FINANCIAL STATEMENT ANALYSIS

Faculty of Banking and Finance

Lecturer: MSc. Nghiem Anh Thu
 THE FINANCIAL STATEMENTS

Financial statements Definition

Balance sheet Present a company’s financial position at a specific point in time
Income statement Present information on the financial results of a company’s business
activities over a period of time.
Cash flow statement Disclose the sources and uses of cash
Statement of changes in Equity Report changes in the owners’ investment in the business over time
Financial Notes An integral part of the complete set of financial statements
Provide essential information to understand the primary statements

2 Faculty of Banking and Finance

 FINANCIAL STATEMENT ANALYSIS DEFINITION

❖ The role of Financial Reporting: Provide information

about a company’s performance, financial position,
and changes in financial position that is useful to a
wide range of users in making economic decisions.

❖ The role of Financial Statement Analysis: Use

financial reports prepared by companies, combined
with other information, to evaluate the past, current
and potential performance and financial position of a
company for the purpose of making investment, credit
and other economic decisions.

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 FINANCIAL STATEMENT ANALYSIS FRAMEWORK

❖ The Financial Statements Analysis Framework

1. The purpose and context of the analysis
2. Collect input data
3. Process data
4. Analyze/ Interpret the processed data
5. Develop & Communicate the Conclusions and
Recommendations
6. Follow-up

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 ANALYTICAL TOOLS AND TECHNIQUES

❖ COMMON-SIZE ANALYSIS

❖ RATIO ANALYSIS

❖ DU PONT ANALYSIS
PRUFROCK CORPORATION

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 CHAPTER 5
FINANCIAL STATEMENTS ANALYSIS

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COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS

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 1 COMMON-SIZE ANALYSIS

❖ DEFINITION:

▪ Common-size analysis involves expressing financial data,

including entire financial statements, in relation to a
single financial statement item, or Base

▪ Vertical common-size analysis & Horizontal common-

size analysis

▪ In essence, common-size analysis creates a ratio between

every financial statement item and the Base item

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 1.1 COMMON-SIZE ANALYSIS

❖ Common-size Analysis of the Balance Sheet:

▪ Vertical common-size balancesheet:

prepared by dividing each item on the
balance sheet by the same period’ s Total
Asset. Then, expressing the result as
percentages, highlighs the composition of
the balance sheet.

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 1.1 COMMON-SIZE ANALYSIS

❖ Common-size Analysis of the Balance Sheet:

▪ Horizontal common-size balancesheet:

prepared by dividing the quantity of each
item by a Base Year quantity of the item

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 1.2 COMMON-SIZE ANALYSIS

❖ Common-size Analysis of the Income Statement:

▪ Vertical common-size income statement: divides

each income statement by revenue.

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 1.3 COMMON-SIZE ANALYSIS

❖ Common-size Analysis of the Cash flow Statement:

▪ Vertical common-size cash flow statement (1) expresses each line item as a percentage of revenue (2) or
each inflow of cash expressed as a percentage of total cash inflows and each outflow of cash
expressed as a percentage of total cash outflows.

▪ 1st method is useful in identifying trends and forecasting future cash flow

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 1.3 COMMON-SIZE ANALYSIS

❖ Common-size Analysis of the Cash flow Statement:

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 CHAPTER 5
FINANCIAL STATEMENTS ANALYSIS

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COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS

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 2 RATIO ANALYSIS

❖ Examine and evaluate the financial conditions of the

firms

❖ Standardize financial information in order to

compare

o The firm itself from year to year

o With other firms in the same industry

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 2 CATEGORIES OF FINANCIAL RATIOS

Financial Ratio Meaning

1. Liquidity Ratios Measures the firm’s short-term solvency
2. Leverage Ratios Measure the firm’s long-term solvency and financial leverage
3. Efficiency Ratios/ Measures the efficiency of asset management and usage
Turnover Ratios
4. Profitability Measures the firm’s ability to control expenses and generate profit
Ratios
5. Market value Measures the market price per share of the stock
Ratios

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 2.1 LIQUIDITY RATIOS

❖ Indicates whether the firm has enough cash or cash

equivalent to pay debt just in time

❖ The ability to convert liquid assets to cash

❖ These ratios focus on current asset and current liabilities

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 2.3.2.1 LIQUIDITY RATIOS

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Prufrock’s

𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 liquidity ratios ?

𝐶𝑎𝑠ℎ
𝐶𝑎𝑠ℎ 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑁𝑒𝑡 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

Net working capital to Total Assets =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Interval measure =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑑𝑎𝑖𝑙𝑦 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑐𝑜𝑠𝑡𝑠
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 2.3.2.2 LEVERAGE RATIOS/ LONG-TERM SOLVENCY RATIOS

❖ Address the firm’s long-run ability to meet its obligations, or

❖ The firm’s financial leverage

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 2.3.2.2 LEVERAGE RATIOS/ LONG-TERM SOLVENCY RATIOS

Total Debts
Total debt ratio =
Total Assets
Prufrock’s
financial leverage
Total Debts ratios ?
Total debt to Equity ratio =
Equity

Total Assets
Equity multiplier =
Total Equity

EBIT
Times Interest Earned =
Interest

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 2.3.2.3 EFFICIENCY RATIOS/ TURNOVER RATIOS

❖ The efficiency with which the company uses its assets.

❖ Sometimes called asset management or utilization ratios

❖ Describe how efficiently a firm uses its assets to generage

sales

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 Prufrock’s
efficiency ratios ?

2.3.2.3 EFFICIENCY RATIOS/ TURNOVER RATIOS

Cost of goods sold 365

Inventory turnover = Days ′ sales in Inventory =
Inventory Inventory turnover

Sales 365
Receivables Turnover = Days ′ sales in receivabes =
Accounts Receivable Receivables turnover

COGS 365
Payables Turnover = Days′ sales in payables =
Account𝑠 Payable Payable turnover

Sales
Total Assets Turnover =
Total Asset𝑠

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 2.3.2.4 PROFITABILITY RATIOS

❖ Shows how well are the firm’s managers maximizing

shareholder wealth

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 2.3.2.4 PROFITABILITY RATIOS

Net income
Profit margin =
Sales
Prufrock’s
profitability ratios ?
EBIT = Profit before tax + Interest

EBITDA = EBIT + Depreciation

Net income
ROA =
Total Assets

Net income
ROE =
Total Equity

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 2.3.2.5 MARKET VALUE RATIOS

❖ The final group is based on information of the market price

per share of the stock.

❖ These measures can be calculated only for publicly traded

companies

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 2.3.2.4 PROFITABILITY RATIOS

Net income
EPS =
Shares outstanding
Prufrock’s market value
ratios ? Assuming that Price per share
PE Ratio =
Prufrock has 33 million Earnings per share
shares & the stock sold
for $88 per share at the Market value per share
end of the year PB Ratio =
Book value per share

EPS & Diluted EPS

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 CHAPTER 2
FINANCIAL STATEMENTS ANALYSIS

01 02 03 04
FINANCIAL STATEMENTS COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS

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 2.4 DUPONT ANALYSIS

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 2.4 DUPONT ANALYSIS

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 2.4 DUPONT ANALYSIS

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 2.4 DUPONT ANALYSIS

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 2.4 DUPONT ANALYSIS

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 2.4 PROBLEMS WITH FINANCIAL STATEMENT ANALYSIS

❖ Many firms are conglomerates, owning unrelated lines of

business difficult for peer group analysis and identifying
industry category

❖ Published industry averages are approximations

❖ Different firms use different accounting procedures. Ex:

Inventory: difficult to compare

❖ Subjective professional judgement

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THANK YOU

Lecturer: MSc. Nghiem Anh Thu

nghiemanhthu@ftu.edu.vn

0906289935