financial statement analysis
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This document provides an overview of financial statement analysis. It discusses evaluating business prospects and risks through credit analysis, equity analysis, accounting analysis, and financial analysis. These analyses examine a company's liquidity, solvency, profitability, and cash flows. Ratio analysis and valuation methods are also covered. The purpose is to evaluate a company's performance and financial position over time using its financial statements and additional information.
![1-37
Analysis Preview
Equity Valuation - Free Cash Flow to Equity
Model
FCFt+n is the free cash flow in the period t + n [often
defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E refers to an expectation](https://image.slidesharecdn.com/chapter01-131130110504-phpapp01/85/financial-statement-analysis-37-320.jpg)
![1-38
Analysis Preview
Equity Valuation - Residual Income Model
BV is the book value at the end of period t
Rit+n is the residual income in period t + n [defined as
net income, NI, minus a charge on beginning
book value, BV, or RIt = NIt - (k x BVt-1)]
k is the cost of capital
E refers to an expectation
t](https://image.slidesharecdn.com/chapter01-131130110504-phpapp01/85/financial-statement-analysis-38-320.jpg)
financial statement analysis
- 1. Financial Statement Analysis K R Subramanyam John J Wild McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
- 2. Overview of Financial Statement Analysis 1 CHAPTER 1-2
- 4. 1-4 Information Sources for Business Analysis
- 5. 1-5
- 7. 1-7 Credit Analysis Credit worthiness: Ability to honor credit obligations (downside risk) Liquidity Ability to meet shortterm obligations Focus: • Current cash flows • Make up of current assets and liabilities • Liquidity of assets Solvency Ability to meet longterm obligations Focus: • Long-term profitability • Capital structure
- 8. 1-8 Equity Analysis Assessment of downside risk and upside potential Technical analysis / Charting • Patterns in price or volume history of a stock • Predict future price movements Fundamental Analysis Determine Intrinsic value without reference to price • Analyze and interpret key factors – Economy – Industry – Company
- 9. 1-9
- 10. 1-10 Accounting Analysis Process to evaluate and adjust financial Process to evaluate and adjust financial statements to better reflect economic reality statements to better reflect economic reality Accounting Risk
- 11. 1-11 Financial Analysis Process to evaluate financial position and Process to evaluate financial position and performance using financial statements performance using financial statements Profitability analysis — Evaluate return on investments Risk analysis ——— Evaluate riskiness & creditworthiness Analysis of — cash flows Evaluate source & deployment of funds Common tools Common tools Ratio analysis Cash flow analysis
- 12. 1-12 Prospective Analysis Process to forecast future payoffs Business Environment & Strategy Analysis Accounting Analysis Financial Analysis Intrinsic Value
- 13. 1-13 Dynamics of Business Activities Business Activities Time
- 15. 1-15 Business Activities Financing activities • Owner (equity) • Nonowner (liabilities) Financing
- 16. 1-16 Business Activities Investing activities • Buying resources • Selling resources Investing Financing Investing = Financing
- 17. 1-17 Business Activities Operating Activities Revenues and expenses from providing goods and services
- 18. 1-18 Financial Statements Reflect Business Activities
- 20. 1-20
- 21. 1-21 Balance Sheet Total Investing = Total Financing = Creditor Financing + Owner Financing
- 22. 1-22
- 23. 1-23 Income Statement Revenues – Cost of goods sold = Gross Profit Gross profit – Operating expenses = Operating Profit Colgate’s Profitability (in $billions) $12.238 - $5.536 = $6.701 Gross Profit $6.701 - $4.5411 = $2.160 Operating profit
- 24. 1-24
- 25. 1-25 Statement of Cash Flows
- 26. 1-26
- 27. 1-27 Additional Information (Beyond Financial Statements)
- 28. 1-28 Analysis Preview Yr1 Yr2 Yr3 Comparative Analysis Purpose: Evaluation of consecutive financial statements Output: Direction, speed, & extent of any trend(s) Types: • Year-to-year Change Analysis • Index-Number Trend
- 30. 1-30 Analysis Preview Common-Size Analysis Purpose : • Evaluation of internal makeup of financial statements • Evaluation of financial statement accounts across companies Output: Proportionate size of assets, liabilities, equity, revenues, & expenses
- 33. 1-33 Analysis Preview Ratio Analysis Purpose : Evaluate relation between two or more economically important items (one starting point for further analysis) Output: Mathematical expression of relation between two or more items Cautions: • Prior Accounting analysis is important • Interpretation is key - long vs short term & benchmarking
- 34. 1-34 Analysis Preview Valuation Valuation - an important goal of many types of business analysis Purpose: Estimate intrinsic value of a company (or stock) Basis: Present value theory (time value of money)
- 35. 1-35 Analysis Preview Debt (Bond) Valuation Bt is the value of the bond at time t It +n is the interest payment in period t+n F is the principal payment (usually the debt’s face value) r is the investor’s required interest rate (yield to maturity)
- 36. 1-36 Analysis Preview Equity Valuation Vt is the value of an equity security at time t Dt +n is the dividend in period t+n k is the cost of capital E refers to expected dividends
- 37. 1-37 Analysis Preview Equity Valuation - Free Cash Flow to Equity Model FCFt+n is the free cash flow in the period t + n [often defined as cash flow from operations less capital expenditures] k is the cost of capital E refers to an expectation
- 38. 1-38 Analysis Preview Equity Valuation - Residual Income Model BV is the book value at the end of period t Rit+n is the residual income in period t + n [defined as net income, NI, minus a charge on beginning book value, BV, or RIt = NIt - (k x BVt-1)] k is the cost of capital E refers to an expectation t
- 39. 1-39 Analysis in an Efficient Market Three assumed forms of market efficiency Weak Form - prices reflect information in past prices Semi-strong - prices reflect all public Form information Strong Form - prices reflect all public and private information