CHAPTER 1: OVERVIEW

 Business analysis: evaluate firm’s prospects and risks, and then make decisions.
 Financial statement analysis is an important component of Business analysis.

COMPONENTS OF BUSINESS ANALYSIS

 Process of Business analysis

- Step 1: Analyze

Company’s business environment & strategies

Business environment includes Industry analysis & Strategy analysis
+ Industry analysis could be done by using the framework of Michael Poster’s Five
competitive forces, including: Bargaining power of suppliers/customers/entrants/
+ Strategy analysis: evaluation company’s decision & its success at establishing a
competitive advantage. (Analyze SWOT model)

- Step 2: Accounting analysis – Process to evaluate & adjust financial statements to better
reflect economic reality.

The quality of FA depends on the RELIABILITY of FS ma FS depends on quality of

ACC analysis

Comparability problems: arise when Different companies adopt different accounting

for similar transactions/events. Or when a company changes its accounting over time.

Distortion problems: Manager estimation error / Earning management / Business

Distortion.

- Step 3: Financial analysis - Process to evaluate financial position & performance using
financial statements. It includes these analyses below:
+ Profitability: evaluate return on investment
+ Risk: evaluate riskiness & creditworthiness
 + Cash flow: evaluate sources & deployment of funds

- Step 4: Prospective analysis – Process to forecast future payoffs -> used to estimate the
value of firm.

TYPES OF BUSINESS ANALYSIS

The two main reasons for analyzing Fin Statement to determine credit value and intrinsic value.
 Credit analysis
There’re 2 types of creditors:
+ Trade creditors: normal selling with trade credit 5%, 10/30 – Focus on Liquidity
(ability to meet Short-term obligations)
+ Non-trade creditors: banks/ bondholders – Focus on Solvency (ability to meet Long-
term obligations)

 Equity analysis
- Equity investors provide funds to a company

INFORMATION SOURCES FOR BUSINESS ANALYSIS

 Quantitative
- Financial statements
- Industry statistics
- Economic indicators
- Regulatory filings
- Trade reports

 Qualitative
- Management discussion & analysis
- Financial press
…
3 MAIN BUSINESS ACTIVITIES
What are the various business activities that an analyst should consider?
3 main activities:
- Investing activities (Buying & selling assets) -> Affect firm’s assets
- Financing activities (Equity & Liabilities)
+ Methods that Company use to raise money.
- Operating activities (Revenues & Expenses)