FINANCIAL ANALYSIS,

DEPRECIATION AND TIME VALUE

ANALYSIS

Presented by:
Najat Albuhendi
 1-Financial Analysis
What is 'Financial Analysis‘?
■ Financial analysis is the process of
evaluating businesses or projects to
determine their performance and
suitability.
■ financial analysis is used to analyze
whether an entity is stable, solvent, liquid
or profitable.
■ focus on the income statements, balance
sheets, and cash flow statements.
Why we need to do a 'Financial Analysis‘?

■ To setup the financial policy,

■ Long-term planning for business
activity,
■ Identify projects or companies
for investment.
■ Evaluate economic trends.
Financial Analysis can be classified
into:

Technical Fundamental
analysis analysis
 Technical Analysis

■ Uses market statistics to make buying

and selling decisions.
■ Studying charts for trading history and
statistics
■ To perform technical analysis, investors
start with charts that show the price and
trading volume history of a particular
security or index
■ Then use the charts to identify trends
and changes in those trends.
 Fundamental Analysis
■ Study of the underlying forces of the economy,
■ To provide data that can be used to forecast
future prices and market developments.
■ Fundamental analysis can be composed of
many different aspects:
1. The analysis of the economy as the whole,
2. The analysis of an industry or that of an
individual company.
3. A combination of the data is used to establish
the true current value
Fundamental Analysis Technical Analysis
Fundamental Analysis Technical Analysis

Analyzes a company’s financial statements Focuses on the statistical analysis of price

movements

Major market player (used by major Less-skilled traders

corporations and governments).

Long-term investors Short-term trading ,

Applied strategically, over longer periods of time Short-term decision-making method

Helps an investor obtain information about the Enables traders to gain a vision of the market
overall state of the market, attractiveness and and make the right move at the right time
state of a specific security as compared to other
securities,
 Another Types of Financial Analysis
classification

• Horizontal • Vertical
Analysis Analysis Stock Price Ratio
Movement Analysis
 Ratio Analysis
■ This type of analysis is extremely popular due to the analyst’s ability to choose two key
features of businesses to analyze.
■ It analyzes various aspects of the company’s financial health.
■ The weakness in this type of analysis is that if the two characteristics are poorly chosen,
an unreliable estimation of financial viability may be produced.
■ For example,
I. - a current ratio is the comparison of assets to liabilities. Many analysts utilize this type
of analysis to support their evaluations of organizations, even if conventional analytical
methodologies may not be as positive
II. - return on assets (ROA) is a common ratio used to determine how efficient a company
is at using its assets and as a measure of profitability. This ratio could be calculated for
several similar companies and compared as part of a larger analysis.
 Financial analysis can be conducted in both
corporate finance and investment finance
• In Corporate Finance
- The analysis is conducted internally, using
ratios as net present value (NPV)
- Taking care of company's past performance,
such as revenue or profit margin,
why?
- To estimate the company's future
performance
-Forecast budgets and make decisions based
on past trends, such as inventory levels.
• In Investment Finance ,
- It is conducted for investment purposes.
- Analysts can either conduct a top-down or
bottom–up investment approach.
- A top-down approach first looks for
opportunities, such as high-performing sectors,
and then finds the best companies within that
sector.
- A bottom-up approach,
looks at past performance and expected future
performance as investment indicators.
5 KEY ELEMENTS OF A FINANCIAL
ANALYSIS
■ 1. Revenue
■ 2. Profit
■ 3. Operational Efficiency
■ 4. Capital Efficiency and
Solvency
■ 5. Liquidity
How to Perform a Company Financial
Analysis in 12 Steps
Step 1. Collect the company’s financial statements from the
last three to five years including:

•Cash Flow Statements

•Income Statements
•Shareholders equity statements

These financial reports can be found in a recent annual

report,
 How to Perform a Company Financial

Step 2. Analyze these financial statements and scan them in

order to look for large movements in specific items from
one year to the next.
For example,
-“Did revenue have a big jump, or a big fall, from one
particular year to the next? Did total or fixed assets grow or
fall?”
-Also, look for suspicious activity. If anything jumps out at
you, research what you know about the business to find out
why an item is suspicious-looking. For instance, did the
company sell off some of its operations during the period of
time you’re analyzing?
.
 How to Perform a Company Financial

■ Step 3. Make sure to review the financial statement’s notes. These

notes may have information that could be important in your
analysis of the business.

■ Step 4. Analyze the Balance Sheet to see if there are large changes
in the company’s assets, liabilities, or equity.

■ Step 5. Examine the Income Statement to identify trends over time

How to Perform a Company Financial

■ Step 6. Next, evaluate the business’s Shareholder’s Equity Statement. It is recommended

to ask the following, “Has the company issued new shares, or bought some back? Are
the retained earnings growing or shrinking in the account?”

■ Step 7. Analyze the company’s Cash Flow Statement.

■ Step 8. Calculate financial ratios.

■ Step 9. Then, gather the company’s key competitor’s data.

How to Perform a Company Financial

■ Step 10. Review the market data of the business’s stock price, as well as the Price to
Earnings (P/E) Ratio.

■ Step 11. Review the Dividend Payout. The Dividend Payout Ratio measures the
percentage of a company’s net income given to shareholders in the form of dividends.
■ How to calculate the Dividend Payout Ratio: Total Annual Dividends Per Share / Diluted
Earnings Per Share

■ Step 12. Now, you can evaluate all of the data YOU generated.
Depreciation

■ Is the reduction of value

in an asset over time due
to usage, wear and tear,
or obsolescence.
Depreciation Methods Include:
 1- Straight-Line Depreciation Method
■ A very common and simple method of calculating the expense. In
straight-line depreciation, the expense amount is the same every
year over the useful life of the asset
■ Depreciation Formula for the Straight Line Method:
Depreciation Expense = (Cost – Salvage value) / Useful life
Example
Consider a piece of equipment that costs $25,000 with an estimated useful life of 8 years and a $0 salvage value. The
depreciation expense per year for this equipment would be as follows:

Depreciation Expense = ($25,000 – $0) / 8 = $3,125 per year

2- Double Declining Balance Depreciation
Method
■ results in larger expense in the earlier years as opposed to the later
years of an asset’s useful life. The method reflects the fact that assets
are more productive in its early years than in its later years. With the
double-declining-balance method, the depreciation factor is 2x that of
a straight line expense method.
■ Periodic Depreciation Expense = Beginning book value x Rate of
depreciation
3- Units of Production Depreciation Method

■ Depreciates assets based on the total number of hours used or the

total number of units to be produced over its useful life.
■ The formula for the units-of-production method:

Depreciation Expense = (Number of units produced / Life in number of

units) x (Cost – Salvage value)
4 Sum-of-the-Years-Digits Depreciation
Method
■ accelerated depreciation methods.
■ A higher expense is incurred in the early years while lower expense is incurred
in the latter years of the asset
■ the remaining life of an asset is divided by the sum of the years and then
multiplied by the depreciating base to determine the expense.
■ The depreciation formula for the sum-of-the-years-digits method:
 Time Value of Money - TVM

■ The time value of money (TVM) is the

concept that money available at the
present time is worth more than the
identical sum in the future due to its
potential earning capacity
■ For example, money deposited into
a savings account earns a
certain interest rate, and is therefore
said to be compounding in value.
 Basic Time Value of Money Formula
■ Depending on the exact situation in question, the TVM formula may change slightly.
■ For example, in the case of annuity or perpetuity payments, the generalized formula
has additional or less factors. But in general, the most fundamental TVM formula takes
into account the following variables:
■ FV = Future value of money
■ PV = Present value of money
■ i = interest rate
■ n = number of compounding periods per year
■ t = number of years
■ Based on these variables, the formula for TVM is:
■ FV = PV x [ 1 + (i / n) ] (n x t)
■ Assume a sum of $10,000 is invested for one year at 10% interest. The future value of that money
is:
■ FV = $10,000 x (1 + (10% / 1) ^ (1 x 1) = $11,000

■ The formula can also be rearranged to find the value of the future sum in present day dollars. For
example, the value of $5,000 one year from today, compounded at 7% interest, is:
■ PV = $5,000 / (1 + (7% / 1) ^ (1 x 1) = $4,673
 Sum it up
■ The role of the financial analyst is to provide reliable
information that managers can use to predict future events
■ Financial analysts are rarely expected to predict the
performance of organizations beyond a few years .
■ Reports provided by financial analysts give investors and
company managers enough information to prepare for short
ahead in time.
■ Project are subject to external or unexpected events,
■ In most cases this information is enough to produce a
business strategy that optimizes impending opportunities and
limits risks.
 References
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https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-depreciation-methods/
-financialplannerworld.com. (2018). Retrieved from financialplannerworld.com:
https://www.financialplannerworld.com/what-is-financial-analysis/
-investinganswers.com. (2018). Retrieved from investinganswers.com:
https://investinganswers.com/financial-dictionary/technical-analysis/technical-analysis-1108
-INVESTOPEDIA. (2018). Retrieved from INVESTOPEDIA:
https://www.investopedia.com/terms/d/depreciation.asp
-king, A. (n.d.). www.industriuscfo.com. Retrieved from www.industriuscfo.com:
http://www.industriuscfo.com/company-financial-analysis/
-MHSA 8630 -- Healthcare Financial Management Time Value of Money Analysis. (n.d.).
www.library.armstrong.edu. Retrieved from library.armstrong:
http://www.library.armstrong.edu/eres/docs/eres/MHSA8630-1_CROSBY/8630_lecture5.PDF
-Pieru, M. (2015, APRIL 13). www.americanexpress.com. Retrieved from www.americanexpress.com:
https://www.americanexpress.com/us/small-business/openforum/articles/financial-analysis-small-business-
health/