Analysis of Financial Statement by azharswati

1. Presentation No.01
Presented To Prof. Liaquat Aziz
Presented By : Jalal Manzoor
Roll No. 4
Class : BBA 5th
Department of Management Science Gov,t Postgraduate
College (Boys) Mzd Affiliated With UAJK

2. Analysis of Financial Statements
Analyzing financial statements involves a thorough examination of a company’s financial data to
assess its financial health, performance, and prospects. Here’s a detailed breakdown of how this
analysis is typically conducted:
Financial statement analysis involves examining a company’s financial statements to assess its
financial performance, health, and stability. There are various types of financial statement analysis,
each serving different purposes. Additionally, different types of ratios are used in financial analysis to
evaluate different aspects of a company’s financial position. Let’s break it down:
Balance Sheet: A balance sheet is a financial statement that provides a snapshot of a company’s
financial position at a specific point in time. It presents the company’s assets, liabilities, and
shareholders’ equity, showing what the company owns (assets), what it owes (liabilities), and the net
worth attributable to shareholders (equity).

3. Review Balance Sheet
Statement of Changes in Equity: Also known as an equity statement or statement of retained
earnings, this financial statement shows the changes in a company’s shareholders’ equity over a
specific period. It typically includes net income or loss, dividends paid, and any other changes in
equity accounts, providing a reconciliation of the beginning and ending balances of shareholders’
equity.
Income Statement: Also known as a profit and loss statement, an income statement is a financial
statement that summarizes a company’s revenues, expenses, and net income (or net loss) over a
specific period, typically a quarter or a fiscal year. It shows how much money a company generated
from its operations, as well as the costs and expenses incurred in generating that revenue.

4. Analyze Income Statement
Notes to Financial Statements: Notes to financial statements are additional disclosures and explanations
that accompany the main financial statements. They provide detailed information about accounting policies,
assumptions, contingencies, and other relevant information that helps users understand the numbers
presented in the financial statements.
Evaluate Cash Flow Statement
The cash flow statement shows the inflows and outflows of cash over a specific period, categorized into
operating, investing, and financing activities. Key aspects to consider include:
Operating Cash Flow: Evaluate the company’s ability to generate cash from its core business operations.
Analyze operating cash flow ratios such as operating cash flow margin and cash flow to revenue ratio.
Investing Cash Flow: Assess the company’s investment activities, including capital expenditures,
acquisitions, and divestitures. Evaluate the company’s investment efficiency and capital allocation strategy.

5. Evaluate Cash Flow Statement
Financing Cash Flow: Examine the company’s financing activities, such as issuing debt, repaying debt, issuing
equity, and paying dividends. Evaluate the company’s capital structure and its ability to raise capital.
Financial Ratios
Liquidity Ratios: Measure a company's ability to meet short-term obligations and manage liquidity risk.
Examples include the current ratio and the quick ratio.
Coverage Ratios: Measure the extent to which a company’s earnings or cash flow can cover fixed financial
obligations such as interest payments or dividends. Examples include the times interest earned ratio and the
dividend coverage ratio.

6. Financial Ratios
By utilizing these types of financial statement analysis and ratios, investors, creditors, and other
stakeholders can gain valuable insights into a company’s financial performance, position, and
prospects, enabling more informed decision-making.
Profitability Ratios: Assess a company’s ability to generate profits relative to its revenue, assets,
equity, or other measures. Examples include the gross profit margin, net profit margin, return on assets
(ROA), and return on equity (ROE).
Cross-sectional Analysis: Compares a company’s financial performance and ratios with those of its
competitors or industry benchmarks to assess relative performance and identify strengths and
weaknesses.

7. Types of Analysis
Trend Analyses
The profitability ratios for BW have ALL been falling since 2005. Each has been below the industry averages for
the past three years.
This indicates that COGS and administrative costs may both be too high and a potential problem for BW. Note, this
result is consistent with the low interest coverage ratio.
Common-Size Analysis: An analysis of percentage financial statements where all balance sheet items are divided
by total assets and all income statement items are divided by net sales or revenues.
Index analysis: An analysis of percentage financial statements where all balance sheet of income statement figures
for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of
their values in the base year.

8. Types of Analysis
Ratio Analysis: Involves calculating and analyzing various ratios using data from financial statements
to assess different aspects of a company’s financial performance, including liquidity, profitability,
efficiency, and solvency.
The analysis of financial statements is a crucial process for assessing a company’s financial health,
performance, and prospects. This comprehensive review involves gathering the balance sheet, income
statement, and cash flow statement to evaluate various financial metrics and ratios. Key steps include
reviewing the balance sheet to assess assets, liabilities, and shareholders’ equity, analyzing the income
statement to understand revenue sources, expenses, and profitability, and evaluating the cash flow
statement to gauge cash inflows and outflows.