complete income statement for the firm for which we are doing financial ratio analysis. We are doing two years of financial ratio analysis for the firm so we can compare them.

Refer back to the income statement and balance sheet as you work through the tutorial.

The first ratios to use to start getting a financial picture of your firm measure your liquidity, or your ability to convert your current assets to cash quickly. They are two of the 13 ratios. Let's look at the current ratio and the quick (acid-test) ratio .

The current ratio measures how many times you can cover your current liabilities. The quick ratio measures how many times you can cover your current liabilities without selling any inventory and so is a more stringent measure of liquidity.

Remember that we are doing a time series analysis, so we will be calculating the ratios for each year.

Current Ratio : For 2020, take the Total Current Assets and divide them by the Total Current Liabilities. You will have: Current Ratio = 642/543 = 1.18X. This means that the company can pay for its current liabilities 1.18 times over. Practice calculating the current ratio for 2021.

Your answer for 2021 should be 1.31X. A quick analysis of the current ratio will tell you that the company's liquidity has gotten just a little bit better between 2020 and 2021 since it rose from 1.18X to 1.31X.

Quick Ratio : In order to calculate the quick ratio, take the Total Current Ratio for 2020 and subtract out Inventory. Divide the result by Total Current Liabilities. You will have: Quick Ratio = (642-393)/543 = 0.46X. For 2021, the answer is 0.52X.

Like the current ratio, the quick ratio is rising and is a little better in 2021 than in 2020. The firm's liquidity is getting a little better. The problem for this company, however, is that they have to sell inventory in order to pay their short-term liabilities and that is not a good position for any firm to be in. This is true in both 2020 and 2021.

This firm has two sources of current liabilities: accounts payable and notes payable. They have bills that they owe to their suppliers (accounts payable) plus they apparently have a bank loan or a loan from some alternative source of financing. We don't know how often they have to make a payment on the note.

Asset management ratios are the next group of financial ratios that should be analyzed. They tell the business owner how efficiently they employ their assets to generate sales. Assume all sales are on credit.

• Receivables Turnover = Credit Sales/Accounts Receivable = ___ X so:
• Receivables Turnover = 2,311/165 = 14X

A receivables turnover of 14X in 2020 means that all accounts receivable are cleaned up (paid off) 14 times during the 2020 year. For 2021, the receivables turnover is 15.28X. Look at 2020 and 2021 Sales in The Income Statement and Accounts Receivable in The Balance Sheet.

The receivables turnover is rising from 2020 to 2021. We can't tell if this is good or bad. We would really need to know what type of industry this firm is in and get some industry data to compare to.

Customers paying off receivables is, of course, good. But, if the receivables turnover is way above the industry's, then the firm's credit policy may be too restrictive.

Average collection period is also about accounts receivable. It is the number of days, on average, that it takes a firm's customers to pay their credit accounts. Together with receivables turnover, average collection helps the firm develop its credit and collections policy.

• Average Collection Period = Accounts Receivable/Average Daily Credit Sales*
• *To arrive at average daily credit sales, take credit sales and divide by 360
• Average Collection Period = $165/2311/360 = $165/6.42 = 25.7 days
• In 2021, the average collection period is 23.5 days

From 2020 to 2021, the average collection period is dropping. In other words, customers are paying their bills more quickly. Compare that to the receivables turnover ratio. Receivables turnover is rising and the average collection period is falling.

This makes sense because customers are paying their bills faster. The company needs to compare these two ratios to industry averages. In addition, the company should take a look at its credit and collections policy to be sure they are not too restrictive. Take a look at the image above and you can see where the numbers came from on the balance sheets and income statements.

Along with the accounts receivable ratios that we analyzed above, we also have to analyze how efficiently we generate sales with our other assets: inventory, plant and equipment, and our total asset base.

The inventory turnover ratio is one of the most important ratios a business owner can calculate and analyze. If your business sells products as opposed to services, then inventory is an important part of your equation for success.

Inventory Turnover = Sales/Inventory = ______ X

If your inventory turnover is rising, that means you are selling your products faster. If it is falling, you are in danger of holding obsolete inventory. A business owner has to find the optimal inventory turnover ratio where the ratio is not too high and there are no stockouts or too low where there is obsolete money. Both are costly to the firm.

For this company, their inventory turnover ratio for 2020 is:

Inventory Turnover Ratio = Sales/Inventory = 2311/393 = 5.9X

This means that this company completely sells and replaces its inventory 5.9 times every year. In 2021, the inventory turnover ratio is 6.8X. The firm's inventory turnover is rising. This is good in that they are selling more products. The business owner should compare the inventory turnover with the inventory turnover ratio with other firms in the same industry.

The fixed asset turnover ratio analyzes how well a business uses its plant and equipment to generate sales. A business firm does not want to have either too little or too much plant and equipment. For this firm for 2020:

Fixed Asset Turnover = Sales/Fixed Assets = 2311/2731 = 0.85X

For 2021, the fixed asset turnover is 1.00. The fixed asset turnover ratio is dragging down this company. They are not using their plant and equipment efficiently to generate sales as, in both years, fixed asset turnover is very low.

The total asset turnover ratio sums up all the other asset management ratios. If there are problems with any of the other total assets, it will show up here, in the total asset turnover ratio.

Total Asset Turnover = Sales/Total Asset Turnover = Sales/Total Assets = 2311/3373 = 0.69X for 2020. For 2021, the total asset turnover is 0.80. The total asset turnover ratio is somewhat concerning since it was not even 1X for either year.

This means that it was not very efficient. In other words, the total asset base was not very efficient in generating sales for this firm in 2020 or 2021. Why?

It seems to me that most of the problem lies in the firm's fixed assets. They have too much plant and equipment for their level of sales. They either need to find a way to increase their sales or sell off some of their plant and equipment. The fixed asset turnover ratio is dragging down the total asset turnover ratio and the firm's asset management in general.

There are three debt management ratios that help a business owner evaluate the company in light of its asset base and earning power. Those ratios are the debt-to-asset ratio, the times interest earned ratio , and the fixed charge coverage ratios. Other debt management ratios exist, but these help give business owners the first look at the debt position of the company and the prudence of that debt position.

The first debt ratio that is important for the business owner to understand is the debt-to-asset ratio ; in other words, how much of the total asset base of the firm is financed using debt financing. For example. the debt-to-asset ratio for 2020 is:

Total Liabilities/Total Assets = $1074/3373 = 31.8%. This means that 31.8% of the firm's assets are financed with debt. In 2021, the debt ratio is 27.8%. In 2021, the business is using more equity financing than debt financing to operate the company.

We don't know if this is good or bad since we do not know the debt-to-asset ratio for firms in this company's industry. However, we do know that the company has a problem with its fixed asset ratio which may be affecting the debt-to-asset ratio.

The times interest earned ratio tells a company how many times over a firm can pay the interest that it owes. Usually, the more times a firm can pay its interest expense the better. The times interest earned ratio for this firm for 2020 is:

• Times Interest Earned = Earnings Before Interest and Taxes/Interest = 276/141 = 1.96X
• For 2021, the times interest earned ratio is 3.35

The times interest earned ratio is very low in 2020 but better in 2021. This is because the debt-to-asset ratio dropped in 2021.

The fixed charge coverage ratio is very helpful for any company that has any fixed expenses they have to pay. One fixed charge (expense) is interest payments on debt, but that is covered by the times interest earned ratio.

Another fixed charge would be lease payments if the company leases any equipment, a building, land, or anything of that nature. Larger companies have other fixed charges which can be taken into account.

• Fixed charge coverage = Earnings Before Fixed Charges and Taxes/Fixed Charges = _____X

In both 2020 and 2021 for the company in our example, its only fixed charge is interest payments. So, the fixed charge coverage ratio and the times interest earned ratio would be exactly the same for each year for each ratio.

The last group of financial ratios that business owners usually tackle are the profitability ratios as they are the summary ratios of the 13 ratio group. They tell the business firm how they are doing on cost control, efficient use of assets, and debt management, which are three crucial areas of the business.

The net profit margin measures how much each dollar of sales contributes to profit and how much is used to pay expenses. For example, if a company has a net profit margin of 5%, this means that 5 cents of every sales dollar it takes in goes to profit and 95 cents goes to expenses. For 2020, here is XYZ, Inc's net profit margin:

Net Profit Margin = Net Income/Sales Revenue = 89.1/2311 = 3.9%

For 2021, the net profit margin is 6.5%, so there was quite an increase in their net profit margin. You can see that their sales took quite a jump but their cost of goods sold rose. It is the best of both worlds when sales rise and costs fall. Bear in mind, the company can still have problems even if this is the case.

The return on assets ratio, also called return on investment , relates to the firm's asset base and what kind of return they are getting on their investment in their assets. Look at the total asset turnover ratio and the return on asset ratio together. If total asset turnover is low, the return on assets is going to be low because the company is not efficiently using its assets.

Another way to look at the return on assets is in the context of the Dupont method of financial analysis. This method of analysis shows you how to look at the return on assets in the context of both the net profit margin and the total asset turnover ratio.

• To calculate the Return on Assets ratio for XYZ, Inc. for 2020, here's the formula:
• Return on Assets = Net Income/Total Assets = 2.6%

For 2021, the ROA is 5.2%. The increased return on assets in 2021 reflects the increased sales and much higher net income for that year.

The return on equity ratio is the one of most interest to the shareholders or investors in the firm. This ratio tells the business owner and the investors how much income per dollar of their investment the business is earning. This ratio can also be analyzed by using the Dupont method of financial ratio analysis. The company's return on equity for 2020 was:

Return on Equity = Net Income/Shareholder's Equity = 3.9%

For 2021, the return on equity was 7.2%. One reason for the increased return on equity was the increase in net income. When analyzing the return on equity ratio, the business owner also has to take into consideration how much of the firm is financed using debt and how much of the firm is financed using equity.

Now we have a summary of all 13 financial ratios for XYZ Corporation. The first thing that jumps out is the low liquidity of the company. We can look at the current and quick ratios for 2020 and 2021 and see that the liquidity is slightly increasing between 2020 and 2021, but it is still very low.

By looking at the quick ratio for both years, we can see that this company has to sell inventory in order to pay off short-term debt. The company does have short-term debt: accounts payable and notes payable, and we don't know when the notes payable will come due.

Let's move on to the asset management ratios. We can see that the firm's credit and collections policies might be a little restrictive by looking at the high receivable turnover and low average collection period. Customers must pay this company rapidly—perhaps too rapidly. There is nothing particularly remarkable about the inventory turnover ratio, but the fixed asset turnover ratio is remarkable.

The fixed asset turnover ratio measures the company's ability to generate sales from its fixed assets or plant and equipment. This ratio is very low for both 2020 and 2021. This means that XYZ has a lot of plant and equipment that is unproductive.

It is not being used efficiently to generate sales for the company. In addition, the company has to service the plant and equipment, pay for breakdowns, and perhaps pay interest on loans to buy it through long-term debt.

It seems that a very low fixed asset turnover ratio might be a major source of problems for XYZ. The company should sell some of this unproductive plant and equipment, keeping only what is absolutely necessary to produce their product.

The low fixed asset turnover ratio is dragging down total asset turnover. If you follow this analysis on through, you will see that it is also substantially lowering this firm's return on assets profitability ratio.

With this firm, it is hard to analyze the company's debt management ratios without industry data. We don't know if XYZ is a manufacturing firm or a different type of firm.

As a result, analyzing the debt-to-asset ratio is difficult. What we can see, however, is that the company is financed more with shareholder funds (equity) than it is with debt as the debt-to-asset ratio for both years is under 50% and dropping.

This fact means that the return on equity profitability ratio will be lower than if the firm was financed more with debt than with equity. On the other hand, the risk of bankruptcy will also be lower.

Unfortunately, you can see from the times interest earned ratio that the company does not have enough liquidity to be comfortable servicing its debt. The company's costs are high and liquidity is low. Fortunately, the company's net profit margin is increasing because their sales are increasing.

Hopefully, this is a trend that will continue. Return on Assets is impacted negatively due to the low fixed asset turnover ratio and, to some extent, by the receivables ratios. Return on Equity is increasing from 2020 to 2021, which will make investors happy.

As you can see, it is possible to do a cursory financial ratio analysis of a business firm with only 13 financial ratios, even though ratio analysis has inherent limitations.

Wells Fargo. " 5 Ways To Improve Your Liquidity Ratio ."

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.2 Operating Efficiency Ratios ." OpenStax, 2022.

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 2, 4.

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 3, 6.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.4 Solvency Ratios ." OpenStax, 2022.

Nasdaq. " Fixed-Charge Coverage Ratio ."

U.S. Small Business Administration. " Calculate & Analyze Your Financial Ratios ," Pages 3, 5.

Julie Dahlquist, Rainford Knight. " Principles of Finance: 6.6 Profitability Ratios and the DuPont Method ." OpenStax, 2022.

3.2 Comparing and Analyzing Financial Statements

Learning objectives.

• Explain the use of common-size statements in financial analysis.
• Discuss the design of each common-size statement.
• Demonstrate how changes in the balance sheet may be explained by changes on the income and cash flow statements.
• Identify the purposes and uses of ratio analysis.
• Describe the uses of comparing financial statements over time.

Financial statements are valuable summaries of financial activities because they can organize information and make it easier and clearer to see and therefore to understand. Each one—the income statement, cash flow statement, and balance sheet—conveys a different aspect of the financial picture; put together, the picture is pretty complete. The three provide a summary of earning and expenses, of cash flows, and of assets and debts.

Since the three statements offer three different kinds of information, sometimes it is useful to look at each in the context of the others, and to look at specific items in the larger context. This is the purpose of financial statement analysis: creating comparisons and contexts to gain a better understanding of the financial picture.

Common-Size Statements

On common-size statements Financial statements where each item’s value is listed as a percentage of or in relation to another value. , each item’s value is listed as a percentage of another. This compares items, showing their relative size and their relative significance (see Figure 3.11 "Common Common-Size Statements" ). On the income statement, each income and expense may be listed as a percentage of the total income. This shows the contribution of each kind of income to the total, and thus the diversification of income. It shows the burden of each expense on total income or how much income is needed to support each expense.

On the cash flow statement, each cash flow can be listed as a percentage of total positive cash flows, again showing the relative significance and diversification of the sources of cash, and the relative size of the burden of each use of cash.

On the balance sheet, each item is listed as a percentage of total assets, showing the relative significance and diversification of assets, and highlighting the use of debt as financing for the assets.

Figure 3.11 Common Common-Size Statements

Common-Size Income Statement

Alice can look at a common-size income statement An income statement that lists each kind of revenue and each expense as a percentage of total revenues. by looking at her expenses as a percentage of her income and comparing the size of each expense to a common denominator: her income. This shows her how much of her income, proportionately, is used up for each expense ( Figure 3.12 "Alice’s Common-Size Income Statement for the Year 2009" ).

Figure 3.12 Alice’s Common-Size Income Statement for the Year 2009

Seeing the common-size statement as a pie chart makes the relative size of the slices even clearer ( Figure 3.13 "Pie Chart of Alice’s Common-Size Income Statement for the Year 2009" ).

Figure 3.13 Pie Chart of Alice’s Common-Size Income Statement for the Year 2009

The biggest discretionary use of Alice’s wages is her rent expense, followed by food, car expenses, and entertainment. Her income tax expense is a big use of her wages, but it is unavoidable or nondiscretionary. As Supreme Court Justice Oliver Wendell Holmes, Jr., said, “Taxes are what we pay for a civilized society.” U.S. Department of the Treasury, http://www.treas.gov/education/faq/taxes/taxes-society.shtml (accessed January 19, 2009). Ranking expenses by size offers interesting insight into lifestyle choices. It is also valuable in framing financial decisions, pointing out which expenses have the largest impact on income and thus on the resources for making financial decisions. If Alice wanted more discretionary income to make more or different choices, she can easily see that reducing rent expense would have the most impact on freeing up some of her wages for another use.

Common-Size Cash Flow Statement

Looking at Alice’s negative cash flows as percentages of her positive cash flow (on the cash flow statement), or the uses of cash as percentages of the sources of cash, creates the common-size cash flows A cash flow statement that lists each cash flow as a percentage of total positive cash flows. . As with the income statement, this gives Alice a clearer and more immediate view of the largest uses of her cash ( Figure 3.14 "Alice’s Common-Size Cash Flow Statement for the Year 2009" and Figure 3.15 "Pie Chart of Alice’s Common-Size Cash Flow Statement" ).

Figure 3.14 Alice’s Common-Size Cash Flow Statement for the Year 2009

Figure 3.15 Pie Chart of Alice’s Common-Size Cash Flow Statement

Again, rent is the biggest discretionary use of cash for living expenses, but debts demand the most significant portion of cash flows. Repayments and interest together are 30 percent of Alice’s cash—as much as she pays for rent and food. Eliminating those debt payments would create substantial liquidity for Alice.

Common-Size Balance Sheet

On the balance sheet, looking at each item as a percentage of total assets allows for measuring how much of the assets’ value is obligated to cover each debt, or how much of the assets’ value is claimed by each debt ( Figure 3.16 "Alice’s Common-Size Balance Sheet, December 31, 2009" ).

Figure 3.16 Alice’s Common-Size Balance Sheet, December 31, 2009

This common-size balance sheet A balance sheet that lists each asset, liability, and equity as a percentage of total assets. allows “over-sized” items to be more obvious. For example, it is immediately obvious that Alice’s student loan dwarfs her assets’ value and creates her negative net worth.

Common-size statements allow you to look at the size of each item relative to a common denominator: total income on the income statement, total positive cash flow on the cash flow statement, or total assets on the balance sheet. The relative size of the items helps you spot anything that seems disproportionately large or small. The common-size analysis is also useful for comparing the diversification of items on the financial statement—the diversification of incomes on the income statement, cash flows on the cash flow statement, and assets and liabilities on the balance sheet. Diversification reduces risk, so you want to diversify the sources of income and assets you can use to create value ( Figure 3.17 "Pie Chart of Alice’s Common-Size Balance Sheet: The Assets" ).

Figure 3.17 Pie Chart of Alice’s Common-Size Balance Sheet: The Assets

For example, Alice has only two assets, and one—her car—provides 95 percent of her assets’ value. If something happened to her car, her assets would lose 95 percent of their value. Her asset value would be less exposed to risk if she had asset value from other assets to diversify the value invested in her car.

Likewise, both her income and her positive cash flows come from only one source, her paycheck. Because her positive net earnings and positive net cash flows depend on this one source, she is exposed to risk, which she could decrease by diversifying her sources of income. She could diversify by adding earned income—taking on a second job, for example—or by creating investment income. In order to create investment income, however, she needs to have a surplus of liquidity, or cash, to invest. Alice has run head first into Adam Smith’s “great difficulty” Adam Smith, The Wealth of Nations (New York: The Modern Library, 2000), Book I, Chapter ix. (that it takes some money to make money; see Chapter 2 "Basic Ideas of Finance" ).

Relating the Financial Statements

Common-size statements put the details of the financial statements in clear relief relative to a common factor for each statement, but each financial statement is also related to the others. Each is a piece of a larger picture, and as important as it is to see each piece, it is also important to see that larger picture. To make sound financial decisions, you need to be able to foresee the consequences of a decision, to understand how a decision may affect the different aspects of the bigger picture.

For example, what happens in the income statement and cash flow statements is reflected on the balance sheet because the earnings and expenses and the other cash flows affect the asset values, and the values of debts, and thus the net worth. Cash may be used to purchase assets, so a negative cash flow may increase assets. Cash may be used to pay off debt, so a negative cash flow may decrease liabilities. Cash may be received when an asset is sold, so a decrease to assets may create positive cash flow. Cash may be received when money is borrowed, so an increase in liabilities may create a positive cash flow.

There are many other possible scenarios and transactions, but you can begin to see that the balance sheet at the end of a period is changed from what it was at the beginning of the period by what happens during the period, and what happens during the period is shown on the income statement and the cash flow statement. So, as shown in the figure, the income statement and cash flow information, related to each other, also relate the balance sheet at the end of the period to the balance sheet at the beginning of the period ( Figure 3.18 "Relationships Among Financial Statements" ).

Figure 3.18 Relationships Among Financial Statements

The significance of these relationships becomes even more important when evaluating alternatives for financial decisions. When you understand how the statements are related, you can use that understanding to project the effects of your choices on different aspects of your financial reality and see the consequences of your decisions.

Ratio Analysis

Creating ratios is another way to see the numbers in relation to each other. Any ratio shows the relative size of the two items compared, just as a fraction compares the numerator to the denominator or a percentage compares a part to the whole. The percentages on the common-size statements are ratios, although they only compare items within a financial statement. Ratio analysis is used to make comparisons across statements. For example, you can see how much debt you have just by looking at your total liabilities, but how can you tell if you can afford the debt you have? That depends on the income you have to meet your interest and repayment obligations, or the assets you could use (sell) to meet those obligations. Ratio analysis A way of comparing amounts by creating ratios or fractions that compare the amount in the numerator to the amount in the denominator. can give you the answer.

The financial ratios Ratios used to understand financial statement amounts relative to each other. you use depend on the perspective you need or the question(s) you need answered. Some of the more common ratios (and questions) are presented in the following chart ( Figure 3.19 "Common Personal Financial Ratios" ).

Figure 3.19 Common Personal Financial Ratios

These ratios all get “better” or show improvement as they get bigger, with two exceptions: debt to assets and total debt. Those two ratios measure levels of debt, and the smaller the ratio, the less the debt. Ideally, the two debt ratios would be less than one. If your debt-to-assets ratio is greater than one, then debt is greater than assets, and you are bankrupt. If the total debt ratio is greater than one, then debt is greater than net worth, and you “own” less of your assets’ value than your creditors do.

Some ratios will naturally be less than one, but the bigger they are, the better. For example, net income margin will always be less than one because net income will always be less than total income (net income = total income − expenses). The larger that ratio is and the fewer expenses that are taken away from the total income, the better.

Some ratios should be greater than one, and the bigger they are, the better. For example, the interest coverage ratio should be greater than one, because you should have more income to cover interest expenses than you have interest expenses, and the more you have, the better. Figure 3.20 "Results of Ratio Analysis" suggests what to look for in the results of your ratio analyses.

Figure 3.20 Results of Ratio Analysis

While you may have a pretty good “feel” for your situation just by paying the bills and living your life, it so often helps to have the numbers in front of you. Here is Alice’s ratio analysis for 2009 ( Figure 3.21 "Alice’s Ratio Analysis, 2009" ).

Figure 3.21 Alice’s Ratio Analysis, 2009

The ratios that involve net worth—return-on-net-worth and total debt—are negative for Alice, because she has negative net worth, as her debts are larger than her assets. She can see how much larger her debt is than her assets by looking at her debt-to-assets ratio. Although she has a lot of debt (relative to assets and to net worth), she can earn enough income to cover its cost or interest expense, as shown by the interest coverage ratio.

Alice is earning well. Her income is larger than her assets. She is able to live efficiently. Her net income is a healthy 13.53 percent of her total income (net income margin), which means that her expenses are only 86.47 percent of it, but her cash flows are much less (cash flow to income), meaning that a significant portion of earnings is used up in making investments or, in Alice’s case, debt repayments. In fact, her debt repayments don’t leave her with much free cash flow; that is, cash flow not used up on living expenses or debts.

Looking at the ratios, it is even more apparent how much—and how subtle—a burden Alice’s debt is. In addition to giving her negative net worth, it keeps her from increasing her assets and creating positive net worth—and potentially more income—by obligating her to use up her cash flows. Debt repayment keeps her from being able to invest.

Currently, Alice can afford the interest and the repayments. Her debt does not keep her from living her life, but it does limit her choices, which in turn restricts her decisions and future possibilities.

Comparisons over Time

Another useful way to compare financial statements is to look at how the situation has changed over time. Comparisons over time provide insights into the effects of past financial decisions and changes in circumstance. That insight can guide you in making future financial decisions, particularly in foreseeing the potential costs or benefits of a choice. Looking backward can be very helpful in looking forward.

Fast-forward ten years: Alice is now in her early thirties. Her career has progressed, and her income has grown. She has paid off her student loan and has begun to save for retirement and perhaps a down payment on a house.

A comparison of Alice’s financial statements shows the change over the decade, both in absolute dollar amounts and as a percentage (see Figure 3.22 "Alice’s Income Statements: Comparison Over Time" , Figure 3.23 "Alice’s Cash Flow Statements: Comparison Over Time" , and Figure 3.24 "Alice’s Balance Sheets: Comparison Over Time" ). For the sake of simplicity, this example assumes that neither inflation nor deflation have significantly affected currency values during this period.

Figure 3.22 Alice’s Income Statements: Comparison Over Time

Figure 3.23 Alice’s Cash Flow Statements: Comparison Over Time

Figure 3.24 Alice’s Balance Sheets: Comparison Over Time

Starting with the income statement, Alice’s income has increased. Her income tax withholding and deductions have also increased, but she still has higher disposable income (take-home pay). Many of her living expenses have remained consistent; rent and entertainment have increased. Interest expense on her car loan has increased, but since she has paid off her student loan, that interest expense has been eliminated, so her total interest expense has decreased. Overall, her net income, or personal profit, what she clears after covering her living expenses, has almost doubled.

Her cash flows have also improved. Operating cash flows, like net income, have almost doubled—due primarily to eliminating the student loan interest payment. The improved cash flow allowed her to make a down payment on a new car, invest in her 401(k), make the payments on her car loan, and still increase her net cash flow by a factor of ten.

Alice’s balance sheet is most telling about the changes in her life, especially her now positive net worth. She has more assets. She has begun saving for retirement and has more liquidity, distributed in her checking, savings, and money market accounts. Since she has less debt, having paid off her student loan, she now has positive net worth.

Comparing the relative results of the common-size statements provides an even deeper view of the relative changes in Alice’s situation ( Figure 3.25 "Comparing Alice’s Common-Size Statements for 2009 and 2019: Income Statements" , Figure 3.26 "Comparing Alice’s Common-Size Statements for 2009 and 2019: Cash Flow Statements" , and Figure 3.27 "Comparing Alice’s Common-Size Statements for 2009 and 2019: Balance Sheets" ).

Figure 3.25 Comparing Alice’s Common-Size Statements for 2009 and 2019: Income Statements

Figure 3.26 Comparing Alice’s Common-Size Statements for 2009 and 2019: Cash Flow Statements

Figure 3.27 Comparing Alice’s Common-Size Statements for 2009 and 2019: Balance Sheets

Although income taxes and rent have increased as a percentage of income, living expenses have declined, showing real progress for Alice in raising her standard of living: it now costs her less of her income to sustain herself. Interest expense has decreased substantially as a portion of income, resulting in a net income or personal profit that is not only larger, but is larger relative to income. More of her income is profit, left for other discretionary uses.

The change in operating cash flows confirms this. Although her investing activities now represent a significant use of cash, her need to use cash in financing activities—debt repayment—is so much less that her net cash flow has increased substantially. The cash that used to have to go toward supporting debt obligations now goes toward building an asset base, some of which (the 401(k)) may provide income in the future.

Changes in the balance sheet show a much more diversified and therefore much less risky asset base. Although almost half of Alice’s assets are restricted for a specific purpose, such as her 401(k) and Individual Retirement Account (IRA) accounts, she still has significantly more liquidity and more liquid assets. Debt has fallen from ten times the assets’ value to one-tenth of it, creating some ownership for Alice.

Finally, Alice can compare her ratios over time ( Figure 3.28 "Ratio Analysis Comparison" ).

Figure 3.28 Ratio Analysis Comparison

Most immediately, her net worth is now positive, and so are the return-on-net-worth and the total debt ratios. As her debt has become less significant, her ability to afford it has improved (to pay for its interest and repayment). Both her interest coverage and free cash flow ratios show large increases. Since her net income margin (and income) has grown, the only reason her return-on-asset ratio has decreased is because her assets have grown even faster than her income.

By analyzing over time, you can spot trends that may be happening too slowly or too subtly for you to notice in daily living, but which may become significant over time. You would want to keep a closer eye on your finances than Alice does, however, and review your situation at least every year.

Key Takeaways

• Each financial statement shows a piece of the larger picture. Financial statement analysis puts the financial statement information in context and so in sharper focus.
• Common-size statements show the size of each item relative to a common denominator.
• On the income statement, each income and expense is shown as a percentage of total income.
• On the cash flow statement, each cash flow is shown as a percentage of total positive cash flow.
• On the balance sheet, each asset, liability, and net worth is shown as a percentage of total assets.
• The income and cash flow statements explain the changes in the balance sheet over time.
• Ratio analysis is a way of creating a context by comparing items from different statements.
• Comparisons made over time can demonstrate the effects of past decisions to better understand the significance of future decisions.
• Financial statements should be compared at least annually.
• Prepare common-size statements for your income statement, cash flow statement, and balance sheet. What do your common-size statements reveal about your financial situation? How will your common-size statements influence your personal financial planning?
• Calculate your debt-to-income ratio and other ratios using the financial tools at Biztech ( http://www.usnews.com/usnews/biztech/tools/modebtratio.htm ). According to the calculation, are you carrying a healthy debt load? Why, or why not? If not, what can you do to improve your situation?
• Read a PDF document of a 2006 article by Charles Farrell in the Financial Planning Association Journal on “Personal Financial Ratios: An Elegant Roadmap to Financial Health and Retirement” at http://www.slideshare.net/Ellena98/fpa-journal-personal-financial-ratios-an-elegant-road-map . Farrell focuses on three ratios: savings to income, debt to income, and savings rate to income. Where, how, and why might these ratios appear on the chart of Common Personal Financial Ratios in this chapter?
• If you increased your income and assets and reduced your expenses and debt, your personal wealth and liquidity would grow. In My Notes or in your personal financial journal, outline a general plan for how you would use or allocate your growing wealth to further reduce your expenses and debt, to acquire more assets or improve your standard of living, and to further increase your real or potential income.

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Comparing Financial & Managerial Accounting

Managerial and financial accounting are used by every business, and there are important differences in their  reporting functions. Those differences are detailed in the table below.

Users of Reports

The information generated from the reports of financial accountants tends to be used primarily by  external users , including the creditors, tax authorities and regulators, investors, customers, competitors, and others outside the company, who rely on the financial statements and annual reports to access information about a company in order to make more informed decisions. Since these external people do not have access to the documents and records used to produce the financial statements, they depend on Generally Applied Accounting Principles (GAAP). These outside users also depend greatly on the preparation of audits that are done by public accounting firms, under the guidelines and standards of either the American Institute of Certified Public Accountants (AICPA), the US Securities and Exchange Commission (SEC), or the Public Company Accounting Oversight Board (PCAOB).

Managerial accounting information is gathered and reported for a more specific purpose for  internal users , those inside the company or organization who are responsible for managing the company’s business interests and executing decisions. These internal users may include management at all levels in all departments, owners, and other employees. For example, in the budget development process, a company such as  Tesla  may want to project the costs of producing a new line of automobiles. The managerial accountants could create a budget to estimate the costs, such as parts and labor, and after the manufacturing process has begun, they can measure the actual costs, thus determining if they are over or under their budgeted amounts. Although outside parties might be interested in this information, companies like  Tesla ,  Microsoft , and  Boeing spend significant amounts of time and money to keep their proprietary information secret. Therefore, these internal budget reports are only available to the appropriate users. While you can find a cost of goods sold schedule in the financial statements of publicly traded companies, it is difficult for outside parties to break it down in order to identify the individual costs of products and services.

Types of Reports

Financial accounting information is communicated through  reporting , such as the financial statements. The financial statements typically include a balance sheet, income statement, cash flow statement, retained earnings statement, and footnotes. Managerial accounting information is communicated through reporting as well. However, the reports are more detailed and more specific and can be customized. One example of a managerial accounting report is a budget analysis (variance report) as shown in the table below. Other reports can include cost of goods manufactured, job order cost sheets, and production reports. Since managerial accounting is not governed by GAAP or other constraints, it is important for the creator of the reports to disclose all assumptions used to make the report. Since the reports are used internally, and not typically released to the general public, the presentation of any assumptions does not have to follow any industry-wide guidelines. Each organization is free to structure its reports in the format that organizes its information in the best way for it.

This type of analysis helps management to evaluate how effective they were at carrying out the plans and meeting the goals of the corporation. You will see many examples of reports and analyses that can be used as tools to help management make decisions.

Frequency of Reports

The financial statements are typically generated quarterly and annually, although some entities also require monthly statements. Much work is involved in creating the financial statements, and any adjustments to accounts must be made before the statements can be produced. A physical count inventory must be done to adjust the inventory and cost of goods sold accounts, depreciation must be calculated and entered, all prepaid asset accounts must be reviewed for adjustments, and so forth. The annual reports are not finalized for several weeks after the year-end, because they are based on historical data; for a company that is traded on one of the major or regional stock exchanges, it must have an audit of the financial statements conducted by an independent certified public accountant. This audit cannot be completed until after the end of the company’s fiscal year, because the auditors need access to all of the information for the company for that year. For companies that are privately held, an audit is not normally required. However, potential lenders might require an independent audit.

Conversely, managers can quickly attain managerial accounting information. No external, independent auditors are needed, and it is not necessary to wait until the year-end. Projections and estimates are adequate. Managers should understand that in order to obtain information quickly, they must accept less precision in the reporting. While there are several reports that are created on a regular basis (e.g., budgets and variance reports), many management reports are produced on an as-needed basis.

Purpose of Reports

The general purpose of financial statement  reporting  is to provide information about the results of operations, financial position, and cash flows of an organization. This data is useful to a wide range of users in order to make economic decisions. The purpose of the reporting done by management accountants is more specific to internal users. Management accountants make available the information that could assist companies in increasing their performance and profitability. Unlike financial reports, management reporting centers on components of the business. By dividing the business into smaller sections, a company is able to get into the details and analyze the smallest segments of the business.

An understanding of managerial accounting will assist anyone in the business world in determining and understanding product costs, analyzing break-even points, and budgeting for expenses and future growth (which will be covered in other parts of this course). As a manager, chief executive officer, or owner, you need to have information available at hand to answer these types of questions:

• Are my profits higher this quarter over last quarter?
• Do I have enough cash flow to pay my employees?
• Are my jobs priced correctly?
• Are my products priced correctly in order for me to make the profit I need to make?
• Who are my most productive and least productive employees?

In the world of business, information is power; stated simply, the more you know, typically, the better your decisions can be. Managerial accounting delivers data-driven feedback for these decisions that can assist in improving decision-making over the long term. Business managers can leverage this powerful tool in order to make their businesses more successful, because management accounting adds value to common business decision-making. All of this readily available information can lead to great improvements for any business.

Focus of Reports

Because financial accounting typically focuses on the company as a whole, external users of this information choose to invest or loan money to the entire company, not to a department or division within the company. Therefore, the global focus of financial accounting is understandable.

However, the focus of management accounting is typically different. Managerial reporting is more focused on divisions, departments, or any component of a business, down to individuals. The mid-level and lower-level managers are typically responsible for smaller subsets within the company.

Managers need accounting reports that deal specifically with their division and their specific activities. For instance, production managers are responsible for their specific area and the results within their division. Accordingly, these production managers need information about results achieved in their division, as well as individual results of departments within the division. The company can be broken into segments based on what managers need—for example, geographic location, product line, customer demographics (e.g., gender, age, race), or any of a variety of other divisions.

Nature of Reports

Both financial reports and managerial reports use  monetary accounting information , or information relating to money or currency. Financial reports use data from the accounting system that is gathered from the reporting of transactions in the form of journal entries and then aggregated into financial statements. This information is monetary in nature. Managerial accounting uses some of the same financial information as financial accounting, but much of that information will be broken down to a more detailed level. For example, in financial reporting, net sales are needed for the income statement. In managerial accounting, the quantity and dollar value of the sales of each product are likely more useful. In addition, managerial accounting uses a significant amount of  nonmonetary accounting information , such as quantity of material, number of employees, number of hours worked, and so forth, which does not relate to money or currency.

Verification of Reports

Financial reports rely on structure. They are generated using accepted principles that are enforced through a vast set of rules and guidelines, also known as GAAP. As mentioned previously, companies that are publicly traded are required to have their financial statements audited on an annual basis, and companies that are not publicly traded also may be required to have their financial statements audited by their creditors. The information generated by the management accountants is intended for internal use by the company’s divisions, departments, or both. There are no rules, guidelines, or principles to follow. Managerial accounting is much more flexible, so the design of the managerial accounting system is difficult to standardize, and standardization is unnecessary. It depends on the nature of the industry. Different companies (even different managers within the same company) require different information. The most important issue is whether the reporting is useful for the planning, controlling, and evaluation purposes.

Daryn’s Dairy

Suppose you have been hired by Daryn’s Dairy as a market analyst. Your first assignment is to evaluate the sales of various standard and specialty ice creams within the Midwest region where Daryn’s Dairy operates. You also need to determine the best-selling flavors of ice cream in other regions of the United States as well as the selling patterns of the flavors. For example, do some flavors sell better than others at different times of the year, or are some top sellers sold as limited-edition flavors? Remember that one of the strategic goals of the company is to increase market share, and the first step in meeting this goal is to sell their product in 10 percent more stores within their current market, so your research will help upper-level management carry out the company’s goals. Where would you gather the information? What type of information would you need? Where would you find this information? How would the company determine the impact of this type of change on the business? If implemented, what information would you need to assess the success of the plan?

Answers will vary. Sample answer:

Where would you gather the information? Where would you find this information?

• Current company sales information would be obtained from internal company reports and records that detail the sale of each type of ice cream including volume, cost, price, and profit per flavor.
• Sales of ice cream from other companies may be more difficult to obtain, but the footnotes and supplemental information to the annual reports of those companies being analyzed, as well as industry trade journals, would likely be good sources of information.

What types of information would you need?

• Some of the types of information that would be needed would be the volume of sales of each flavor (number of gallons), how long each flavor has been sold, whether seasonal or limited-edition flavors are produced and sold only once or are on a rotating basis, the size of the market being examined (number of households), whether the other companies sell similar products (organic, all natural, etc.), the median income of consumers or other information to assess the consumers’ willingness to pay for organic products, and so forth.

How would Daryn’s Dairy determine the impact of this type of change on the business?

• Management would evaluate the cost to expand into new stores in their current market compared to the potential revenues from selling their products in those stores in order to assess the ability of the potential expansion to generate a profit for the company.

If implemented, what information would Daryn’s Dairy need to assess the success of the plan?

• Management would measure the profitability of selling any new products, expanding into new stores in their current market, or both to determine if the implementation of the plan was a success. If the plan is a success and the company is generating profits, the company will continue to figure out ways to improve efficiency and profitability. If the plan is not a success, the company will determine the reasons (cost to produce too high, sales price too high, volume too low, etc.) and make a new plan.

Media Attributions

• Assorted Ice Creams © jeshoots is licensed under a CC0 (Creative Commons Zero) license

Financial and Managerial Accounting Copyright © 2021 by Lolita Paff is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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BUS202: Principles of Finance

Unit 2 Financial Statement Analysis Exercises

Complete these exercises and problems and then check your work.

The income statement captures all activity related to revenues and expenses over a particular time period. For instance, the quarterly income statement includes all revenue and expense items for that quarter. The beginning of the quarter is treated the same as the end of the quarter. The same applies for annual income statements. However, balance sheets represent a firm's assets, liabilities, and owners' equity at a particular point in time. The quarterly balance sheet only reflects the last day of that quarter and the annual balance sheet only reflects the last day of the year. As such, the balance sheet is more open to seasonality issues and short-term fluctuations. For instance, if the balance sheet is prepared 1 day prior to a large cash payment the cash account will appear artificially large. On the other hand, if it is prepared 1 day after the payment the cash account will appear artificially small.

The firm has $60 million in total liabilities.

A = L + OE $100M = L + $40M $60M = L

Depreciation is a noncash expense. While it lowers net income, the firm is not actually paying anything for depreciation so it has no impact on cash flows (ignoring taxes…when considering taxes, depreciation lowers net income but increases cash flows as less cash is paid in taxes). The cash flow impact of an asset purchase from a finance perspective occurs when the asset is purchased. Spreading the cost equally over the assets useful life ignores the time value of money and understates the true cost of the purchase. A few other issues that may create a difference between cash flows and earnings include (this is not a complete list) –

• Revenue recognition
• Inventory accounting method
• Prepaid expenses
• Accounts Payable/Receivable

While many people use ratio analysis, the primary parties interested are

• Competitors
• Stockholders (and potential stockholders)
• Long-Term Creditors
• Short-Term Creditors

When analyzing  Liquidity Ratios , the most interested parties are management and short-term creditors. Management needs to understand the firm's liquidity position in order to properly manage the firm. Short-term creditors typically do not care much about the long-term health of the firm, but only if they have enough liquid capital to meet the short-term obligations. Long-term creditors and stockholders would also be interested, but primarily only if the liquidity ratios were weak enough to damage the long-term health of the firm.

When analyzing  Asset Management Ratios , the most interested parties are management, competitors, and stockholders. Again, management must be interested in all the ratios as they must manage all aspects of the firms operations. Competitors are interested as a gauge of their own performance. If our competition has a total asset turnover of 2.50 and ours is only 1.95 we must understand what they are doing to outperform us in this measure. By identifying our weaknesses, we can address them. Stockholders have some interest in that often asset management ratios impact a firm's ability to generate profits and increase firm value. Long-term and short-term creditors are typically not significantly concerned with these measures as they do not share in any “extra” profits the company generates. As long as the firm is able to meet interest and principle obligations, debt holders are happy.

Management, long-term creditors, short-term creditors, and stockholders are all focused on  Debt Management Ratios . These ratios measure a firm's ability to meet their debt obligations, so creditors want to see these ratios strong in order to be confident of receiving their full interest and principle payments. Long-term creditors are probably more focused on this as short-term creditors hope to be repaid quickly enough that they are more concerned about the liquidity issues. Stockholders are concerned because if the firm is unable to meet its debt obligations it will be forced into bankruptcy and the stockholders will likely lose all of their investment.

Profitability Ratios  are a concern primarily for management, competitors, and stockholders. Creditors, both LT and ST, do not participate in profits so their only concern with profitability ratios is if they are negative and threaten the ability of the firm to meet interest and principal payments. Like asset management ratios, competitors use profitability ratios as a method to gauge their strengths and weaknesses. Since stockholders “own” the business, the profits belong to them. Therefore, the stronger the profitability ratios, the happier the stockholders are.

Market Value Ratios  are looked at by stockholders and management. These ratios measure how “cheap” or “expensive” the stock is. Management typically wants these ratios to be high as it is a sign that they are maximizing firm value. Potential stockholders typically want them low as that is an indication that the stock may be cheap (except for dividend yield). As a side note, market value ratios are often much more difficult to analyze than many people would like.

The key to this question recognizing the role of the equation A = L + OE in these two ratios. Because all firms use some degree of liabilities (long-term debt, accounts payable, accruals, etc.), we know that Assets must be larger than Owners' Equity. The greater the amount of debt financing (liabilities), the greater the difference between Assets and Owners Equity will be. Also, since the difference between ROA and ROE is the denominator (ROA is NI/Assets while ROE is NI/OE), ROE will always be higher than ROE (for firms with positive NI). Finally, the greater the amount of debt financing (liabilities), the greater the difference between ROA and ROE will be.

When considering the above paragraph, we can now comment on the specific ROA and ROE numbers for Company A and B. Since Company B has a lower ROA and a higher ROE (relative to Company A), we know that Company B is using more leverage (debt financing) than Company A.

Neither approach is necessarily “better” or “worse” than the other. They are just different. Company B is using a more aggressive (riskier) strategy of financing. The higher level of debt increases the risk, but also means stockholders earn a greater return on their money when the company does well. However, if the company does poorly, the higher leverage (debt financing) will magnify the losses (as the interest must still be paid and the loss is spread over less shareholder capital). Thus, higher amounts of debt financing are riskier, but also increase the potential return. Which approach is better depends on the level of risk aversion for each shareholder.

The DSO ratio does provide an indication of how long it is taking a firm to collect its credit sales. Thus, a high DSO ratio can be an indication of a problem in managing a firm's accounts receivables. However, one must be very careful in jumping to conclusions. First, DSO can be very industry dependent. Second, and the issue in this question, is that DSO uses both balance sheet and income statement values to calculate the ratio. As the Annual Income statement is not subject to seasonality while the Annual Balance Sheet is, there is the potential for seasonality issues to distort the ratio. Specifically, Company A has larger accounts receivable on their annual balance sheet due to the seasonal nature of their sales. This inflates their DSO ratio. Company B has had plenty of time to collect their accounts receivable. This is a prime example of why you need to consider seasonality when evaluating ratios.

If we think of the inventory turnover ratio, Company A should appear to be doing better. Specifically, they will have less inventory on hand at the end of the year (as their heavy sales season is winding down and they approach seasonally lower sales). Alternatively, Company B's inventory will be high to meet their seasonally high 1st and 2nd quarter sales that are right around the corner.

Subject to Seasonality – Quarterly Income Statement, Quarterly Balance Sheet, Annual Balance Sheet

Not Subject to Seasonality – Annual Income Statement

This is a FALSE statement. While it is true that everything else equal, a higher profit margin is better than a lower profit margin there is not enough information to make this a true statement. We are ignoring both trend analysis and comparative analysis, so we don't have the necessary context to evaluate the profit margin number. For instance company A could be in a low profit margin industry (such as banking or retail) while company B could be in a high profit margin industry (such as software or pharmaceuticals). Also, profit margin is only one ratio and to label one company as outperforming another based on a single ratio is shortsighted. We need to consider the larger picture before making such a statement. The purpose of this question is to illustrate that one ratio without context is close to meaningless.

Trend Analysis refers to looking at a firm's ratios over a period of 3-5 years to identify whether specific areas are strengthening or weakening. Comparative analysis refers to looking at a firm's ratios relative to other firms in the same industry to evaluate whether they are better or worse than industry averages. Trend/comparative analysis provides us some of the necessary context to properly interpret the ratios.

QUESTION 10

Potential problems with trend analysis include

Potential problems with comparative analysis include

QUESTION 11

A very low quick ratio may be cause for concern because it could indicate liquidity concerns. A low level of cash and accounts receivable relative to our current liabilities could indicate that we will have a hard time paying those current liabilities when they are due. A very high quick ratio may be cause for concern because it indicates an inefficient allocation of resources. Cash and accounts receivable are not high return assets. We would likely be better off allocating our assets to areas with higher rates of return.

QUESTION 12

The primary objective of financial statement analysis from the perspective of management is to identify potential strengths and weaknesses of our firm relative to our competitors so we can take full advantage of our strengths and work on fixing our weaknesses.

There are several difficulties that management might encounter in conducting a complete financial statement analysis. Some are mentioned in the question on potential problems with trend analysis and comparative analysis above. Other problems include comparability of financial statements across firms in the industry due to different fiscal years and/or different accounting procedures. Also, the need to dig beyond the numbers is critical. For example, is a high ROE due to a well-run company or due to too much leverage that could cause significant problems if we hit a small rough patch? Another issue is that financial statement analysis may help us identify potential strengths and weaknesses. However, even after confirming them by digging deeper, the financial statement analysis often does not recommend HOW we can fix the weakness or exploit the strength.

The primary objective of financial statement analysis from the perspective or the stockholder is to identify companies to invest in (potential stockholders) or evaluate the companies the stockholder currently owns (current stockholders).

Stockholders face many of the same problems discussed above with management. However, an important challenge for stockholders is that they must not only analyze the company's financial health, but also evaluate how much they are paying for it. There may be situations where buying stock in a company with poor financial health is a good opportunity (the stock price is “cheap” enough and there is a chance for the company to rebound). There may also be situations where selling shares of stock in a company with strong financial health is good (the stock price is so expensive that the firm's success is already more than fully reflected in the stock price). Too often stockholders get caught up in what they are buying and don't think enough about how much they are paying for it.

CR = CA/CL = 7,000,000/4,500,000 = 1.56 QR = (CA – Inv)/CL = (7,000,000 – 2,000,000)/4,500,000 = 1.11 ITR = CGS/Inv = 6,000,000/2,000,000 = 3 times DSO = AR/(Sales/365) = 2,000,000/(15,000,000/365) = 48.67 days FAT = Sales/Fixed Asst = 15,000,000/10,000,000 = 1.5 times TAT = Sales/Total Asst = 15,000,000/17,000,000 = 0.88 times TD/TA = 10,000,000/17,000,000 = 58.8% TD/OE = 10,000,000/7,000,000 = 142.86% TIE = EBIT/Int = 4,000,000/1,000,000 = 4 times GPM = (Sales – CGS)/Sales = (15,000,000 – 6,000,000)/15,000,000 = 60% NPM = NI/Sales = 2,100,000/15,000,000 = 14.0% ROA = NI/Asst = 2,100,000/17,000,000 = 12.4% ROE = NI/OE = 2,100,000/7,000,000 = 30.0% PE = Price/EPS = 25/1.05 = 23.81 M/B = Price/BV = 25/(7,000,000/2,000,000) = 7.14 DY = Div/Price = $0.50/$25 = 2.00%

CR = CA/CL = 11,050,000/7,000,000 = 1.58 QR = (CA – Inv)/CL = (11,050,000 – 4,000,000)/7,000,000 = 1.01 ITR = CGS/Inv = 11,000,000/4,000,000 = 2.75 times DSO = AR/(Sales/365) = 4,000,000/(20,000,000/365) = 73 days FAT = Sales/Fixed Asst = 20,000,000/11,000,000 = 1.82 times TAT = Sales/Total Asst = 20,000,000/22,050,000 = 0.91 times TD/TA = 15,000,000/22,050,000 = 68.0% TD/OE = 15,000,000/7,050,000 = 212.77% TIE = EBIT/Int = 3,000,000/1,500,000 = 2 times GPM = (Sales – CGS)/Sales = (20,000,000 – 11,000,000)/20,000,000 = 45% NPM = NI/Sales = 1,050,000/20,000,000 = 5.25% ROA = NI/Asst = 1,050,000/22,050,000 = 4.76% ROE = NI/OE = 1,050,000/7,050,000 = 14.89% PE = Price/EPS = 17.5/0.525 = 33.33 M/B = Price/BV = 17.5/(7,050,000/2,000,000) = 4.96 DY = Div/Price = $0.50/$17.50 = 2.86%

Each item in the income statement is expressed as a percentage of sales (revenues) and each item in the balance sheet is presented as a percentage of total assets.

To start the analysis of finding strengths and weaknesses, I started with the common size statements. The first thing that I noticed was the increase in Cost of Goods Sold from 40% of sales in 2015 to 55% of sales in 2017. This indicates that our production costs jumped significantly and will act to lower our net income. Selling and Administrative expenses dropped slightly from 20% of sales to 17.5% of sales. This is a strength, but is not a very large change so I don't place much emphasis on it. The declines in EBIT and Net Income as a % of sales are due to the increase in CGS, so do not need further analysis. Thus, from the Common Size Income statement, I focus on the increase in CGS as a significant weakness and would classify the decline in S&A Expenses as a small strength.

Next I proceed to the Common Size balance sheet. The first things I notice are the increases in accounts receivable and inventory as a % of total assets. This is a concern that needs more analysis before I declare it a weakness. Consider accounts receivable first. AR could increase due to higher sales levels. If 25% of my sales are done on credit and sales increase, my AR will automatically increase as well. This could result in AR being a bigger portion of my firm's assets and would not be seen as a negative. On the other hand, AR may be increasing because fewer customers are paying their bills on time. This could lead to more bad debt expense or higher collection costs. I can not tell which explanation is causing the increase in AR from the CS balance sheet, so I will make a note of it and look more at the issue as I move through my analysis. Like AR, inventory increases may or may not be a weakness. If sales increase, I will need more inventory on hand to handle the increase in sales which is likely to cause inventory to make up a larger portion of my firm's assets. Alternatively, if I am getting stuck with more out-of-date inventory it will also make up a larger portion of my firm's assets until I am forced to do a write down and take the loss. From the CS balance sheet I can't tell which scenario is taking place so this is also something to investigate further.

Net PPE shows a large drop in the CS Balance sheet, but that is primarily a result of the increase in current assets caused by the jump in AR and Inv which have already been discussed, so I will not pay much attention to the decline in Net PPE. Notes Payable shows a large jump, however that could just be a function of me financing some of my increase in current assets so again that is not something that would concern me too much. I would probably want to note it and make sure I find out the reason for the increase but it likely is not a strength/weakness. The jump in Total Liabilities as a % of total assets is something that might concern me. Higher levels of liabilities as a % of total assets indicates higher risk levels. The firm has a greater chance of serious financial problems is there is a slowdown. This is not necessarily bad as the higher debt levels also have the chance to increase our profits if things go well, however it is something to note with a degree of caution due to the higher risk. Finally, the drop in OE is merely the flip side to the increase in TL, so needs no further analysis.

Next I move on to the ratio analysis. My liquidity ratios appear to be sound as both are stable from year to year and similar to the industry averages. Next is my Inv. Turnover Ratio. This, combined with the increase in inventory on the CS balance sheet indicates a problem. If my inventory increase was merely a result of increased sales, the inventory turnover ratio would hold steady or increase slightly. Instead it has decreased slightly and is noticeably lower than the industry average. This means that I am tying up more of my capital as inventory and probably ending up with older inventory that will need to be marked down and sold at a loss.

I also notice problems with my Days Sales Outstanding ratio. The significant jump in the DSO ratio tells me its taking me an about 24 days longer on average to collect each dollar in sales. Since this is also much higher than the industry average it means one of two things. Either I have a lot of customers that aren't paying on time and may end up with higher levels of bad debts or that I have to offer more favorable credit terms to my customers to keep sales from dropping. Both of these possibilities are bad, so my accounts receivable situation is a definite cause for concern.

Fixed Asset Turnover and Total Asset Turnover both look good. FAT is up and both are higher than the industry average. This is a sign that I am doing a good job overall of using my assets (especially my LT assets) to generate sales.

The debt management ratios are troublesome. My TD/TA and TD/OE ratios have increased by quite a bit and are higher than the industry averages. Also, my TIE ratio has dropped and is lower than the industry average. This means that our firm is using more debt financing and has less margin for error. If we experience an off year or two our firm is likely to run into severe financial problems and could face bankruptcy. On the other hand, if we have a couple of strong years, we will make higher returns for our shareholders due to the leverage provided by debt. This is not necessarily a strength/weakness but is a sign of high financial risk.

The profitability ratios are all showing an interesting pattern that ties back into my CGS observation from the CS income statement. My profitability (PM, ROA, ROE) is down due to the increase in CGS. However, all three ratios are consistent with the industry average. This might be an indication that the increase in CGS is more of an industry issue rather than firm specific. If a key input had a price increase, this is likely to impact all firms in the industry equally. For example, if grain prices jumped significantly both Kellogg's and General Mills may see a jump in their CGS and a decline in their profit margins. It doesn't indicate a management problem, but an industry issue. If my profitability ratios declined significantly AND were lower than the industry average I would be more concerned about company specific problems.

Finally we have the market value ratios which are difficult to interpret in this instance. The PE ratio has increased significantly as my stock price fell, but earnings fell faster. It is also higher than the industry average which indicates the stock is more expensive in terms of what investors pay for each dollar of earnings (possibly indicating that they believe the earnings drop is not permanent). The MV/BV ratio has decreased significantly which indicates the stock is cheaper. This is because book value is less sensitive to the recent earnings decline which lowered the stock price (making the stock cheaper relative to its book value). However, the stock is still slightly more expensive than the industry average. While our dividend yield increased and is higher than the industry average (which is good), there is a danger sign here. If earnings drop any further, we may have to cut our dividend which would cause the yield to drop.

To summarize, our financial statement analysis indicates

• The firm needs to address the CGS issue, but that it is probably an industry issue instead of a company specific problem. This doesn't mean we can ignore it, just that it will be more difficult to fix.
• The firm needs to get control of its credit policies and improve its collections process.
• The firm needs to get control of its inventory concerns
• The firm is doing a good job at generating sales from its LT Assets.
• The firm has a high degree of financial risk
• The firm does not appear to have any major liquidity constraints.
• The stock is relatively expensive relative to the industry average and the dividend yield (while attractive) should be viewed with caution as it may not be sustainable.

You know that you need the current stock price and the book value per share in order to get the MV/BV ratio. To get current stock price, you can use the PE ratio: PE = Price/EPS ⇒ Price = (PE)×(EPS)

To get EPS, you need Net Income which you can get from the net profit margin: Net Profit Margin = Net Income/Sales ⇒ Net Income = Net Profit Margin×Sales

You have the Profit Margin, so you need Sales. You can get Sales from the Total Asset Turnover Ratio: Total Asset Turnover = Sales /Assets ⇒ Sales = TA Turnover×Assets

Sales = (1.5)×($6,000,000) = $9,000,000 Net Income = (0.05)×($9,000,000) = $450,000 EPS = ($450,000)/(600,000 shares) = $0.75 per share Stock Price = (13)×(0.75) = $9.75

Now you need to solve for Book Value which is Owners' Equity per Share. We know the Return on Equity, so we can use that (along with Net Income) to get Owners' Equity: ROE = Net Income/Owners Equity ⇒ Owners Equity = NI/ROE

Owners' Equity = ($450,000)/(0.14) = $3,214,285.71 Book Value = $3,214,285.71)/(600,000 shares) = $5.36 per share MV/BV = ($9.75)/($5.36) = 1.82

Our MV/BV ratio is 1.82. This is a tough problem as it not only tests your knowledge of ratios, but your problem solving skills. Don't worry if you didn't get it at first, but hopefully once you see the solution it makes sense.

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Finance assignment depicting the ratio analysis of Nestle and Unilever and comparing which one is better than the other.

Task: Can you analyze the consolidated financial statements of Nestle and Unileverusing different ratios in your finance assignment?

Backgroundof the present finance assignment A finance assignmenthas been prepared for 2 of the public companies in the same industry. The companies selected for analysis are Nestle and Unilever both of which belongs to the FMCG industry. The performance and financial position of the companies have been analysed and compared for the period of 2018 – 2020 in this finance assignment. The finance assignmenthas been divided into 4 parts namely ratio analysis, Du Pont analysis, working capital analysis and lastly the financing of the business.

Discussion and Analysis Ratio Analysis The results of ratio analysis along with formulas for the period of 2018-2020 has been shown below in this finance assignment:

Unilever > Ratios Analysis

2 Profitability ratios in the finance assignment: The return on equity shows the profit earned on the capital investment in the company and the same has dropped for Unilever from 80.78% in 2018 to 38.51% in 2020. One of the major reasons has been one-time profits on account of disposal of spreads business in 2018 amounting to €4,331 million. On the other hand, the equity holding has also increased over the years thereby decreasing the overall returns. On similar lines, the net profit margin has also decreased from 19.20% in 2018 to 11.97% in 2020(Annual Report, 2020). For Nestle, the returns on equity has risen sharply from 17.92% in 2018 to 24.90% in 2020 due to increase in net profits and decrease in equity capital driven by the movement of treasury shares across the years. The net profit margin as per the finance assignmenthas also increased from 11.45% in 2018 to 14.67% in 2020, mainly driven by increase in other operating income and decrease in other operating expenses. One of the important factors to be noted in the finance assignmentis that for Unilever, the sales has almost been consistent for 3 years with small degrowth in 2020 due to COVID impact however the decline was substantial in case of Nestle in 2020.

1 Efficiency ratios: The efficiency ratios shows how effectively the assets are being used to generate revenue/business. In case trade receivables turnover ratio is analysed in this finance assignment, the same increased from 7.87 times in 2018 to 10.27 times in 2020 thereby showing efficiency in collection which will help in improving working capital cycle. On the other hand, for Nestle, the receivables turnover ratio has decreased from 8.19 times in 2018 to 7.85 times to 2020 due to sharp decrease in sales in 2020 without corresponding decrease in receivables balance(Annual Report, 2020).

2 Liquidity ratios: These ratios shows the ability of the company to pay off the short term liabilities on time with the help of the current and liquid assets. The current ratio as well as the liquid ratio as per the finance assignmenthas improved marginally by 1 bps and 2 bps respectively for Unilever. One of the major highlights in current assets of Unilever is increase in cash and cash equivalents and decrease in receivables over years. However, the company needs to improve the current ratio as it is in the range of 0.7-0.8 times only as compared to the industry standard of 2 times(Goldmann, 2016). On the other hand, for Nestle, the current ratio has decreased from 0.95 times in 2018 to 0.86 times in 2020. Similarly the liquid ratio has also decreased sharply from 0.74 times in 2018 to 0.60 times in 2020 as per the finance assignment. One of the major reasons for deterioration of liquidity ratios for Nestle is decrease in assets held for sale and cash and cash equivalents whereas the current liabilities hasn’t decreased much.

1 Financial gearing ratios: This shows the proportion of debt and equity in the overall capital of the company. For Unilever, the debt equity ratio from 4.04 times in 2018 to 2.83 times in 2020 which is positive sign, mainly due to the increase in the equity balance in 2020 driven by gain from acquisition of Horlicks business(Annual Report, 2018). On the other hand, for Nestle, the debt equity ratio has risen from 1.35 times in 2018 to 1.67 times in 2020 mainly due to decrease in equity capital driven by movement of treasury shares(Kew & Stredwick, 2017).

Based on the overall assessment of 2 companies based on ratios mentioned in this finance assignment, it can be said that Nestle is better placed that Unilever is most of the aspects – liquidity, gearing, profitability, most of which have been on improving trend for Nestle. On the other hand, most of the ratios have been adversely affected for Unilever due to Covid impact but the same can be expected in years to come considering the strong fundamentals of the business, diversity in portfolio and coverage across the world.

Du Pont Analysis: This analysis in the finance assignmentis known for a framework which bifurcates the return on equity into various components to understand the strengths and weaknesses of the company. In the 3 step model of Du Pont analysis, the below mentioned equation states that if company net profit margin, asset turnover and financial leverage are multiplied, we would be able to get return on equity of the company. Here in the finance assignmentit has been computed for the year 2020(Vieira, et al., 2017).

The components that influence the return on equity are as follows: 1. Net Profit Margin: This is higher for Nestle at 14.67% vs 11.97% for Unilever on account of lower operational expenses. 2. Asset turnover: Unilever has a better asset turnover of 0.77 times vs 0.67 times for Nestle as per the finance assignment. This shows that the efficiency in terms of asset utilization for generating sales is better for Unilever. 3. Financial Leverage Ratio: This shows the extent of leverage each company is using. This is calculated as ratio of average assets to average equity. This is again better for Unilever at 4.20 times whereas it is 2.54 times for Nestle. However, the disadvantage of over-leveraging is that the Unilever is at higher risk of repayment to debt holders. Overall, most of the factors are in favour of Unilever here and hence the return on equity for Unilever is higher at 38.51% vs 24.90% for Nestle(Annual Report, 2018).

Working Capital Analysis A. In terms of liquidity, Unilever has had quite stable current and liquid ratios at 0.78 times and 0.57 times respectively. This is lower vs the ideal ratio of 2 times and 1 times respectively. In addition to this, the cash flow ratio has improved from 0.36 times in 2018 to 0.44 times in 2020. This shows that the operating cash flows have improved in comparison to increase in current liabilities which is a positive sign. This is mainly attributable to the improvement in working capital, majorly collection from receivables(Alexander, 2016). For Nestle, on the contrary, even though the liquidity ratios are better than Unilever but the same has deteriorated over the years. The current ratio as mentioned in the finance assignmenthas declined from 0.95 times in 2018 to 0.86 times in 2020 and the liquid ratio has declined from 0.74 times in 2018 to 0.60 times in 2020. One of the major reasons for deterioration of liquidity ratios for Nestle as per the finance assignmentis decrease in assets held for sale and cash and cash equivalents whereas the current liabilities hasn’t decreased much. The cash flow ratio has remained constant at 0.36 times. Overall the liquidity ratio are better for Nestle vs Unilever but Nestle has a declining trend, which is a cause of worry.

B. The operating cash cycle for Unilever as well as Nestle has been computed below:

Financing a business The sourcing of finance for both the companies as per the finance assignmenthas been shown below and further bifurcated into long term and short terms and internal and external funding to understand the choicing of sources of finance by the management of each companies(Heminway, 2017).

Sources of Finance

From the above table preset in the finance assignment, it can be seen that for Unilever, almost 26% sourcing is from internal capital and rest all is external capital and hence it is dependent a lot on the external debt capital and is leveraging a lot. On the other hand, Nestle is slightly less dependent on external sourcing which constitutes nearly 62.5% of overall capital requirement. The debt equity ratio is more favorable for Nestle vs Unilever(Choy, 2018).

On the other hand, in case bifurcation is seen from long term and short term perspective then both are companies are almost same. Both Nestle and Unilever as per the finance assignmenthas almost 30% of short term financing and rest 70% is from long terms sources.

In case the constituents of the changes in equity are analysed in this finance assignment, we can say most of the items are almost same like profit/loss for the year, comprehensive income for the year, dividend paid for the year, changes in non-controlling interests, reduction in share capital, Movements in treasury shares and other movements in equity/retained earnings.

However, there are some differing items as well which can be found in Statement on changes in equity – some of which are movement of treasury shares in case of Nestle, Issue of PLC ordinary shares as part of Unification in case of Unilever, Cancellation of NV ordinary shares as part of Unification in case of Unilever, Other effects of Unification in case of Unilever. One of the main reason for these line items as mentioned in the finance assignmentis one off items for Unification in case of Unilever, which is not there in case of Nestle(Visinescu, et al., 2017).

In terms of the share price movements for both the companies over the period of 3 years, it can be seen the prices has increased in 2019 vs 2018 due to growth in business and profits however the share prices of 2020 have taken a hit slightly on account of negative sentiments in markets due to arrival of COVID and bad results for both the companies(Linden & Freeman, 2017).

From the overall assessment conducted in this finance assignment it can be concluded that for both the companies, strong form efficiency is what can be seen to reflected in the share prices meaning securities and stock prices reveal the overall information in the market, be it public or private. The stock prices follow the efficient market hypothesis and is dependent on the demand and supply factors as per the findings of this finance assignment.

References Alexander, F., 2016. The Changing Face of Accountability in the finance assignment. The Journal of Higher Education, 71(4), pp. 411-431. Annual Report, N., 2018. Annual Report, Nestle. pp. 1-130. Annual Report, N., 2020. Annual Report, Nestle. pp. 1-140. Annual Report, U., 2018. Annual Report, Unilever. pp. 1-200. Annual Report, U., 2020. Annual Report, Unilever. pp. 1-209. Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldviewfinance assignment Analysis. Ecological Economics, 3(1), p. 145.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, 4(3), pp. 103-112. Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35. Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. 2nd ed. London: Chartered Institute of Personnel and Development. Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly, 27(3), pp. 353-379.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems in finance assignment.SAGE Journals, 30(1), pp. 23-48. Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.

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