Module 6 Interpretation of Financial Statements Omar ElKheshen – kheshen@gmail.com 1 Learning Objectives By the end of this module you should understand: 1. The need for ratio analysis of external financial statements 2. The strengths and weaknesses of ratio analysis 3. The major ratios commonly used: liquidity ratios, profitability ratios, capital structure ratios, and efficiency ratios 4. How to expand the external analysis to an integrated chart analysis focusing on return on investment 5. The basic stock market ratios Omar ElKheshen – kheshen@gmail.com 2 Agenda 6.1 Introduction 6.2 Ratio Analysis 6.3 Group 1: Liquidity Ratios 6.4 Group 2: Profitability Ratios 6.5 Group 3: Capital Structure Ratios 6.6 Group 4: Efficiency Ratios 6.7 Other Possible Ratios 6.8 Window Dressing 6.9 Putting it all Together: The Dupont Chart 6.10 A One Hundred Per Cent Statement 6.11 Basic Stock Market Ratios Review Questions Case Studies Omar ElKheshen – kheshen@gmail.com 3 In chapter 1, we saw how this course is designed to cover both accounting functions – financial and managerial Financial Accounting (Reporting) Management Accounting Compiling accounting information into financial statements showing the overall picture of the firm Predicting future prices and costs of daily operations Important for managers and shareholders in taking decisions and assessing company’s performance Important for managers to plan and control the day to-day activities of the business The first 7 modules of this course address financial accounting for managers; the following 9 modules address management accounting for decision making Omar ElKheshen – kheshen@gmail.com 4 So far we’ve covered the meaning and the basic construction of the principal financial statements prepared by a company Module 2 Module 3 Module 4 Module 5 Profit and loss account Balance sheet Statement of cash flow Financial reporting framework From the The perspective of a manager who must understand what