Financial Statement Analysis

Financial Statement AnalysisDavid Kelly

Whos Results are Better?Which Company is better?How do we Compare These ?

Lets Try Financial Statement AnalysisIntegral part of broader framework of business analysisUse of financial statements to analyze a companys financial position and performance and to assess future financial performance.

What are the components of financial statement analysis?Profitability analysis the evaluation of a companys return on investment.Risk analysis the evaluation of a companys ability to meet its commitments.Analysis of cash flows the evaluation of how a company is obtaining and deploying its funds.

What are the Analysis Tools?Comparative Financial Statement AnalysisComparing consecutive balance sheets, income statements or statements of cash flows from period to period.Review changes in account balances on a year-to-year or multiyear basis.Reveals direction, speed and extent of trends.Includes year to year change analysis.Includes index-number trend analysis.Also called horizontal analysis.

What are the analysis tools (Cont.)?Common-Size Financial StatementsFinancial statement analysis can benefit from knowing what portion of a group is made up of a particular account.The balance sheet components are expressed as a % of total assets.Income statement components are expressed as a % of total revenues.Also called vertical analysis.

What are the analysis tools (Cont.)?Ratio AnalysisMost popular and widely used tool.It expresses the mathematical relation between two economically important quantities.There must be a direct and crucial link, i.e. an items sales price and cost.Ratios provide insights into underlying conditions.Examples are; current ratio, debt to equity ratio and return on assets.

What are the analysis tools (Cont.)?Cash Flow AnalysisA tool to evaluate the sources and uses of funds.Provides insights into how a company is obtaining its financing and deploying its resources.Can be used in both cash flow forecasting as well as in liquidity analysis.

What is an outcome of financial analysis?Valuation Valuation is an important reason, result and outcome.Valuation refers to estimating the intrinsic value of a company or its stock.Based on present value theory which states that the value of a company is equal to the sum of all expected future payoffs from the security that are discounted to the present value at an appropriate discount rate.And the winner is

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