01 - FS Analysis 2013

8/12/2019 01 - FS Analysis 2013

1/19

By Arthur S. Cayanan

Copyright Arthur S. Cayanan 2013

8/12/2019 01 - FS Analysis 2013

2/19


Identify the objectives for analyzing thefinancial statements

Identify the owners and managers behind the

company Identify the trends in the industry where the

company operates and the macroeconomicvariables that will be crucial to the companys

operations

8/12/2019 01 - FS Analysis 2013

3/19


Look at the external auditors opinion

Identify the possible motivations of managersto window-dress the financial statements

being analyzed Evaluate the companys accounting policies

Apply financial analysis techniques

8/12/2019 01 - FS Analysis 2013

4/19


For equity investments (short term or longterm? for control or not?)

For lending (short term or long term loan?

working capital loan or project financing?) For appraising managements performance

For regulatory purposes

For monitoring

8/12/2019 01 - FS Analysis 2013

5/19

8/12/2019 01 - FS Analysis 2013

6/19


GDP growth rates

Interest rates

Foreign exchange rates

Demographics Cultural differences

Political situation

Regulatory environment

8/12/2019 01 - FS Analysis 2013

7/19Copyright Arthur S. Cayanan 2013

Unqualified

Qualified

Adverse

8/12/2019 01 - FS Analysis 2013


To raise funds (equity or debt financing)

To protect managements compensationpackages (stock options, bonuses, salary

increases) To comply with regulatory requirements

To manage taxes

To present more stable operations (income

smoothing)

8/12/2019 01 - FS Analysis 2013


Aggressive or conservative

Capitalize or expense

Managements judgment and estimates

Classification and presentation On or off

8/12/2019 01 - FS Analysis 2013


Break-even analysis

Financial ratio analysis

Common size analysis

Trend analysis

8/12/2019 01 - FS Analysis 2013

11/19

Behavior of Costs- Fixed

-Variable

Break-even Analysis


8/12/2019 01 - FS Analysis 2013

12/19

Variable Costs Fixed Costs

Contribution Margin


8/12/2019 01 - FS Analysis 2013

13/19

Sales

BP

Fixed Costs

Variable Costs

Total Costs

Sales

BREAK-EVEN CHART

Volume


8/12/2019 01 - FS Analysis 2013

14/19

Liquidity RatiosCurrent Ratio = Current Assets/CurrentLiab.Quick Asset Ratio= Quick Assets/Cur.

Liab.Leverage Ratios

Total Liabilities/Total AssetsTotal Liabilities/Stockholders Equity

Total liabilities/Tangible Net WorthInterest coverage ratio= EBIT/Interestexpense


8/12/2019 01 - FS Analysis 2013

15/19

8/12/2019 01 - FS Analysis 2013

16/19

Profitability Ratios Return on Investment (ROI) = NI/Invt

Return on equity = Net income/Equity

Return on assets= (NI + Interest expense (1-t))/Total Assets

Gross profit margin= Gross profit/Sales

Operating profit margin= Operating

income/Sales Net profit margin = Net income/Sales


8/12/2019 01 - FS Analysis 2013

17/19

ROE = Net profit margin x Turnoverratio x Leverage ratio

=Net income/Sales x Sales/Assets

x Assets/Equity


8/12/2019 01 - FS Analysis 2013

18/19

1. F/S analysis deals only with quantitativedata

2. Management can take short run actions toinfluence ratios.

3. Differences in accounting practices acrossfirms

4. Different formulas can be used


8/12/2019 01 - FS Analysis 2013

19/19

Amounts are historical. Future may notnecessarily be the same as the past.

A ratio standing alone has no significance


01 - FS Analysis 2013

Documents

Transcript of 01 - FS Analysis 2013