Financial Analysis

1. FINANCIAL STATEMENT
ANALYSIS
COURSE LECTURER
Ghaffar Waince
Director (Finance),
Punjab Local Govt. Board,
LG & CD Department
Course Code:
_____Program
Academic Year
Spring/Fall 2024

2. Financial Statement Analysis
• A thorough financial statement analysis
include:
• Ratio Analysis
• Trend Analysis
– Common Size Analysis
– Percent Change Analysis
• Du Pont Analysis

3. Trend Analysis
• Trend analysis is about plotting ratio over
time.
• Trends give clues as to whether a firms
financial condition is likely to improve or
to deteriorate.

4. Trend Analysis
• This graph shows that
MicroDrive’s ROE has
been declining since
1998, even though the
industry average has
been relatively stable.
• All the other ratios can
be analyzed similarly.
ROE
(%)
Rate of Return on Equity 1997-2001
6%
4%
2%
0%
18%
16%
14%
12%
10%
8%
1997 1998 1999 2000 2001
Industry
MicroDriv
e

5. Common Size Analysis
• Common Size analysis is used to identify trends in
financial statements.
• Common size is also useful in comparative analysis.
• In common size analysis all income statement items
are divided by sales ( common size income statement
shows each item as % of sales) and all balance sheet
items are divided by total assets (common size
balance shows each item as a % of total assets).

6. Common Size Analysis
• The advantage of common size analysis is :
– It facilitates comparisons of balance sheets and
income statements over time and across
companies.

7. Percent Change Analysis
• Percent Change analysis is also used to
identify trends in financial statements.
• In this type of analysis, growth rates are
calculated for all income statement items and
balance sheet accounts.

8. Du Pont Analysis
• The profit margin times the total asset
turnover is called Du Pont equation and it
gives rate of return on assets.
• ROA=Profit margin X Total asset turnover
=(Net income/Sales) X (Sales/Total assets)
If the company is financed only with common
equity, the ROA and ROE would be same because
total assets equal total equity.

9. Du Pont Analysis
• However if a company use debt than ROE
must be greater than ROA. Specifically the
ROA can be multiplied by the equity
multiplier.
• Equity Multiplier (EM) = total assets / equity
• Firms that use large amounts of debt financing
(more leverage) will have a high EM-the more
the debt the less the equity, hence the higher
the EM.

10. Du Pont Analysis
• ROE depends on its ROA and its use
of leverage
• ROE = ROA x EM
• ROE = (net income/total assets) x (total
assets/equity)
• So the extended Du Pont Equation is:
• ROE = (Profit Margin)(Total Assets
t/o)(EM)

11. Comparative Ratios and Benchmarking
• Ratio analysis involves comparisons – a
company’s ratios are compared with those of
other firms in the same industry, that is to
industry average figures.
• However some firms go a step further – they also
compare their ratios with those of a smaller set of
leading companies in that industry. This
technique is called Benchmarking.
• The bench marking setup makes it easier for
company’s to see exactly where the company
stands relative to its competition.