Financial statement analysis;

              82 HASKINS & SELLS November
Financial Statement Analysis
BY SPENCER B. STEVENSON
(Of the New York Thirty-ninth Street Office)
(EDITORIAL NOTE: Of late years the subject of analysis of financial statements has become
increasingly prominent. The task of interpreting correctly a balance sheet and a statement of
income requires no little skill. A number of methods to facilitate evaluation have been advanced.
Among those who have made notable contributions to the subject are Mr. Alexander Wall,
Mr. James H. Bliss, and Mr. Stephen Gilman. Although all aim toward the same goal, their
methods of approach are divergent. Mr. Stevenson has attempted in the following article to
compare and evaluate them and to set forth the results of his own research into the subject.
The article has been reprinted, with adaptations, from the March, 1925, issue of Management
and Administration.)
BUSINESS executives, bankers, in­vestors,
and others, are constantly
confronted with the problem of interpret­ing
financial statements, in order to formu­late
policies or to judge the present and
prospective soundness of a business. To
facilitate such interpretation, several meth­ods
of analysis have been proposed.
Among them are those described in the
articles entitled " A Method of Balance
Sheet Analysis," by Stephen Gilman, and
"Balance Sheet Analysis," by Alexander
Wall, and in J . H . Bliss's books, Financial
and Operating Ratios in Management and
Management Through Accounts.
The purpose of this article is to compare
the several methods proposed, from the
viewpoint of practical utility in judging
the condition of a business, and to con­tribute
some independent thoughts on the
development of the subject toward that
end.
Ratio Method
In brief, by the ratio method, two ele­ments
whose relationship to each other is
considered to be of importance are ex­pressed
by dividing one into the other and
expressing the result decimally. Follow­ing
is a comparison of the ratios advocated
by the writers whose views are now under
consideration:
RATIO PROPOSED BY
Current assets to current liabilities Gilman Wall Bliss
Sales to accounts receivable Gilman Wall Bliss
Sales to inventory Gilman Wall Bliss
Sales to fixed assets Gilman Wall Bliss
Sales to net worth Gilman Wall . . ..
Net worth to fixed assets Gilman Wall . . ..
Net worth to debt (total liabilities) Gilman Wall . . ..
Inventory to receivables Wall . . ..
Sales to total assets (total capital
employed) Bliss
Operating profits to total assets
(total capital employed) Bliss
Gross earnings to sales Bliss
Expenses to sales Bliss
Operating profits to sales . Bliss
Net profits to sales Bliss
Net profits to net worth .... Bliss
Earnings left in business to net
income Bliss
Various classes of assets to total
assets (to emphasize manner in
which capital is invested) Bliss
Various classes of liabilities to
total liabilities (to emphasize
sources from which capital is
drawn) Bliss
It will be observed that many of the
ratios listed, especially among those ad­vocated
by Bliss, do not relate entirely,
or in some cases at all, to the balance sheet.
It will also be noted that none of the ratios
suggested by Gilman and Wall deals with
profits, either operating or net, or with
expenses. This may be because their
articles were intended to consider balance
sheet analysis only, though sales figures
were introduced to permit the calculation
of turnover rates. An income statement
should accompany any balance sheet to
enable a satisfactory analysis to be made,