Fin Statement Analysis MANAC(14 17)

7/18/2019 Fin Statement Analysis MANAC(14 17)

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What is financial statement analysis?

Tearingapart the financial statements

and looking

at the relationships

Financial Statement AnalysisFinancial Statement Analysis


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Who analyes financial statements? !nternal "sers #i$e$% management&

'(ternal "sers #emphasis of chapter&'(amples?

!n)estors% creditors% reg"latory agencies * +

stock market analysts and

a"ditors



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What do internal "sers "se it for?

lanning% e)al"ating and controllingcompany operations

What do e(ternal "sers "se it for?

Assessing past performance and c"rrentfinancial position and making predictions

a.o"t the f"t"re profita.ility and sol)encyof the company as /ell as e)al"ating theeffecti)eness of management



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!nformation is a)aila.le from ".lished ann"al reports

#1& Financial statements

#2& otes to financial statements

#3& etters to stockholders

#,& A"ditors report #!ndependent

acco"ntants& 4anagements disc"ssion and

analysis

5eports filed /ith the go)ernment



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!nformation is a)aila.le from ther so"rces

#1& e/spapers

#2& eriodicals

#3& ther ."siness p".lications



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8oriontal Analysis

9ertical Analysis

:ommon-Sie Statements

Trend ercentages

5atio Analysis

4ethods of4ethods of



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8oriontal Analysis8oriontal Analysis


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9ertical Analysis9ertical Analysis

For a single financialstatement% each item

is e(pressed as apercentage of asignificant total%

e$g$% all incomestatement items aree(pressed as a

percentage of sales

For a single financialstatement% each item

is e(pressed as apercentage of asignificant total%e$g$% all income

statement items aree(pressed as a

percentage of sales


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:ommon-Sie Statements:ommon-Sie Statements

Financial statements that sho/only percentages and no

a.sol"te dollar=r"pee amo"nts

Financial statements that sho/only percentages and no

a.sol"te dollar=r"pee amo"nts


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Trend ercentagesTrend ercentages

Sho/ changes o)er time ingi)en financial statement items

#can help e)al"ate financialinformation of se)eral years&

Sho/ changes o)er time ingi)en financial statement items

#can help e)al"ate financialinformation of se)eral years&


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5atio Analysis5atio Analysis

'(pression of logical relationships.et/een items in a financialstatement of a single period#e$g$% percentage relationship

.et/een re)en"e and net income&

'(pression of logical relationships.et/een items in a financialstatement of a single period

#e$g$% percentage relationship.et/een re)en"e and net income&

1 13


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8oriontal Analysis '(ample8oriontal Analysis '(ample

The management of :lo)er :ompanypro)ides yo" /ith comparati)e .alancesheets of the years ended @ecem.er 31%

1>>> and 1>>;$ 4anagement asks yo" toprepare a horiontal analysishoriontal analysis on the

information$

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17 10


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:alc"lating :hange in @ollar Amo"nts

@ollar

:hange

:"rrent ear

Fig"re

Base ear

Fig"reC D


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:alc"lating :hange in @ollar Amo"nts

Since /e are meas"ring the amo"nt ofthe change .et/een 1>>; and 1>>>% the

dollar amo"nts for 1>>; .ecome theE.ase year fig"res$

@ollar

:hange

:"rrent ear

Fig"re

Base ear

Fig"reC D


17 17


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:alc"lating :hange as a ercentage

ercentage

:hange

@ollar :hange

Base ear Fig"re 1C G


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H12% D H23%0 C H#11%0&


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#H11%0 I H23%0& G 1 C ,;$>


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:9'5 :55AT!

:omparati)e Balance Sheets

@ecem.er 31% 1>>> and 1>>;

!ncrease #@ecrease&1>>> 1>>; Amo"nt

ia.ilities and StockholdersJ 'K"ity

:"rrent lia.ilitiesL

Acco"nts paya.le 67%???H ,,%???H 23%???H 02$3

otes paya.le 3%??? 6%??? #3%???& #0?$?&

Total c"rrent lia.ilities 7?%??? 0?%??? 2?%??? ,?$?

ong-term lia.ilitiesL

Bonds paya.le% ; 70%??? ;?%??? #0%???& #6$3&

Total lia.ilities 1,0%??? 13?%??? 10%??? 11$0

StockholdersJ eK"ityL

referred stock 2?%??? 2?%??? - ?$?

:ommon stock 6?%??? 6?%??? - ?$?

Additional paid-in capital 1?%??? 1?%??? - ?$?

Total paid-in capital >?%??? >?%??? - ?$?

5etained earnings ;?%??? 6>%7?? 1?%3?? 1,$;

Total stockholdersJ eK"ity 17?%??? 10>%7?? 1?%3?? 6$,

Total lia.ilities and stockholdersJ eK"ity 310%???H 2;>%7??H 20%3??H ;$7

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:9'5 :55AT!

:omparati)e !ncome StatementsFor the ears 'nded @ecem.er 31% 1>>> and 1>>;

!ncrease #@ecrease&

1>>> 1>>; Amo"nt

et sales 02?%???H ,;?%???H ,?%???H ;$3

:ost of goods sold 36?%??? 310%??? ,0%??? 1,$3

Mross margin 16?%??? 160%??? #0%???& #3$?&

perating e(penses 12;%6?? 126%??? 2%6?? 2$1

et operating income 31%,?? 3>%??? #7%6??& #1>$0&

!nterest e(pense 6%,?? 7%??? #6??& #;$6&

et income .efore ta(es 20%??? 32%??? #7%???& #21$>&

ess income ta(es #3?& 7%0?? >%6?? #2%1??& #21$>&et income 17%0??H 22%,??H #,%>??&H #21$>&

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:9'5 :55AT!


!ncrease #@ecrease&

1>>> 1>>; Amo"nt

et sales 02?%???H ,;?%???H ,?%???H ;$3

:ost of goods sold 36?%??? 310%??? ,0%??? 1,$3

Mross margin 16?%??? 160%??? #0%???& #3$?&



!nterest e(pense 6%,?? 7%??? #6??& #;$6&



Sales increased .y ;$3 /hile net

income decreased .y 21$>$

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!ncrease #@ecrease&

1>>> 1>>; Amo"nt

et sales 02?%???H ,;?%???H ,?%???H ;$3

:ost of goods sold 36?%??? 310%??? ,0%??? 1,$3

Mross margin 16?%??? 160%??? #0%???& #3$?&



!nterest e(pense 6%,?? 7%??? #6??& #;$6&



There /ere increases in .oth cost of goodssold #1,$3& and operating e(penses #2$1&$These increased costs more than offset the

increase in sales% yielding an o)eralldecrease in net income$

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9ertical Analysis '(ample9ertical Analysis '(ample

The management of Sample :ompany asksyo" to prepare a )ertical analysis)ertical analysis for the

comparati)e .alance sheets of the

company$

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H;2% I H,;3% C 17 ro"nded

H3% I H3;7% C ; ro"nded

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H76% I H,;3% C 16 ro"nded

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Trend ercentages '(ampleTrend ercentages '(ample

Wheeler% !nc$ pro)ides yo" /ith the follo/ingoperating data and asks that yo" prepare a

trend analysis$

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Wheeler% !nc$ pro)ides yo" /ith the follo/ingoperating data and asks that yo" prepare a

trend analysis$

H1%>>1 - H1%;2 C H171H1%>>1 - H1%;2 C H171

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>0 as the .ase year% /e de)elop thefollo/ing percentage relationships$

H1%>>1 - H1%;2 C H171H1%>>1 - H1%;2 C H171

H171 I H1%;2 C > ro"ndedH171 I H1%;2 C > ro"nded

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Trend line

for Sales

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5atios can .e e(pressed in three different/aysL

1$ 5atio#e$g$% c"rrent ratio of 2L1&

2$ #e$g$% profit margin of 2&

3$ H #e$g$% 'S of H2$20&

:A


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Ratio Analysis:Ratio Analysis:

Ratio analysis: an analytical technique that

typically involves a comparison o the

relationship !et"een t"o inancial items#

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$!%ectives o Ratio Analysis:$!%ectives o Ratio Analysis:

Stan&ar&i'e inancial inormation or

comparisons

Evaluate current operations Compare perormance "ith past

perormance

Compare perormance a(ainst other irmsor in&ustry stan&ar&s

Stu&y the eiciency o operations

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Ratio Analysis:Ratio Analysis:

Ratio analysis !e(ins:

"ith the calculation o a set o inancial ratios

&esi(ne& to sho" the relative stren(ths an&

"ea)nesses o a company as compare& to:$ther irms in the in&ustry

Lea&in(s irms in the in&ustry

The previous year o the same irm Ratio analysis helps to sho" "hether the irm*s

position has !een improvin( or &eterioratin(

Ratio analysis can also help plan or the uture

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Five Types o Financial Ratios:Five Types o Financial Ratios:

Liqui&ity Ratios#

Asset Mana(ement Ratios +Activity Ratios,#

-e!t Mana(ement Ratios +Levera(eRatios,#

.roita!ility Ratios#

Mar)et /alue Ratios#

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Liqui&ity Ratios:Liqui&ity Ratios:

A liqui& asset is one that can !e easily

converte& into cash at a air mar)et value

Liqui&ity question &eals "ith this question0ill the irm !e a!le to meet its current

o!li(ations1

T"o measures o liqui&ityCurrent Ratio

2uic)3Aci& Test Ratio

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Current ratio 4

Current assets 3 Current lia!ilities

Purpose: Measures a irm*s a!ility to pay its

current lia!ilities rom its current assets#

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5T :55AT!


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5T :55AT!

1>>>

:ash 3?%???H

Acco"nts recei)a.le% net

Beginning of year 17%???

'nd of year 2?%???

!n)entory

Beginning of year 1?%???

'nd of year 12%???

Total c"rrent assets 60%???Total c"rrent lia.ilities ,2%???

Sales on acco"nt ,>,%???

:ost of goods sold 1,?%???

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:"rrent 5atio:"rrent 5atio

:"rrent5atio

H60%H,2%

C C 1$00 L 1

4eas"res the a.ilityof the company to pay c"rrent

de.ts as they .ecome d"e$

:"rrent5atio

:"rrent Assets:"rrent ia.ilities

C

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2uic) +Aci& Test, Ratio 4

Current assets 5 Inventories 3 Current

lia!ilities

Purpose: Measures a irm*s a!ility to pay itscurrent lia!ilities "ithout relyin( on the

sale o its inventory#

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O"ick Assets:"rrent ia.ilities

CAcid-Test

5atio

orton :orporations K"ickassets consist of cash of

H3% and acco"nts

recei)a.le of H2%$

Acid-Test #O"ick& 5atioAcid-Test #O"ick& 5atio

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O"ick Assets:"rrent ia.ilities

CAcid-Test

5atio

H0%H,2%

C 1$1> L 1CAcid-Test

5atio

Acid-Test #O"ick& 5atioAcid-Test #O"ick& 5atio

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Asset Mana(ement Ratios:Asset Mana(ement Ratios:

Asset mana(ement ratio measures ho" eectively

the irm is mana(in(3usin( its assets

-o "e have too much investment in assets or too

little investment in assets in vie" o current an&pro%ecte& sales levels1

0hat happens i the irm has

Too much investment in assets Too little investment in assets

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The Inventory Turnover Ratio#

The -ays Sales $utstan&in(#

The Fi6e& Assets Turnover Ratio# The Total Assets Turnover Ratio#

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The Inventory Turnover Ratio4

Sales3 Inventory#

Purpose: In&icates the num!er o times that airm sells its inventory each year#

Measures the eiciency o Inventory

Mana(ement A hi(h ratio in&icates that inventory &oes not

remain in "arehouses or on shelves7 !ut rather

turns over rapi&ly into sales

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!n)entory T"rno)er!n)entory T"rno)er

:ost of Moods SoldA)erage !n)entory

!n)entoryT"rno)er

C

4eas"res the n"m.er of timesin)entory is sold and

replaced d"ring the year$

C 12$73 times H1,%

#H1% P H12%& I 2!n)entoryT"rno)er

C

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Sales on Acco"ntA)erage Acco"nts 5ecei)a.le

Acco"nts5ecei)a.le

T"rno)er

C

Acco"nts 5ecei)a.le T"rno)erAcco"nts 5ecei)a.le T"rno)er

C 26$7 times H,>,%

#H17% P H2%& I 2

Acco"nts5ecei)a.leT"rno)er

C

This ratio meas"res ho/ manytimes a company con)erts its

recei)a.les into cash each year$

A)erage% net acco"ntsrecei)a.le

et% credit sales

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Asset Mana(ement Ratio:Asset Mana(ement Ratio:

-ays Sales $utstan&in( +-S$,

To appraise the quality o accounts receiva!les

Avera(e len(th o time that the irm must "ait

ater ma)in( a sale !eore receivin( cash romcustomers

Measures eectiveness o a irm cre&it policy

In&icates the level o investment nee&e& in

receiva!les to maintain irm*s sales level 0hat happens i this ratio is

Too hi(h7 or

Too lo"

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The -ays Sales $utstan&in( +-S$,4

Accounts Receiva!les3+Sales389,#

Purpose: In&icates the len(th o timenormally require& to collect a receiva!le

resultin( rom a cre&it sale#

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"m.er of @ays Sales"m.er of @ays Sales


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"m.er of @ays Sales"m.er of @ays Sales

in Acco"nts 5ecei)a.lein Acco"nts 5ecei)a.le

4eas"res% on a)erage% ho/ manydays it takes to collect an

acco"nt recei)a.le$

@ays Salesin Acco"nts

5ecei)a.les

C 36 @aysAcco"nts 5ecei)a.le T"rno)er

C 13$,; daysC 36 @ays26$7 Times

@ays Salesin Acco"nts5ecei)a.les

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The Fi6e& Assets Turnover Ratio4

Sales3 Net Fi6e& Assets#

Purpose: to measure ho" eectively the irmuses its plant an& equipment to (enerate sales#

Fi6e& Assets Turnover Ratio

Measures eiciency o lon(5term capital

investment

;o" much i6e& assets are nee&e& to achieve a

particular level o sales1

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Total Asset Turnover Ratio4

Sales3 Total Assets#

Purpose: Measure eiciency o total assets or

the company as a "hole or or a &ivision o

the irm#

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-e!t Mana(ement Ratios +Levera(e-e!t Mana(ement Ratios +Levera(e


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-e!t Mana(ement Ratios +Levera(e-e!t Mana(ement Ratios +Levera(e

Ratios,:Ratios,:

Implications o use o !orro"in(s

Cre&itors loo) to Stoc)hol&ers* equity as a

saety mar(in

Interest on !orro"in(s is a le(al lia!ility o the

irm

Interest is to !e pai& out o operatin( income

-e!t ma(niies return an& ris) to commonstoc)hol&ers

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-e!t Mana(ement Ratios:-e!t Mana(ement Ratios:

Total -e!t to Total Assets#

Times Interest Earne& Ratio +Covera(e

Ratio,

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Total -e!t to Total Assets Ratio4

Total &e!ts3Total assets#

Purpose: Measures a irm*s inancial levera(e# Measures percenta(e o assets !ein( inance&throu(h !orro"in(s

Too hi(h a num!er means increase& ris) o

!an)ruptcy 0hat percenta(e o total assets are !ein(

inance& throu(h &e!ts1

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Times Interest Earne& +TIE,4

E


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.roita!ility Ratios:.roita!ility Ratios:

Net .roit Mar(in on Sales#


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.roit Mar(in on Sales4

Net Income3 Sales#

Purpose: In&icates the percenta(e o each sales

&ollar that contri!utes to net income#

Relates net income availa!le to commonstoc)hol&ers to sales

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Return on Assets +R$A,4

Net Income3 Total Assets#

Purpose: Measures the rate o return a irm reali'es

on its investment in assets#

Relates net income availa!le to common

stoc)hol&ers to total assets

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Return on Common Equity +R$E,4

Net Income3 Common Equity#

Purpose: Measures the rate o return on a irm*s

stoc)hol&ers* equity#

Relates net income availa!le to common

stoc)hol&ers to common stoc)hol&ers equity

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'K"ity% or ongDTerm'K"ity% or ongDTerm


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'K"ity% or ong Term'K"ity% or ong TermSol)ency 5atiosSol)ency 5atios

This is part of the information tocalc"late the eK"ity% or long-term

sol)ency ratios of orton :orporation$

5T :55AT!

1>>>

et operating income ;,%???H

et sales ,>,%???

!nterest e(pense 7%3??

Total stockholdersJ eK"ity 23,%3>?

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5T :55AT!

1>>>


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1>>>

:ommon shares o"tstanding

Beginning of year 17%

'nd of year 27%,

et income 03%6>H

StockholdersJ eK"ity

Beginning of year 1;%

'nd of year 23,%3>

@i)idends per share 2

@ec$ 31 market price=share 2

!nterest e(pense 7%3

Total assets

Beginning of year 3%

'nd of year 3,6%3>

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'K"ity 5atio'K"ity 5atio

'K"ity5atio

CStockholders 'K"ity

Total Assets

'K"ity5atio

C H23,%3>

H3,6%3>67$7C

4eas"res the proportionof total assets pro)ided .y

stockholders$

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et !ncome to et Saleset !ncome to et Sales


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et !ncome to et Saleset !ncome to et SalesA=Q=A 5et"rn on Sales or rofit 4arginA=Q=A 5et"rn on Sales or rofit 4argin

et !ncometo

et Sales

C et !ncome

et Sales

et !ncometo

et SalesC

H03%6>H,>,%

C 1$>

4eas"res the proportion of the sales dollar/hich is retained as profit$

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5et"rn on A)erage :ommon5et"rn on A)erage :ommon


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ggStockholders 'K"ity #5'&Stockholders 'K"ity #5'&

5et"rn on

Stockholders'K"ity

C

et !ncome

A)erage :ommonStockholders 'K"ity

C H03%6>

#H1;% P H23,%3>& I 2C 20$>

5et"rn onStockholders

'K"ity

!mportant meas"re of theincome-prod"cing a.ility

of a company$

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'arnings

per Share

'arnings A)aila.le to :ommon StockholdersWeighted-A)erage "m.er of :ommon

Shares "tstanding

C

'arningsper Share

H03%6>#17% P 27%,& I 2

C C H2$,2

The financial press reg"larly p".lishesact"al and forecasted 'S amo"nts$

'arnings er Share'arnings er Share

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rice-'arnings 5atiorice-'arnings 5atio


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rice 'arnings 5atiorice 'arnings 5atio=' 5atio=' 5atio

rice-'arnings

5atio

4arket rice er Share

'S

C

rice-'arnings5atio

C H2$

H 2$,2C ;$3 L 1

ro)ides some meas"re of /hether thestock is "nder or o)erpriced$

Fin Statement Analysis MANAC(14 17)

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