Financial Analysis (Midterm)

• Financial Statements


  Guide users in making informed, prudent or sound economic decisions.
• Two main parts of an Annual Report

  1. qualitative
  2. verbal/ narrative information
• Ways in Analyzing Financial Statement

  1. Longitudinal evaluation of financial data
  2. Analysis of financial ratios
• Credible FS is a by product of a good kin analytic mind and the application of through research skills.
• Research is important to account for and explain the results of the analysts computations.
• 
  

  Increase or Decrease in Financial Statement

  • by efficiency or inefficiency of an employees, department, branch, subsidiary in the performance of their roles, duties and responsibilities.
• Increase or Decrease in Financial Statement

  • due to external factors in community, socio-political or economic in nature.

  – e.g. inflation or deflation
• Analysis of financial ratios

  1. Financial Analysis
  2. Financing Decisions
• Financing Decision


  Refers to decision that involve funding investments and operations over the long run.
• Objectives of Financial Statement

  1. profitability
  2. liquidity and stability
  3. Asset utilization/activity
  4. Debt utilization/ leverage
• Liquidity and Stability


  Liquidity is also referred to as working

  capital position or short-term financial position. It is ability of the firm to meet or pay its current or short-term maturing obligations.
• 7 limitations of Financial Statement

  1. Failure to consider changes in purchasing power-inconsistencies of accounting policies, principles and procedures
  2. Failure to consider changes in purchasing power of currency
  3. Age of FS is a limitation
  4. Failure to understand the information in the notes to FS
  5. FS have not undergone external auditing procedures may not conform with GAAP
  6. FS not undergone external auditing procedures may prove to be inaccurate or fraudulent.
  7. Audited FS do not guarantee accuracy
• 6 Steps in the Analysis of FS

  1. Determine objectives would be the coverage of the analysis
  2. Analysis done may not cover only the subject firm but also other variables
  3. Know the firm you are analyzing. Know the vision and mission
  4. Assess/Analyze Financial Statements areas
  5. Interpret results of the computation and ratios
  6. Draw conclusions
• Determine objectives would be the coverage of the analysis

  > profitability

  > liquidity

  >asset activity

  > debt-utilization
• Analysis done may not cover only the subject firm but also other variables

  > other firms of same industry

  > new laws

  > prices

  > shares of stocks
• Assess/Analyze Financial Statements areas:

  • Profitability

  • liquidity/solvency

  • stability

  • operational efficiency
• Horizontal Analysis


  Known as dynamic measure or trend analysis.
• Horizontal Analysis


  Involves comparison and measurement of financial statements of two or more periods.
• Horizontal Analysis


  Shows both monetary amounts, percentage changes, financial trends, and analysis absolute changes
• Vertical Analysis


  Known as static measure or structural ratios.
• Vertical Analysis


  Includes comparison of financial data for one period.
• Vertical Analysis


  Comparing and establishing relationship of the components of the financial statement
• Horizontal Analysis of Comparative Statements


  Balance of the accounts in the Financial statements of the previous year is substantial from the current year.
• Vertical Analysis


  Uses percentages/ratio that present the

  relationship of the different accounts or items in the Financial statements.
• Analyst chooses a base figure or amount equal to 100 percent and calculate each items percentage.
• Statement of financial position - base uses in total assets
• Income Statement


  Box uses is net sales or net revenues

  vertical analysis presents the relative size of an account or item in proportion to the whole (base). Outcome is

  presented in common-size statement.
• Common-size Statement


  Are also called component percentage or 100 percent statements.
• Tips in assessing Financial Statement (Vertical Analysis)

  1. Allocation of assets stated in percentage form is disclosed in common-size statement of financial position.
  2. Shows capital structure by presenting the percentage allocation of assets in terms of how much percent the owners invested.
  3. For working capital analysis current asset percentage may be compared with current liabilities, percentage to as certain the firms or solvency.
  4. Present the percentage relationship of sales to all the other items in the income statement: cost of good sold ratio, gross profit ratio, net profit ratio
• Present the percentage relationship of sales to all the other items in the income statement

  > cost of good sold ratio

  > gross profit ratio

  > net profit ratio

  • are among revealed in common-size statement
• Analysts account for the increase or decrease of the items in the FS, should be able to explain why there increase and decrease occured

  – ↑ accounts receivable has a bearing on sales

  – ↓ inventory has a bearing on cost of sales
• Longitudinal evaluation


  Involves the horizontal comparison and/or contrast of the financial data involving atleast two periods.
• Longitudinal evaluation


  Comparison of two companies to determine the performance of the firm vis -a-vis the performance of another company belonging to same industry.
• Profitability


  This pertains to the ability of the firm to yield a sufficient amount of return on company sales assets and invested capital.
• Profitability


  It also refers to the firm’s capacity to generate earnings vis-a-vis its expenses and other relevant cost incurred during a specific period of time.
• Asset utilization or activity


  This pertains to how efficient the company is on managing its resources.
• Asset utilization or activity


  It also refers to the firm’s speed or pace in turning over accounts receivable, inventory and long-term assets. this reveals the frequency of the firm in selling its products or in collecting its receivable.
• Asset utilization or activity


  In so far as fixed or long-term assets are concern, it reveals how the company uses their fixed assets to yield revenue.
• Asset utilization or activity


  Measures how often is the turn over of A/R.
• Debt utilization/leverage


  Overall status of the company