d

2. Introduction
 Financial analysis is defined as understanding economic and
financial realities to assess current performance and predict
future performance at the level of macro-economy, industry,
and firm.
 There are two key types of analysis:
1) Quantitative analysis using accounting and market data.
2) Qualitative analysis using non-financial data.

3.  Quantitative analysis employs ratios, formulas and statistical modeling, and
divided into two key techniques:
1) Common size statement Analysis: Vertical Analysis.
2) Trend Analysis: Horizontal Analysis.
 Qualitative analysis employs comparisons and explanations of data based on
preset criteria and standards.
 Sources of Data: Financial Statements and published statistics.
 The Financial Analysis should be made at four levels:
1. Global Economy
2. Local Economy
3. Industry
4. Company

4. • Global environment: WTO, Free Capital Flow, and
integration of markets.
• Exchange Rate: Rate at which domestic currency can
be converted into foreign currency.
• Business Competition and challanges.

5. In Local
Currency
In U.S.
Dollars
Brazil -17.0 -28.7
Britain 14.0 15.5
Canada 9.5 1.0
China -10.0 -7.3
France 17.0 20.7
Germany 24.8 28.7
Greece 40.9 45.4
Hong Kong 1.5 1.5
India 6.7 6.0
Italy 19.4 23.2
Japan 55.1 27.9
Mexico -5.0 -5.6
Russia -1.2 -8.9
Singapore -0.5 -4.4
South Korea -1.9 -1.4
Spain 27.0 31.0
Source: The Economist, January 4, 2014

6. -22.2%
7.3%
-12.1%
1.5%
-35% -30% -25% -20% -15% -10% -5% 0% 5% 10%
Canada
Japan
Euro
U.K.
U.S. Dollar vs. Major Currencies, 2003-2014

7.  Gross Domestic Product (GDP)
◦ Market value of goods and services produced over
period of time
 Unemployment Rate
◦ Ratio of number of unemployed to total labor force
 Inflation
◦ Rate at which general level of prices for goods and
services is rising

8.  Interest Rates
◦ Cost of money: high interest rates reduce present
value of future cash flows
 Budget Deficit
◦ Government spending in excess of government
revenues
 Sentiment
◦ Consumer and investor optimism/pessimism is
determinant of economic performance

9. Policy Description
Fiscal Policy
Use of government spending and
taxing for stabilizing economy
Monetary
Policy
Actions taken by Board of
Governors of Federal Reserve
System to influence money supply
or interest rates
Supply-Side
Policy
Address productive capacity of
economy, goal is to induce
workers/owners to produce goods

10.  Recurring cycles of recession and recovery
 Peak
◦ Transition from end of expansion to start of
contraction
 Trough
◦ Transition point between recession and recovery

12.  Economic series that tend to rise or fall in advance of rest of the
economy
 Average weekly hours of production workers
 Initial claims for unemployment insurance
 Manufacturers’ new orders
 New orders for capital goods
 New private housing units authorized by local building permits
 Stock prices: Index changes
 Money supply (M2) growth rate
 Index of consumer expectations for business conditions

13.  Economic series that tend to rise or fall in tandem with the
rest of the economy
 Employees on nonagricultural payrolls
 Personal income less transfer payments
 Industrial production
 Manufacturing and trade sales

14.  Economic series that tend to rise or fall behind the rest of
the economy
 Average duration of unemployment
 Ratio of trade inventories to sales
 Change in index of labor cost per unit of output
 Average prime rate charged by banks
 Commercial and industrial loans outstanding
 Ratio of consumer installment credit outstanding to
personal income
 Change in consumer price index for services

15.  Defining an Industry
◦ NAICS codes
Classification of firms into industry groups
using numerical codes to identify industries
◦ Sensitivity to the Business Cycle
Sensitivity of sales
Operating leverage
Financial leverage

16. 0 5 10 15 20 25 30 35 40
Major airlines
Telecom services
Restaurants
Food products
Home improvement
Business software
Pharmaceuticals
Chemical products
Asset management
Lodging
Aerospace/defense
Railroads
Application software
Trucking
Tobacco
Health care plans
Auto manufacturers
Computer systems
Heavy construction
Integrated oil & gas
Money center banks
Biotech
Electric utilities
ROE (%)

17. 0 10 20 30 40 50 60 70 80 90
Major airlines
Telecom services
Restaurants
Food products
Home improvement
Business software
Pharmaceuticals
Chemical products
Asset management
Lodging
Aerospace/defense
Railroads
Application software
Trucking
Tobacco
Health care plans
Auto manufacturers
Computer systems
Heavy construction
Integrated oil & gas
Money center banks
Biotech
Electric utilities
Rate of return (%)

18.  Shifting portfolio into industry sectors
expected to outperform others based on
macroeconomic forecasts
 After peak, defensive industries often better
performers
 In trough, capital goods industries often
better performers
 In expansion, cyclical industries often better

19.  Industry Life Cycles: Stages Firms Pass Through to
Maturity
 Start-up stage: Often characterized by new
technology/product
 Consolidation stage: Industry leaders begin to emerge
 Maturity stage: Product has reached potential for use
by consumers
 Relative decline: May grow less than rest of economy
or shrink