Pyar Paolo F.

Dela Cruz FM BSA 3-1

Financial Statement Analysis

Income Statement
The income statement is a financial document that dissects a company's
earnings in comparison to its expenditures, ultimately yielding its net profit or loss. The
primary purpose of an income statement is to provide an overview of a company's
revenues, expenses, and net income (or net loss) during the reporting period. It
summarizes the company's financial performance by showing how much money it
earned (revenues), how much it spent (expenses), and the resulting profit or loss.

● Horizontal analysis: Horizontal analysis on the income statement involves

comparing line items across multiple periods (usually years) to identify trends
and changes. It helps assess whether revenues and expenses are increasing or
decreasing over time.

● Vertical analysis: This technique involves expressing each line item as a

percentage of total revenue for the same period. This helps in understanding the
proportion of each expense item in relation to the total revenue.

● Ratio analysis: Various financial ratios can be calculated using data from the
income statement. Common ratios include the earnings per share (EPS),
price-to-earnings (P/E) ratio, and return on assets (ROA). These ratios provide
insights into profitability, earnings quality, and valuation.

FORMULA:
❖ Gross Profit Margin: (Gross Profit / Total Revenue) x 100
● This ratio measures the percentage of revenue that remains after
deducting the cost of goods sold (COGS). It reflects the efficiency of a
company's production or service delivery.

❖ Net Profit Margin: (Net profit / Total Revenue) x 100

● This ratio indicates the percentage of revenue that represents a
company's bottom-line profit after all expenses, including taxes and
interest. It measures profitability.

❖ Earnings Per Share: (Net Income - Preferred Dividends) / Average Outstanding

Shares
● EPS represents the portion of a company's profit allocated to each
outstanding share of common stock. It is a key metric for assessing a
company's profitability on a per-share basis.
Statement of Financial Position
The balance sheet is a financial report that provides a snapshot of a company's
overall financial health, representing its book value. It is typically divided into three main
sections, which are assets, liabilities, and shareholder equity. Short-term assets like
cash and accounts receivable offer insights into a company's operational efficiency.
Liabilities encompass the company's obligations and the debt it is servicing, while
shareholder equity includes information about equity capital investments and retained
earnings generated from periodic net income.

● Horizontal analysis: Like the income statement, horizontal analysis of the

balance sheet entails a comparison of a company's assets, liabilities, and equity
components over different time periods in order to identify alterations in the
financial status.

● Vertical analysis: Analyzing the balance sheet by representing each item as a

percentage of total assets enables us to evaluate how much of the company's
assets are funded through debts and equity. It can reveal changes in a
company's capital structure over time.

● Liquidity Ratios: Ratios like the current ratio and quick ratio assess a
company's capacity to satisfy its immediate financial obligations using its current
assets.

FORMULA:
❖ Current ratio: Current Assets / Current Liabilities
● The current ratio measures a company's ability to cover its short-term
liabilities with its short-term assets. A ratio greater than 1 indicates
liquidity.

❖ Debt to equity ratio: Total Debt / Shareholder’s equity

● This ratio assesses the proportion of a company's financing that comes
from debt compared to equity. It indicates the company's financial
leverage and risk.

❖ Return on Equity (ROE): (Net Income / Shareholder’s Equity) x 100

● ROE measures the return earned on shareholders' equity. It reflects how
efficiently a company generates profits from its equity investments.
Statement of Cash Flows
The cash flow statement provides an overview of the company’s cash flows from
operating activities, investing activities, and financing activities. The cash flow statement
is a fundamental financial document that companies include in their financial reports. It
offers a concise overview of how a company's cash and cash equivalents have
fluctuated during a defined period, usually a fiscal quarter or year. This statement holds
significant value as it aids various stakeholders, such as investors, creditors, and
management, in comprehending the ways in which a company generates and deploys
cash for its operational activities.

● Operating, Investing, and Financing Activities Analysis: Evaluating the cash

flow statement entails scrutinizing the cash inflows and outflows across three
primary segments: operational, investment, and financing activities. This
examination helps in comprehending the manner in which a company generates
and allocates its cash resources.

● Cash Flow Trend analysis: Analyze trends in cash flows over multiple periods
to identify patterns. A consistent upward trajectory in cash generated from
operational activities may signal enhanced operational effectiveness, whereas a
decreasing trend in cash allocation to investment activities could indicate a shift
in the company's capital allocation strategy

● Cash Flow Ratios: Ratios like the cash flow from operations to net income ratio
or the free cash flow yield offer valuable insights on a company's earnings quality
and its ability to generate cash flow.

FORMULA:
❖ Operating Cash Flow (OCF): Net Income + Depreciation & Amortization ±
Changes in Working Capital
● OCF shows the cash generated or used by a company's core operating
activities. It reflects the company's ability to generate cash from its
day-to-day operations.

❖ Free Cash Flow (FCF): Operating Cash Flow - Capital Expenditures

● FCF represents the cash available after covering operating expenses and
capital investments. It is a measure of a company's ability to generate
cash for growth or distribution to shareholders.

❖ Cash Flow to Debt Ratio: Operating Cash Flow / Total Debt

● This ratio measures a company's capacity to meet its debt obligations by
relying on its operating cash flow. It assesses the company's financial
stability and its capability to settle its debts.