FS ANALYSIS

• A crucial tool used by investors, creditors, and analysts to evaluate the financial performance and health of a company.

  Financial Statement Analysis
• Key Components of Financial Statement Analysis

  • Statement of Financial Performance Analysis
  • Statement of Financial Position Analysis
  • Cash Flow Statement Analysis
• Provides snapshots of company's revenues, expenses, and profitability over a specific period

  Income Statement
• Presents a company's assets, liabilities, and shareholder's equity at a specific point in time

  Balance Sheet
• Tracks the inflow and outflow of cash over a given period, categorizing cash flows into operating, investing, and financing activities.

  Cash Flow Statement
• Objectives of Financial Statement Analysis

  • Assessing Financial Performance
  • Forecasting Future Performance
  • Identifying Financial Health and Risk
  • Valuation
• It enables comparisons with industry benchmarks and competitors to identify strengths and weakness.

  Assessing Financial Performance
• These forecasts assists investors and creditors in making investment and lending decisions.

  Forecasting Future Performance
• This insight enables stakeholders to mitigate risks and make strategic decisions accordingly

  Identifying Financial Health and Risks
• Crucial in determining the intrinsic value of a company's stock or business.

  Valuation
• Valuation Techniques

  • Discounted Cash Flows
  • Price-to-Earnings
  • Ratio Analysis
  • Comparable company analysis
• Challenges in Financial Statement Analysis

  Accounting Principles and Standards

  • Complex Business Structures
  • Objectivity and Bias
  • Incomplete Information
• Differences in revenue recognition method, depreciation policies, and inventory valuation techniques may distort financial performance metrics.

  Accounting Practices and Standards
• Analysts must exercise diligence and objectivity to minimize biases and arrive at reliable conclusions

  Subjectivity and Bias
• Difference in business structures, Subsidiaries, or diversifies operations may present challenges in accurately assessing financial performance and risk.

  Complex Business Structure
• Financial statements may not always provide a complete picture of a company's financial health and performance

  Incomplete Information
• Liquidity Ratio

  • Current Ratio
  • Quick Ratio (Acid-Test Ratio)
• Measures ability to meet its short-term obligations with its short-term assets.

  Current Ratio
• It excludes inventory as it may not be easily converted into cash in the short term

  Quick Ratio
• Profitability Ratio

  • Gross Profit Margin
  • Net Profit Margin
• Solvency Ratio

  • Debt-to-Equity Ratio
  • Interest Coverage Ratio
• Measures the percentage of the revenue that exceeds the COGS

  Gross Profit Margin
• Measures the percentage of revenue that remains as net income after deducting all expenses, including taxes and interest.

  Net Profit Margin
• Proportion of debt financing relative to equity financing

  Debt-to-Equity
• Measures company's ability to meet interest obligations on its debt.

  Interest Coverage Ratio
• Efficiency Ratios

  • inventory turnover ratio
  • accounts receivable turnover ratio
• measures how many times a company's inventory is sold and replaced over a specific period

  inventory turnover ratio
• measures how efficiently a company collects its accounts receivable

  accounts receivable turnover ratio