Financial Statement Analysis
(FIN442)
Lecture 8 – Liability
Recognition
SPRING 2018
JONATHAN LEONG
Outline
• Previous class
• Solvency
• Bonds
Previous Class
• Reviewed Pension Accounting
• Asset Recognition
Ratios, ratios, ratios
• Last class we calculated all those wonderful ratios
◦ A/R Days
◦ Inventory Days
Liquidity & Solvency
• We try to determine if a company can remain solvent, or can it pay of its bills and debt
• We have already seen the initial turnover ratios but will now explore other ratios
◦ Quick Ratio
◦ Current Ratio
◦ Leverage Ratio
Solvency Ratios
• Current Ratio – Indicates the amount of cash and other readily available liquid assets relative
to its obligations coming due
◦ Current Assets/Current Liabilities
• Quick Ratio – Also know as the acid test ratio, similar to the current ratio, but only looks at the
assets that could easily be converted into cash
◦ (Current Assets – Inventories)/Current Liabilities
• Leverage Ratio – Focuses on the relative mix of debt, different from the leverage ratio we saw
earlier
◦ Total Debt/Total Equity
Notes, Bonds and Debt
• Why do we care?
• What is a Bond and its components?
• How do we value it?
• How do we report it?
Kaisa
• A Chinese property company known as Kaisa defaulted on its debt despite the boom in the
Chinese/Hong Kong equity markets
• In 2010 they were able to come out with a 13.5% 5 Year bond, twice the yield on the normal
US real estate bond at the time
• Despite having the market “appropriately” price out the value of the debt, many investors
ended up taking a bath here…
• What do you need to know not to do the same?
Kasia Holding