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Financial reporting & financial statements analysis

Financial Statement Analysis tools & Techniques
Week three
 FCES Students’ Council Financial Reporting Week 3

‫ وليه محتاج اعمله‬analysis ‫ وازاي بعملها‬financial statements ‫اهال يا شباب… في الجزء ده هنتكلم عن ال‬
‫ ده هنتكلم عنهم وهنعرف امتى‬chapter‫ وفي ال‬financial statements ‫هنعرف ان في كذا طريقة نقدر نحلل بيها ال‬
.‫ فيهم‬tool ‫نستخدم كل‬
Objectives of financial analysis
 The main objective of financial statement analysis is to evaluate the financial position of
the company through identifying the major changes in financial statements data.
‫ بتاع‬financial position‫ هو اني عاوز اعرف ايه هو ال‬financial statement analysis ‫الهدف الرئيسي الي‬
‫ وبقدر اعرف‬...‫شركتي بمعنى هل انا اقدر اسدد الديون اللي عليا او اني عارف اكسب ارباح كفاية تخليني اكمل‬
‫ واقيسها او اقيس‬statement‫ بتاعي عن طريق اني اشوف التغيرات اللي حصلت في ال‬financial position‫ال‬
.‫تاثيرها‬
 Financial analysis also aims at investigating the reasons underlying those changes
through further analysis of related ratios
‫ واحدد قيمتها عن‬statements ‫ بتاعي بقدر اعرف سبب التغيرات اللي حصلت في ال‬analysis‫ومن خالل ال‬
.ratios‫طريق ال‬
When we interpret our analysis, it is essential to compare the results obtained with
other standards or benchmark, there are three bases for comparison:
‫ ثابت عشان نقدر نحدد انا قبل‬benchmark‫ بتاعت الشركة بتاعتنا اننا نقارنها ب‬results‫مهم جدا واحنا بنقيس ال‬
.comparisons ‫ انواع من ال‬3 ‫وال بعد وعلي االساس ده اخد القرار المناسب وفي‬
 Intracompany Basis:
a comparison within the company. The comparison is usually performed with similar
amount in previous financial statements.
.‫هنا بقارن نتائج الشركة علي مدار السنين وبكدا المقارنة بتم جوا الشركة‬
For example, in ABC company, if the current year balance sheet shows a cash balance
of $5 M, the absolute number can be meaningless unless compared with last year
cash balance to show the increase or decrease of the cash balance of the company.

 Industry Average:
comparison with the average number of the companies in the same industry. This
provides an indication about the company’s relative position within the industry.
‫ بتاعت‬outputs‫ وده بنحسبه عن طريق اني بجمع ال‬industry average ‫في اغلب الصناعات الزم يبقى في‬
‫كل الشركات اللي في نفس الصناعة بتاعتي سواء كبيرة او صغيرة وبقسمها علي عددهم وبكدا يعتبر زي‬
.industry ‫ عن طريقه بقدر احدد مكاني في ال‬indication
For example, investors can compare the numbers of X company with the
average numbers published about the industry to decide whether to invest in
X company or not.

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 FCES Students’ Council Financial Reporting Week 3

 Intercompany Basis:
Comparisons with other companies provide insight into a company’s competitive
position. In this case the comparison is done with each other competitive company
rather than the industry average.
‫ كلها سواء‬industry ‫ بتوعها بدل ما بقارن بال‬main competitors ‫اخر حاجة بقى دي بقارن الشركة مع ال‬
.‫كبير او صغير‬
Tools for financial analysis
There are various ways through which financial analysis can be done. The choice among
these ways depends on the type of firm or industry and the specific needs of the user of
analysis information. There are five important financial analysis tools:
‫ عشان يستفيدوا‬users‫ وبختار الطريقة علي حسب نوع الشركه او احتياجات ال‬financial analysis‫في طرق كتير لل‬
.‫من المعلومات اللي هتطلعهم‬
1) Comparative Financial Statement Analysis.
2) Common-Size Financial Statement Analysis.
3) Ratio Analysis.
4) Cash Flow Analysis.
5) Valuation.

 Comparative Financial Statement Analysis

- It is also known as Horizontal Analysis. In this type of analysis, analyst review a series
of financial statements (balance sheets, income statements, or statements of cash
flow) over a period of time. So, it involves review of changes in individual account
balance on a year to-year or multiyear basis.
‫ اتغير‬account ‫ سنين وبيشوف كل‬5 ‫ او‬4 ‫ لفترة معينة مثال‬financial statement ‫ بيحلل كل ال‬analyst‫هنا ال‬
.‫ازاي وسبب تغييره ايه‬
For example, analyst reviews income statements for 2019, 2018 and 2017 in order to
understand the changes in the major numbers of the statement.

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 FCES Students’ Council Financial Reporting Week 3

‫ علي مدار السنتين‬financial investment securities ‫خلينا نقارن ال‬

Financial investment securities = 197,541,651 - 157,585,611
= 39,956,040 (increase)
= 39,956,040 /157,585,611 = 25.4%
- The most important information revealed from this analysis is called TREND. A
comparison of statements over several periods can reveal the direction, speed, and
extent of a trend. There are two techniques of comparative analysis: year-to-year
change analysis and index-number trend analysis.

‫ الشركة رايحة لفين هل هتكسب وال هتقع مثال ولما بقارن بين ال‬trend ‫ هو ال‬analysis ‫ من ال‬output ‫اهم‬
‫ يعني هو في صالح الشركة وال ال وفي نوعين من‬trend‫ علي مدار السنين ممكن افهم اتجاه او سرعة ال‬statements
.comparative analysis ‫ال‬
1. Year-to-Year Change Analysis
- This technique is performed when financial statements are compared over a relatively
short period, two or three years

.‫ سنين‬3 ‫ لفترة صغيرة مش بتعدي ال‬financial statements‫بيهتم بانه يقارن ال‬

Advantage of this technique
- Year-to-year change analysis present changes in absolute dollar amounts as well as in
percentage.

.‫مش بيطلعلي التغيير كقيمة بس لكن الزم يطلعلي نسبة كمان للتغير اللي حصل‬

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 FCES Students’ Council Financial Reporting Week 3

Dollar Change= Analysis Period Amount - Base Period Amount

‫هنا بحسب القيمة بالدوالر‬
Percentage Change= Dollar Change/ Base Period Amount * 100
‫وهنا بحولها لنسبة مئوية‬
Rules to be considered when performing Year-to-Year Change Analysis:
 When a negative amount appears in the base and a positive amount in the next
period (or vice versa), we cannot compute a meaningful percentage change.

‫ في اي سنة من السنين سواء في السنة االولى او التانية الن‬negative amount ‫ماينفعش احسبه لو ظهر‬
.‫النسبة مش هتبقى سليمة و ملهاش معنى‬
 When there is no amount for the base period, no percentage change is computable.

.zero ‫ مالهاش قيمة او ب‬base or previous year ‫ماينفعش احسب اي نسبة لو عندي ال‬
 When the base period amount is small, a percentage change can be computed but
the number must be interpreted with caution.

‫ قيمتها قليلة جدا ممكن نحسب النسبة بس هيبقى صعب نترجمها بعد كدا او هنترجمها‬base period ‫لو ال‬
.‫بحذر جدا‬
 When an item has a value in the base period and none in the next period, the
decrease is 100%

%011 ‫ قل بنسبة‬item ‫ معنى كدا ان ال‬zero ‫ ب‬next period ‫لو ال‬

 year-to-year change analysis is useful in short term comparisons.

.‫ يعني بالكتير سنتين‬short term ‫ بيهتم بال‬analysis ‫النوع ده من ال‬

2. Index-Number Trend Analysis
o It is cumbersome to be used in more than two or three periods. So, index-number
trend analysis is a useful technique for long-term trend comparison.

.‫ فبستخدمه لو بقارن اكتر من سنتين‬long term‫بيهتم بال‬

o Analyzing data using index-number trend analysis requires choosing a base period,
for all items, with a preselected index number usually set to 100.

011 ‫ واحده بس وعلى اساسها بقارن كل السنين بيها و بنعبر بيها اغلب الوقت بالرقم‬base period ‫بستخدم‬
.‫ هي السنة اللي قبل السنة اللي بقارنها‬base year ‫ كانت ال‬year to year‫عكس ال‬

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 FCES Students’ Council Financial Reporting Week 3

o When using index numbers, we

compute percentage changes by
reference to the base period
Rules to be considered when
performing index-number trend
analysis:
 Focus on analyzing significant
items in financial statements rather
than analyzing every item.

‫ اللي بتأثر في‬items ‫بركز علي اني احلل ال‬

‫ قيمتها قليلة الن‬items ‫الشركة بشكل كبير مش باخد‬
time consuming ‫ده هيبقى‬
 Exercise care in interpreting index-number trend comparisons where changes might
be due to economy or industry factors.

‫ جديد او في االقتصاد زي ال‬competitor ‫ يتأثر باي تغييرات في الصناعة زي مثال دخل‬analysis ‫ممكن ال‬
.inflation
 interpretation of percentage changes, including those using index-number trend
series, must be made with an awareness of potentially inconsistent applications of
accounting principles over time.

‫ اللي‬items‫ مختلفة فبقارن ال‬principles ‫ احط في الحسبان ان ممكن استخدم‬output‫الزم وانا بترجم ال‬
principle‫محسوبة بنفس الطريقة ومعتمدة علي نفس ال‬
 The longer the time period for comparison, the more distortive are effects of any
price-level changes.

‫كل لما عدد السنين اللي بقارنها اكتر كل لما تاثيرها بتغيرات االسعار بتقل فمش بحس بيها لما بحسب سنة واحده‬
.‫منهم‬
Example:
ABC cash balance at December 31 year1 (the base period), is $15,000. its cash
balance at December 31, Year 2 is $21,000.

- Using 100 as the index number for year 1, the index number for Year 2 equals
Current year balance/ base year balance * 100
= $21,000 / $15,000 * 100= 140
‫ والرقم اللي‬011 ‫ و اضربه في‬base year number‫ بتاعها زاد وال قل علي ال‬item ‫بقسم السنة اللي عاوز اعرف ال‬
.normal‫ من ال‬41 ‫ اكتر ب‬cash balance ‫( في المثال ده ال‬index number( 011 ‫هيطلع هقارنه ب‬

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 FCES Students’ Council Financial Reporting Week 3

If Cash balance at December 31 Year 3 is $ 27,000

The index for year 3 = $27,000/$15,000* 100= 180

 Common-size financial statement analysis

- This type of analysis is also known as Vertical Analysis. It helps in understanding the
internal components of financial statements. In other words, it gives information
about what subaccounts makes a particular account and in what proportion. it is
common to express total assets as 100%. Consequently, the sum of individual
accounts within the assets is 100%. As the sum of individual accounts within groups is
100%.

comparative ‫ يعني مش زي ال‬statements ‫ في ال‬internal components‫ هنا بهتم بال‬analysis ‫في ال‬
‫ تاني زي اني مثال اعرف نسبه ال‬account ‫ من‬account ‫ هنا انا بقارن نسبه‬...‫ في سنتين مثال‬item ‫بقارن نفس ال‬
.total assets ‫ من ال‬inventory ‫ او‬cash
In analyzing a balance sheet, a common-size analysis stresses two factors:

.‫ الزم اخد بالي من حاجتين‬balance sheet ‫لما باجي اشتغل علي ال‬
 Sources of financing- including the distribution of financing across current liabilities,
noncurrent liabilities, and equity

non-current ‫ او‬current ‫انا بجيب الفلوس منين وايه الديون اللي عليا سواء‬
 Composition of assets- including amounts for individual current and noncurrent assets.

‫ بتاعت الشركة؟‬assets‫ايه هي تقسيمة ال‬

Common-size statements are helpful when conducting an intercompany comparison
because financial statements of different companies are recast in common-size format
‫ مفيده جدا في المقارنه بين الشركات عشان كدا اغلب الشركات بيستخدموها لتسهيل‬common-size statement ‫ال‬
.‫المقارنه‬
Comparisons of a company’s common-size statements with those of competitors, or with
industry averages, can highlight differences in account makeup and distribution. Reasons
for such differences should be explored and understood because financial statements of
different companies are recast in common-size format
absolute numbers ‫ افضل كتير من اني اقارن‬account ‫الن لما اجي اقارن الشركه بالمنافسين علي اساس نسبة كل‬
.‫وعن طريق المقارنة اقدر اعرف نقاط ضعفي او قوتي اواخد القرارات المناسبة‬

End of Week 3, Good Luck

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