Financial Analysis


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Financial Analysis

  1. 1. ADMN1107 Distance Education Chapter 12 – Financial Statement Analysis
  2. 2. Financial Statement Analysis - Keys <ul><li>Auditors’ Report </li></ul><ul><ul><li>Why have it and its limitations </li></ul></ul><ul><li>Reading the financial statements </li></ul><ul><ul><li>This includes the notes to the financial statements </li></ul></ul><ul><ul><li>Why read the notes to the financial statements? </li></ul></ul><ul><li>Using the past to predict the future </li></ul>
  3. 3. Financial Statement Analysis <ul><li>Time-series analysis </li></ul><ul><ul><li>Year to year analysis with the same company </li></ul></ul><ul><ul><li>Over a period of 2 or more years </li></ul></ul><ul><ul><ul><li>Sales </li></ul></ul></ul><ul><ul><ul><li>Receivables </li></ul></ul></ul><ul><ul><ul><li>Expenses </li></ul></ul></ul>
  4. 4. Financial Statement Analysis <ul><li>Cross-Sectional Analysis </li></ul><ul><ul><li>From one company to another </li></ul></ul><ul><ul><li>Examples? </li></ul></ul>
  5. 5. Financial Data <ul><li>There are three general types of types of data </li></ul><ul><ul><li>Raw Financial Data [F/S Data] </li></ul></ul><ul><ul><li>Common Size Ratio [Interrelationships] </li></ul></ul><ul><ul><li>Ratio Data </li></ul></ul>
  6. 6. Performance Ratios <ul><li>Return on Assets (ROA) </li></ul><ul><ul><li>Type of return that is earned on the investment in assets </li></ul></ul><ul><ul><li>Cross industry analysis must be done carefully </li></ul></ul><ul><li>Return on Equity (ROE) </li></ul><ul><ul><li>The return the shareholders are earning on their investment in the company </li></ul></ul>
  7. 7. Performance Ratios <ul><li>Leverage </li></ul><ul><ul><li>How much is financed by debt holders </li></ul></ul><ul><ul><li>If a large portion is financed from debt holders then it’s said to be ‘highly leveraged’ </li></ul></ul>
  8. 8. Turnover Ratios <ul><li>Accounts Receivable </li></ul><ul><li>Inventory Turnover </li></ul><ul><li>Accounts Payable Turnover </li></ul>
  9. 9. Short-Term Liquidity Ratios <ul><li>Current Ratio </li></ul><ul><li>Quick Ratio </li></ul><ul><ul><li>Includes Cash, Accounts Receivable and Marketable Securities </li></ul></ul>
  10. 10. Long-term Liquidity Ratios <ul><li>Debt/Equity Ratios </li></ul><ul><ul><li>Measure of how much debt a company has in relation to equity </li></ul></ul>
  11. 11. Earnings Per Share <ul><li>Mandatory disclosure for public companies </li></ul><ul><li>Often quoted and will fluctuate based on certain factors </li></ul><ul><ul><li>Revenue Projections </li></ul></ul><ul><ul><li>Quarterly earnings </li></ul></ul><ul><li>Basic calculates what we know [remove preferred dividends] </li></ul>
  12. 12. Earnings Per Share <ul><li>Diluted EPS takes a ‘what if’ approach </li></ul><ul><li>It can get very complicated as it includes things such as: </li></ul><ul><ul><li>Convertible Bonds </li></ul></ul><ul><ul><li>Stock Options </li></ul></ul>
  13. 13. So Ratio Analysis is Fool Proof Right?
  14. 14. Pitfalls of Ratio Analysis <ul><li>“Rules of thumb” may not work for all industries </li></ul><ul><li>Comparison between companies may not be valid [size, market share, etc.] </li></ul><ul><li>A ratio on its own is just a number </li></ul>
  15. 15. End