Financial Statement Analysis

1. FINANCIAL
STATEMENT ANALYSIS
Submitted by:- Yashika
Gupta
Date -12/04/2020

2. GENERAL UNDERSTANDING OF FINANCIAL
STATEMENT ANALYSIS
Aiming to detect changes in company’s trends and
relationships in order to make more successful economic
decisions, the financial statement analysis (also referred as
financial analysis of enterprise) is the process of analyzing and
reviewing firm’s balance sheet (Statement of financial
position), income statement (Profit and loss report) and other
statements.

3. MEANING OF FINANCIAL STATEMENT ANALYSIS
Financial Statement Analysis is the collective name for the tools
and techniques that are intended to provide relevant information
to the decision makers. The purpose of the FSA is to assess the
financial health and performance of the company.
FSA consist of the comparisons for the same company over the
period of time and comparisons of different companies either in
the same industry or in different industries.

4. FINANCIAL STATEMENT ANALYSIS
Purpose:
• To use financial statements to evaluate an organisation’s
– Financial performance
– Financial position
– Prediction of future performance
• To have a means of comparative analysis across time in terms of:
– Intracompany basis (within the company itself)
– Intercompany basis (between companies)
– Industry Averages (against that particular industry’s averages)
• To apply analytical tools and techniques to financial statements to obtain useful information to
aid decision making.

5. FINANCIAL STATEMENT ANALYSIS
Financial statement analysis involves analysing the information
provided in the financial statements to:
– Provide information about the organization's:
• Past performance
• Present condition
• Future performance
– Assess the organization's:
• Earnings in terms of power, persistence, quality and growth
• Solvency

6. OBJECTIVE OF FINANCIAL
STATEMENT ANALYSIS
1. To estimate the earning capacity of the business concern.
2. To find out the operating performance of a company.
3. To examine efficiency of various business activities.
4. To find out the financial performance of a company.
5. To judge the managerial ability.
6. To compare the performance of a company for different
periods.
7. To assess the borrowing capacity of the business concern.

7. OBJECTIVE OF FINANCIAL
STATEMENT ANALYSIS
8. To determine the long term liquidity and solvency of the
business concern.
9. To decide about the future prospects of the business concern.
10. To know the profitability and collection policy of the
business concern.
11. To verify the correctness and accuracy of the decision taken
by the management already.
12. To compare the overall performance of the company with
other similar companies.
13. To examine the impact of past decision of the management
on financial aspect.

8. FINANCIAL STATEMENTS
1. The Income Statement
• 2. The Balance Sheet
• 3. The Statement of Retained Earnings
• 4. The Statement of Changes in Financial Position
-Changes in Working Capital Position
-Changes in Cash Position
-Changes in Overall Financial Position

9. TOOLS OF FINANCIAL STATEMENT
ANALYSIS
The commonly used tools for financial statement analysis are:
• Comparative financial statements analysis:
– Horizontal analysis/Trend analysis
– Vertical analysis/Common size analysis/ Component Percentages
• Financial Ratio Analysis

10. FINANCIAL STATEMENT ANALYSIS
METHODS
Horizontal financial statement analysis means the comparison
of the information from the financial report of a company over
some certain time periods. Both the financial information and
the ratios derived from it can be compared. In other words,
horizontal analysis (very often referred as trend analysis) is
reviewing and comparing the dynamics of the same indicators
and making conclusions on company’s performance over time.
As said before, this analysis method may be applied the
financial statement information itself and to ratios derived from
it, so the horizontal analysis may include either absolute values
comparison or percentage comparison. Ratios and indicators of
a company can also be compared to average values in the
economic sector or values of competitors.

11. FINANCIAL STATEMENT ANALYSIS
METHODS
Vertical analysis is a process of comparison of one item to the
base item. Commonly, the vertical analysis is conducted for the
financial statement of a single period (unlike the horizontal
analysis, which is reviewing information over at least two
different periods of time, or more). Also referred as common-
size analysis, vertical analysis generally means usage of total
assets or total liabilities or shareholders’ equity as base figures
of the proportion. The main reason for performing the vertical
analysis for one single period is seeing the relative proportions
of different elements of assets and sources of finance. The
second method of the financial statement analysis is ratios
calculation and interpretation. Many ratios, showing the relative
size of one number in relation to another exist, and being able
to measure them and see their dynamics over time is extremely
useful in terms of understanding firm’s performance and

12. FINANCIAL RATIOS
Activity ratios – Measure how productive/efficient a company is in
using its assets
Liquidity ratios – Measure a firm’s ability to meet its short-term cash
obligations
Solvency ratios – Measure a firm’s financial leverage and ability to pay
its long-term obligations
Profitability ratios – Measures how efficient company is at turning
sales into net profit
Valuation ratios – Measure the quantity of an asset (or flow) for a
specific piece of ownership. These are used to compare companies
relative valuation

13. ACTIVITY RATIOS
Activity ratios measure how productive/efficient a company is in using its
assets which is why they are sometimes known as operating efficiency ratios
or asset utilization ratios. Note that the ratios that use a balance sheet value
use the average vaue for a given period (beginning +ending values/2):

15. LIQUIDITY RATIOS
Liquidity ratios measure a firm’s ability to meet its short-term cash
obligations. As we’ve covered, the first three ratios are only different
in the assumed liquidity of the current assets we include in the
numerator.

17. SOLVENCY RATIOS
Solvency ratios measure a firm’s ability to meet long term
commitments. They include debt ratios based on the balance sheet as
well as coverage ratios based on the income statement.

19. PROFITABILITY RATIOS
Profitability ratios measure the overall performance of the firm
relative to assets, equity, capital, or revenue. Calculating how
profitable a firm is, in some respects at least, the holy grail. It is
worth noting before introducing the different ratios that many of
them use slightly different different definitions for types of earnings
and profit. You need to understand and be able to
calculate/differentiate between EBITDA, EBIT, and EBT for example.

21. LIMITATIONS OF FINANCIAL
STATEMENT ANALYSIS
1. We must be careful with financial statement analysis.
-Strong financial statement analysis does not necessarily mean that the
organization has a strong financial future.
-Financial statement analysis might look good but there may be other factors
that can cause an organization to collapse.
2. Financial Analysis is only a Means
3. Ignores the Price Level Changes
4. Financial Statements are essentially Intrim Reports
5. Accounting Concepts and Conventions
6. Influence of Personal Judgments6. Disclose only Monetary Facts

22. SUMMARY
The essence of the financial statement analysis of a company is the
usage of different methods of emphasizing the comparative and
relative importance of the data, presented in the financial report of a
company in order to evaluate company’s performance and position.
These methods include horizontal and vertical analysis, calculation of
various ratios, studying and interpreting their values in order to make
right conclusions on the business.