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LECTURE 1: OVERVIEW OF FINANCIAL STATEMENT ANALYSIS

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Overview of financial analysis Industry analysis Strategy analysis Principal financial statements Analysis tools

◦ Comparative analysis◦ Common size analysis◦ Ratio analysis

Valuation

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ProspectiveAnalysis

AccountingAnalysis

BusinessEnvironment &

Strategy Analysis

IndustryAnalysis

StrategyAnalysis

FinancialAnalysis

Cash flow

AnalysisProfitability

Analysis

RiskAnalysis

Cost of Capital Estimate Intrinsic Value 3

Process to generate performance expectations through industry analysis and competitive strategy analysis

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Process to evaluate accounting quality by assessing accounting policies and estimates

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Process to evaluate performance using ratios and cash flow analysis

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Process to make forecasts and value business

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Value chain analysis Porter’s Five Forces

Buyer power Supplier power Rivalry among firms Threat of new entrants Threat of substitutes

Economic attributes framework Demand - Marketing Supply - Financing Manufacturing

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Nature of product or service Degree of integration within value chain Degree of geographical diversification Degree of industry diversification

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Cost leadership: supply same product or service at a lower cost

Differentiation: supply a unique product or service at a cost lower than the price premium customer will pay

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Balance sheet Income statement Cash flow statement Notes to financial statements

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A snapshot of the resources of a firm and the claims on those resources at a specific time.

Assets = Liabilities + Owners’ equity Assessing the quality of the Balance Sheet

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Information about the operating profitability of a firm for a particular time period

Net income = Revenues + Gains - Expenses – Losses

Based on accrual basis Assessing the quality of earnings

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Reports for a period of time the net cash flows from the three principal business activities: operating, investing and financing

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Comparative analysis Common size analysis Ratio analysis

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An important goal of many business analysis

To estimate the intrinsic value of a company

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Problem 1.9 Problem 1.12 Problem 1.14

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