Topic 12 - Financial_statement_analysis

Chapter

12

Financial Statements Analysis 100 Shares

Analysing Financial Stmts? $1 par value

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Learning Learning Objectives Objectives  Explain the purpose of analysis.  Identify the building blocks of analysis.  Describe standards for comparisons in analysis.  Identify the tools of analysis.

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 Explain and apply methods of horizontal analysis.  Describe and apply methods of vertical analysis.  Define and apply ratio analysis.

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Basics Basics of of Analysis Analysis Application of analytical tools

Reduces uncertainty

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Involves transforming data

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Purpose Purpose of of Analysis Analysis Financial Financial statement statement analysis analysis helps helps users users make make better better decisions. decisions.

Internal Users Managers Officers Internal Auditors Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

External Users Shareholders Lenders Customers © The McGraw-Hill Companies, Inc., 2007

Building Building Blocks Blocks of of Analysis Analysis Ability to meet short-term obligations and to efficiently generate revenues

Ability to provide financial rewards sufficient to attract and retain financing

Liquidity and Efficiency

Solvency

Market Profitability Prospects

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Ability to generate future revenues and meet long-term obligations

Ability to generate positive market expectations

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Information Information for for Analysis Analysis Income Statement

Notes

Balance Sheet Statement of Changes in Shareholders’ Equity

Statement of Cash Flows

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Standards Standards for for Comparison Comparison To help me interpret our financial statements, I use several standards of comparison.

 Intracompany  Intercompany  Industry  Guidelines Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Tools Tools of of Analysis Analysis

Horizontal Horizontal Analysis Analysis Comparing a company’s financial condition and performance across time

Time Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Tools Tools of of Analysis Analysis Comparing a company’s financial condition and performance to a base amount

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

VV ee rr tt ii cc aa ll A A nn aa ll yy ss ii ss

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Tools Tools of of Analysis Analysis Using key relations among financial statement items

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Horizontal Horizontal Analysis Analysis

Time

Now, let’s look at some ways to use horizontal analysis.

The term horizontal analysis arises from left-to-right (or right-to-left) movement of our eyes as we review comparative financial statements across time. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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KRISPY KREME COMPARATIVE BALANCE SHEETS 31-Dec 2006

2005

ASSETS Non-current assets Land Buildings and equipment, net Total non-current assets

40,000 40,000 120,000 85,000 $ 160,000 $ 125,000

Current assets Cash and equivalents Accounts receivable, net Inventory Prepaid expenses Total current assets Total assets

$ 12,000 $ 23,500 60,000 40,000 80,000 100,000 3,000 1,200 $ 155,000 $ 164,700 $ 315,000 $ 289,700

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Dollar Change

Percent Change

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Comparative Comparative Statements Statements Calculate Change in Dollar Amount Dollar Change

=

Analysis Period Amount

–

Base Period Amount

Since we are measuring the amount of the change between 2005 and 2006, the dollar amounts for 2005 become the “base” period amounts. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Comparative Comparative Statements Statements Calculate Change as a Percent Percent Change

=

Dollar Change Base Period Amount

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

×

100%

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CLOVER CORPORATION COMPARATIVE BALANCE SHEETS 31-Dec 2006 ASSETS Non-curent assets Land Buildings and equipment, net Total non-current assets

2005

Dollar Change

Percent Change*

$ 40,000 $ 40,000 120,000 85,000 $ 160,000 $ 125,000

Current assets Cash and equivalents $ 12,000 $ 23,500 $ (11,500) (48.9) Accounts receivable, net 60,000 40,000 Inventory 80,000 100,000 Prepaid expenses 3,000 1,200 Total current assets $ 155,000 $ 164,700 $12,000 – $23,500 = $(11,500) Total assets $ 315,000 $ 289,700 * Percent rounded to first decimal point.

($11,500 ÷ $23,500) × 100% = 48.9%

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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CLOVER CORPORATION Comparative Balance Sheets 31-Dec 2005

Dollar Change

$

40,000 85,000 $ 125,000

35,000 $ 35,000

0.0 41.2 28.0

$

$ (11,500) 20,000 (20,000) 1,800 $ (9,700) $ 25,300

(48.9) 50.0 (20.0) 150.0 (5.9) 8.7

2006 ASSETS Non-current assets Land Buildings and equipment, net Total non-current assets

$

40,000 120,000 $ 160,000

Current assets Cash and equivalents $ 12,000 Accounts receivable, net 60,000 Inventory 80,000 Prepaid expenses 3,000 Total current assets $ 155,000 Total assets $ 315,000 * Percent rounded to first decimal point.

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23,500 40,000 100,000 1,200 $ 164,700 $ 289,700

Percent Change*

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Now, let’s review the dollar and percent changes for the liabilities and shareholders’ equity accounts.

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CLOVER CORPORATION Comparativ e Balance Shee ts 31-Dec 2005

Dollar Change

Pe rce nt Change*

20,000 60,000 10,000 69,700 $ 159,700

10,300 $ 10,300

0.0 0.0 0.0 14.8 6.4

2006 EQUITY AND LIABILITIES Equity Prefe rre d shares Common shares Additional paid-in capital Retained earnings Total equity Non-current liabilities Bonds payable , 8% Total non-curre nt liabilitie s Current liabilities Accounts payable Notes payable Total current liabilities Total liabilitie s Total equity and liabilities

$

20,000 60,000 10,000 80,000 $ 170,000

$

$ $

75,000 75,000

$ $

$

67,000 3,000 $ 70,000 $ 145,000 $ 315,000

80,000 80,000

(5,000) (5,000)

(6.3) (6.3)

$

44,000 6,000 $ 50,000 $ 130,000

$ 23,000 (3,000) $ 20,000 $ 15,000

52.3 (50.0) 40.0 11.5

$ 289,700

$ 25,300

8.7

* Perce nt rounded to first decimal point.

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Now, let’s look at trend analysis!

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Trend Trend Analysis Analysis Also called trend percent analysis or index number trend analysis.

Trend Trend analysis analysis is is used used to to reveal reveal patterns patterns in in data data covering covering successive successive periods. periods.

Trend Percent

=

Analysis Period Amount Base Period Amount

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

×

100%

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Trend Trend Analysis Analysis KRISPY KREME INCOME INFORMATION FOR THE YEARS ENDED 31 DECEMBER Item Revenues Cost of sales Gross profit

2006 $ 400,000 285,000 115,000

2005 $ 355,000 250,000 105,000

2004 $ 320,000 225,000 95,000

2003 $ 290,000 198,000 92,000

2002 $ 275,000 190,000 85,000

2002 is the base period so its amounts will equal 100%.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Trend Trend Analysis Analysis KRISPY KREME INCOME INFORMATION FOR THE YEARS ENDED 31 DECEMBER Item Revenues Cost of sales Gross profit

2006 $ 400,000 285,000 115,000

2005 $ 355,000 250,000 105,000

2004 $ 320,000 225,000 95,000

Item Revenues Cost of sales Gross profit

2006

2005

2004

(290,000 ÷ 275,000) × (198,000 ÷ 190,000) × (92,000 85,000) Larson, Wild, Chiapetta, Ropidah,÷ Haslinda, Aryati, Liana×

2003 $ 290,000 198,000 92,000

2003 105% 104% 108%

100% = 105% 100% = 104% 100% = 108%

2002 $ 275,000 190,000 85,000

2002 100% 100% 100%

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Trend Trend Analysis Analysis KRISPY KREME INCOME INFORMATION FOR THE YEARS ENDED 31 DECEMBER Item Revenues Cost of sales Gross profit

Item Revenues Cost of sales Gross profit

2006 $ 400,000 285,000 115,000

2006 145% 150% 135%

2005 $ 355,000 250,000 105,000

2005 129% 132% 124%

2004 $ 320,000 225,000 95,000

2004 116% 118% 112%

2003 $ 290,000 198,000 92,000

2003 105% 104% 108%

2002 $ 275,000 190,000 85,000

2002 100% 100% 100%

How would this trend analysis look on a line graph? © The McGraw-Hill Companies, Inc., 2007

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Trend Trend Analysis Analysis 160

Percentage

150

We can use the trend percentages to construct a graph so we can see the trend over time.

140 130 Revenues Cost of Sales Gross Profit

120 110 100 2002

2003

2004

2005

2006

Year

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VV ee rr tt ii cc aa ll A A nn aa ll yy ss ii ss

Now, let’s look at some vertical analysis tools!

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Vertical Vertical Analysis Analysis Vertical Analysis is also called as common-size analysis

The term vertical analysis arises from the updown (down-up) movement of our eyes as we review common-size financial statements. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

VV ee rr tt ii cc aa ll A A nn aa ll yy ss ii ss

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Common-Size Common-Size Statements Statements Calculate Common-size Percent Common-size Percent

=

Analysis Amount Base Amount

×

100%

Financial FinancialStatement Statement

Base BaseAmount Amount

Balance BalanceSheet Sheet

Total Total Assets Assets

Income IncomeStatement Statement

Revenues Revenues

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KRISPY KREM E COM PARATIVE BALANCE SHEETS 31-De c

2006 ASSETS Non-curre nt asse ts Land Buildings and e quipme nt, ne t Total non-curre nt asse ts

2005

Common-size Pe rce nts* 2006 2005

$

40,000 $ 40,000 120,000 85,000 $ 160,000 $ 125,000

Curre nt asse ts Cash and e quiv ale nts $ 12,000 $ 23,500 3.8% 8.1% Accounts re ce iv able , ne t 60,000 40,000 Inv e ntory 80,000 100,000 Pre paid e xpe nse s 3,000 1,200 Total curre nt asse ts $ 155,000 $ 164,700 Total asse ts $ 315,000 $ 289,700 100.0% 100.0% ($12,000 ÷ $315,000) × 100% = 3.8% * Pe rce nt rounde d to first de cimal point.

($23,500 ÷ $289,700) × 100% = 8.1% Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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KRISPY KREM E COM PARATIVE BALANCE SHEETS 31-De c

2006 ASSETS Non-curre nt asse ts Land Buildings and e quipme nt, ne t Total non-curre nt asse ts

2005

$

Common-size Pe rce nts* 2006 2005

40,000 $ 40,000 120,000 85,000 $ 160,000 $ 125,000

12.7% 38.1% 50.8%

13.8% 29.3% 43.1%

Curre nt asse ts Cash and e quiv ale nts $ 12,000 $ 23,500 Accounts re ce iv able , ne t 60,000 40,000 Inv e ntory 80,000 100,000 Pre paid e xpe nse s 3,000 1,200 Total curre nt asse ts $ 155,000 $ 164,700 Total asse ts $ 315,000 $ 289,700 * Pe rce nt rounde d to first de cimal point.

3.8% 19.0% 25.4% 1.0% 49.2% 100.0%

8.1% 13.8% 34.5% 0.4% 56.9% 100.0%

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KRISPY KREME COMPARATIVE BALANCE SHEETS 31-Dec

2006 EQUITY AND LIABILITIES Equity Preferred shares Common shares Additional paid-in capital Retained earnings Total equity Non-current liabilities Bonds payable, 8% Total non-current liabilities Current liabilities Accounts payable Notes payable Total current liabilities Total liabilities Total equity and liabilities

$

2005

Common-size Percents* 2006 2005

20,000 60,000 10,000 80,000 $ 170,000

$

20,000 60,000 10,000 69,700 $ 159,700

6.3% 19.0% 3.2% 25.4% 54.0%

6.9% 20.7% 3.5% 24.1% 55.1%

$ $

75,000 75,000

$ $

80,000 80,000

23.8% 23.8%

27.6% 27.6%

67,000 3,000 $ 70,000 $ 145,000 $ 315,000

$

44,000 6,000 $ 50,000 $ 130,000 $ 289,700

21.3% 1.0% 22.2% 46.0% 100.0%

15.2% 2.1% 17.3% 44.9% 100.0%

$

* Percent rounded to first decimal point.

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KRISPY KREME COMPARATIVE INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER Common-size Percents* 2006 2005 2006 2005 Revenues $520,000 $480,000 100.0% 100.0% Cost of sales 360,000 315,000 69.2% 65.6% Expenses Selling and admin. Interest expense Profit before taxes Income taxes (30%) Profit for the period Profit per share Avg. # common shares

$128,600 $126,000 6,400 7,000 $ 25,000 $ 32,000 7,500 9,600 $ 17,500 $ 22,400 $ 0.79 $ 1.01 22,200 22,200

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24.7% 1.2% 4.8% 1.4% 3.4%

26.3% 1.5% 6.7% 2.0% 4.7%

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Liquidity and Efficiency

Solvency

Profitability

Market

Let’s use the following financial statements for Norton Corporation for our ratio analysis.

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KRISPY KREME BALANCE SHEET 31 DECEMBER 2006

2005

ASSETS Non-current assets Land Buildings and equipment, net Total non-current assets

$ 165,000 116,390 $ 281,390

$ 123,000 128,000 $ 251,000

Current assets Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Total assets

$ 30,000 20,000 12,000 3,000 $ 65,000 $ 346,390

$ 20,000 17,000 10,000 2,000 $ 49,000 $ 300,000

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KRISPY KREME BALANCE SHEET 31-Dec 2006 EQUITY AND LIABILITIES Equity Common shares, $1 par value Additional paid-in capital Retained earnings Total equity Non-current liabilities Notes payable, long-term Total non-current liabilities Current liabilities Accounts payable Notes payable, short-term Total current liabilities Total liabilities Total equity and liabilities

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

$

2005

27,400 158,100 48,890 $ 234,390

$

$ $

70,000 70,000

$ $

39,000 3,000 $ 42,000 $ 112,000 $ 346,390

$

$

17,000 113,000 50,000 $ 180,000

78,000 78,000

40,000 2,000 $ 42,000 $ 120,000 $ 300,000

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KRISPY KREME INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER

Revenues Cost of sales Gross margin Expenses Operating profit Interest expense Profit before taxes Income taxes (30%) Profit for the period

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$ $ $ $ $

2006 494,000 140,000 354,000 270,000 84,000 7,300 76,700 23,010 53,690

$ $ $ $ $

2005 450,000 127,000 323,000 249,000 74,000 8,000 66,000 19,800 46,200

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Liquidity Liquidity and and Efficiency Efficiency Current Current Ratio Ratio

Inventory Inventory Turnover Turnover

Acid-test Acid-test Ratio Ratio

Days’ Days’ Sales Sales Uncollected Uncollected

Accounts Accounts Receivable Receivable Turnover Turnover

Days’ Days’ Sales Sales in in Inventory Inventory Total Total Asset Asset Turnover Turnover

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KRISPY KREME 2006 Cash

$

30,000

Accounts receivable, net

Use this information to calculate the liquidity and efficiency ratios for Krispy Kreme.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Beginning of year

17,000

Ending of year

20,000

Inventory Beginning of year

10,000

Ending of year

12,000

Total current assets

65,000

Total current liabilities

42,000

Total assets Beginning of year

300,000

Ending of year

346,390

Revenues

494,000

Cost of sales

140,000

© The McGraw-Hill Companies, Inc., 2007

Working Working Capital Capital Working capital represents current assets financed from long-term capital sources that do not require near-term repayment. 31 Dec. 2006 Current assets

$

Current liabilities Working capital

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

65,000 (42,000)

$

23,000

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Current Current Ratio Ratio Current Current Assets = Ratio Current Liabilities Current = Ratio

$65,000 = 1.55 : 1 $42,000

This ratio measures the short-term debt-paying ability of the company. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Acid-Test Acid-Test Ratio Ratio Quick Assets Acid-Test = Current Liabilities Ratio Quick assets are Cash, Short-Term Investments, and Current Receivables.

Acid-Test = $50,000 = 1.19 : 1 $42,000 Ratio This ratio is like the current ratio but excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Accounts Accounts Receivable Receivable Turnover Turnover Accounts Sales on Account Receivable = Average Accounts Receivable Turnover Accounts $494,000 Receivable = ($17,000 + $20,000) ÷ 2 = 26.7 times Turnover This ratio measures how many times a company converts its receivables into cash each year. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Inventory Inventory Turnover Turnover Inventory Turnover Inventory Turnover

=

Cost of Sales Average Inventory

$140,000 = = 12.73 times ($10,000 + $12,000) ÷ 2

This ratio measures the number of times merchandise is sold and replaced during the year. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Days’ Days’ Sales Sales Uncollected Uncollected Days’ Sales Accounts Receivable × 3 = Uncollected Net Sales 65 Days’ Sales $20,000 × 365 = 14.8 = Uncollected $494,000 days

This ratio measures the liquidity of receivables. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Days’ Days’ Sales Sales in in Inventory Inventory Days’ Sales = in Inventory

Ending Inventory Cost of Sales

× 3 65

Days’ Sales $12,000 × 365 = 31.29 = in Inventory $140,000 days

This ratio measures the liquidity of inventory. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Total Total Asset Asset Turnover Turnover Total Asset Net Sales = Turnover Average Total Assets Total Asset $494,000 = = 1.53 times Turnover ($300,000 + $346,390) ÷ 2

This ratio measures the efficiency of assets in producing sales. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Solvency Solvency Debt Debt Ratio Ratio Equity Equity Ratio Ratio Pledged PledgedAssets Assets to to Secured Secured Liabilities Liabilities Times Times Interest Interest Earned Earned Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Use this information to calculate the solvency ratios for Norton Corporation. KRISPY KREME 2006 Profit before interest expense and income taxes Interest expense

$

84,000 7,300

Total shareholders' equity

234,390

Total liabilities

112,000

Total assets

346,390

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Debt Debt Ratio Ratio Total Liabilities Debt = Ratio Total Assets Debt = Ratio

$112,000 $346,390

= 32.3%

This ratio measures what portion of a company’s assets are contributed by creditors. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Equity Equity Ratio Ratio Total Equity Equity = Ratio Total Assets Equity = Ratio

$234,390 $346,390

= 67.7%

This ratio measures what portion of a company’s assets are contributed by owners. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Pledged Pledged Assets Assets to to Secured Secured Liabilities Liabilities Pledged Assets to = Book Value of Pledged Assets Secured Book Value of Secured Liabilities Liabilities

This ratio measures the protection to secured creditors.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Times Times Interest Interest Earned Earned Times Interest = Earned

Profit before Interest Expense and Income Taxes Interest Expense

Times $84,000 = 11.51 Interest = $7,300 Earned This is the most common measure of the ability of a firm’s operations to provide protection to the long-term creditor. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Profitability Profitability Basic Basic Earnings Earnings per per Share Share

Profit Profit Margin Margin Gross Gross Margin Margin Return Return on on Total Total Assets Assets

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Book BookValue Value per per Common Common Share Share Return Return on on Common Common Shareholders’ Shareholders’ Equity Equity © The McGraw-Hill Companies, Inc., 2007

KRISPY KREME 2006

Use this information to calculate the profitability ratios for Krispy Kreme.

Number of common shares outstanding all year Profit for the period

27,400 $

53,690

Shareholders' equity Beginning of year

180,000

Ending of year

234,390

Revenues

494,000

Cost of sales

140,000

Total assets Beginning of year

300,000

Ending of year

346,390

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Profit Profit Margin Margin Profit Profit for the period = Margin Net Sales $53,690 Profit = 10.87% = Margin $494,000 This ratio describes a company’s ability to earn a net income from sales.

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Gross Gross Margin Margin Gross Net Sales - Cost of Sales = Margin Net Sales $494,000 - $140,000 Gross = 71.66% = Margin $494,000 This ratio measures the amount remaining from $1 in sales that is left to cover operating expenses and a profit after considering cost of sales. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Return Return on on Total Total Assets Assets Return on = Profit for the period Total Assets Average Total Assets Return on $53,690 = ($300,000 + $346,390) ÷ 2 = 16.61% Total Assets

This ratio is generally considered the best overall measure of a company’s profitability. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Return Return on on Common Common Shareholders’ Shareholders’ Equity Equity Return on Common Shareholders’ Equity

=

Return on Common = Shareholders’ Equity

Profit for the period - Preferred Dividends Average Common Shareholders’ Equity

$53,690 - 0 ($180,000 + $234,390) ÷ 2

= 25.9%

This measure indicates how well the company employed the owners’ investments to earn income. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Book Book Value Value per per Common Common Share Share Book Value Shareholders’ Equity Applicable to per Common Shares = Common Number of Common Shares Share Outstanding

This ratio measures liquidation at reported amounts.

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Basic Basic Earnings Earnings per per Share Share Basic Earnings per = Share Basic Earnings per = Share

Profit for the period - Preferred Dividends Weighted-Average Common Shares Outstanding

$53,690 - 0 = $1.96 per share 27,400

This measure indicates how much income was earned for each share of common shares outstanding. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Market Market Prospects Prospects PricePriceEarnings Earnings Ratio Ratio Dividend Dividend Yield Yield

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Market Market Prospects Prospects Use this information to calculate the market ratios for Krispy Kreme.

KRISPY KREME 31 December 2006 Earnings per Share Market Price Annual Dividend per Share

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

$

1.96 15.00 2.00

© The McGraw-Hill Companies, Inc., 2007

Price-Earnings Price-Earnings Ratio Ratio Price-Earnings Market Price Per Share = Ratio Earnings Per Share Price-Earnings $15.00 = = 7.65 times Ratio $1.96

This measure is often used by investors as a general guideline in gauging share values. Generally, the higher the price-earnings ratio, the more opportunity a company has for growth. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

Dividend Dividend Yield Yield Dividend Annual Dividends Per Share = Yield Market Price Per Share Dividend $2.00 = = 13.3% Yield $15.00

This ratio identifies the return, in terms of cash dividends, on the current market price of the share. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007

End of Chapter 12

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

© The McGraw-Hill Companies, Inc., 2007