OVERVIEW OF FINANCIAL

STATEMENT ANALYSIS
CHAPTER 1.
Business Analysis
• Business analysis is a process of evaluating a company’s economic
PROSPECTS and RISK for the purpose of making business decisions.
• Business analysis (Analisa Bisnis) ini termasuk menganalisa:
➢Business Environment (lingkungan bisnis)
➢Strategy
➢Financial position and performance (melalui suatu Teknik Analisa yang
disebut Financial Statement Analysis)
• Langkah awal dalam Analisa bisnis adalah: mengevaluasi lingkungan
bisnis dan strategi perusahaan.
Evaluate Business Environment and Strategies:
Company: Colgate
• It is a leading global consumer products company.
• It has several internationally well-known brands (primarily in oral, personal
and home care market).
• It has brands in market yang sangat bervariasi (dental care, soaps and
cosmetics, household cleaning products, pet care, nutritions)
• Features yang lain: Its comprehensive global presence.
▪ 80% revenues berasal dari international operations.
▪ Operates in 200 countries around the world, with equal presence in every major
continent.
• Strength:
✓ Popularity of its brand
✓ Highly diversified nature of operation Give Colgate financial stability,
✓ Static nature of demand for consumer products. Sehingga mengurangi resiko investor,
baik debt/equity investor
Evaluate Business Environment and Strategies (2)
• Weaknesses: static nature of demand membuat
▪ (+) reducing sales volatility
▪ (-) menimbulkan fierce competition for market share
• Colgate melakukan apa untuk mengatasi persaingan yang ketat ini?
✓ Following a carefully defined business strategy that develops and increases
market leadership positions in key product categories and market that are
consistent with the company’s core strength and competencies and through
relentless innovations.
✓Apa strateginya?
o Uses its valuable consumer insights to develop successful new product regionally, then
rolled out on global basis.
o Focus on areas of the world where economic development and increasing consumer
spending provide opportunity for growth.
Evaluate Business Environment and Strategies (3)
✓Tetapi, tetap saja profit margin terus menerus tergerus oleh persaingan. Sehingga
pada tahun 2004, Colgate melakukan program restructuring untuk mengurangi biaya
dengan memotong tenaga kerja 12% dan menutup lini produk yang tidak profitable.
✓Sejumlah financial measures yang digunakan:
• Operating profit margin
• Return on Assets
• Return on Equity
• Price to earnings ratio How the stock market rewards a company’s performance
• Price to book ratio
✓Darimana kita bisa medapatkan angka angka itu? Financial Statement
▪ Financial statement provide a rich and reliable source of information for
such financial analysis.
o How company obtaines its resources (financing).
o Where and how those resources deploys (Investing)
o How effectively those resources deploys (operating profitability)
Introduction to Business Analysis:
• Untuk equity investor, apa saja yang akan digali informasinya sebelum
memutuskan untuk ‘buy, hold, sell’?
o Future business prospects, growth of market, dan swot analysis.
o Bagaimana earning potential perusahaan, recent earnings performance, how
sustainable current earnings, ‘drivers’ of profitability, estimation on earnings
growth.
o Current financial condition, risk and rewards dari financing structure company,
apakah earnings vulnerable to variability, apakah perusahaan memiliki financial
strength to overcome a period of poor profitability.
o How a company compare with its competitor.
o What is the reasonable price for that company’ stock.
Introduction to Business Analysis (2):
• Untuk creditor, apa saja yang akan digali informasinya sebelum
memutuskan untuk meminjamkan $ ke perusahaan?
o Company’s business plans and prospects. What are company’s needs for
future financing.
o Source of payment of interest and principal, how much cushion does that
company have in earnings and cash flows to pay interest and principal.
o What is the likelihood that company will be unable to meet its financial
obligations, how volatile is the earnings and cash flows, does that company
have financial strength to pay its commitments in a period of poor
profitability.
• Untuk menjawab pertanyaan di atas, diperlukan informasi berupa
quantitative dan qualitative informations.
Information Sources for Business Analysis
Types of Business Analysis
1. Credit Analysis
Credit Analysis:

Asymetric
relation
antara risk
dan return
Type of Business Analysis:
2. Equity Analysis
• Equity investors are the first to absorb losses when a company liquidates,
although their losses are usually limited to the amount invested. However,
when a company prospers, equity investors share in the gains with unlimited
upside potential.
Symetric
relation antara
risk dan return

Major goal dari

fundamental analysis
adalah Intrinsic value
(fundamental value)

Evaluation of a
company’s financial
position and
performance
• Intrinsic value = the value of a company (or its stock) determined
through fundamental analysis without reference to its market value
(stock price).
• Intrinsic value > Market value (price) : BUY
• Intrinsic value < Market value : SELL
• Intrinsic value mendekati market value: HOLD

Other uses of Business Analysis:

(baca halaman 10 textbook)
Component Processes of Business Analysis:
Business Environment and Strategy Analysis:
• Business Environment Analysis: major goalnya adalah a Company
PROSPECT, dengan cara: mengidentifikasi dan menilai situasi ekonomi
perusahaan dan industry. Termasuk menganalisa: product, labor,
capital markets within its economic and regulatory setting.
• Strategy Analysis:
o To identify and assess a company’s competitive strength and weaknesses
along with its opportunities and threats (SWOT analysis)
• Business Environment and Strategy Analysis terdiri dari 2 bagian,
yaitu:
1. Industry Analysis (memakai framework dari Porter, atau value chain
analysis).
• industry is viewed as a collection of competitors that jockey for bargaining power with
consumers and suppliers and that actively compete among themselves and fac threats
form new entrants and subtitute products.
• Asses both industry prospect and the degree of actual and potential competition facing a
company.
2. Strategy analysis.
• Is a evaluation of both a company business decisions and its success at
establishing a competitive advantage.
Accounting Analysis:
untuk mengurangi Accounting Risk
(memerlukan restatement dan
2 Accounting problems: reclassification of Financial St.)

Creates:

• Termasuk mengevaluasi earning quality (accounting quality).

Financial Analysis

3 Broad
areas:
Prospective Analysis
Valuation
• Is a main objective of many types of business analysis.
• Refers to the process of converting forecasts of future payoffs into an
estimate of company value.
• To determine company value, select a valuation model and estimates
the company’s cost of capital.

FINANCIAL STATEMENTS- BASIS OF ANALYSIS

Dari financial statement dan related disclosures akan
menginformasikan setidaknya 4 aktivitas utama dalam suatu
perusahaan: planning, financing, investing dan operating.
Planning Activities:
• Goal and objectives of a company dapat dilihat di Business Plan.
o Purpose
o Strategy its activities Management’s
o Tactis for Letter to
Discussion and
shareholders
Analysis

Financing Activities:
• External financing
1. Equity investors (owners/shareholders) -> menginginkan RETURN on their
investments.
2. Creditors/lenders.
• Decisions on the composition of financing activities tergantung dari kondisi
financial market (jumlah financing yang dibutuhkan, sumber financing, timing
of repayment, structure of financing agreement)
 • Equity financing:
• Private offering (1 individu atau beberapa organisasi yang ter’pilih’)
• Public offering (dijual terbuka ke public). Keuntungan dari public offering: dana yang
terhimpun dapat dalam jumlah yang cukup besar.
• Creditors:
• Debt creditors:
✓ Directly lend money to the company (eg. Banks)
✓ Ada interest, formal agreement or contract
• Operating creditors:
✓ Whom the company owes money as part of its operations (eg. Suppliers, employees)
• Internal financing ( RE yang ditahan di dalam perusahaan untuk
digunakan kembali dalam bisnis).
o Earnings reinvestment (earnings retention)
o Diukur dengan retention ratio: 1- dividend payout rate
o Contoh, jika dividend payout rate adalah 10%, makan retention ratio=1-10%=
90%.
Investing Activities:
• Company’s acquisition and maintenance of investment for purposes of
selling product and providing services (operating assets) and for the
purpose of investing excess cash (financial assets).
• Ada beberapa faktor terkait:
o Jenis investment yang diperlukan
o Jumlahnya
o Timing (waktu)
o Assets allocation
o Contractual agreement (purchase, rent, lease)
Operating Activities:
• R&D
• Procurement (Pembelian0
• Production
• Marketing
• Administration
Financial Statement
• Silahkan dibaca di textbook untuk review

ANALYSIS TOOLS
1. Comparative Financial Statement Analysis (Horizontal Analysis)
a. Year to year analysis
• Untuk short period (2-3 years)
• Advantages: presenting changes in absolute dollar amounts and percentage.
• Tetapi jika base year negative dan positif di tahun berikutnya (dan kebalikannya), tidak
dapat dihitung persentase change nya.
b. Index number trend analysis
• Untuk periode >2-3 years (long period)
• Choose a base period dan semua item di index menjadi 100.
• Tetapi jika ada perubahan dari angka negative ke positif, index tidak dapat dihitung.
• Lihat contoh perhitungan di illustrasi 1.2
• Index number trend analysis tidak dapat digunakan untuk menganalisa semua item
dalam laporan keuangan. Lebih baik hanya untuk item tertentu yang hendak di fokuskan.
 • Harus hati hati jika menggunakan index number trend analysis jika terdapat
perubahan pada ekonomi atau industry secara keseluruhan.
• Must be made with awareness of potentially inconsistent applications of accounting
principle over time.
• The longer the time period for comparison, the more distortive are aeefect of any
price-level change.
2. Common Size Financial Statement Analysis (vertical analysis)
• Especially useful for intercompany comparisons.
• Dapat digunakan untuk perbandingan suatu company dengan competitor nya.
• Limitations: the failure to reflect the relative sizes of the company under analysis.
3. Ratio Analysis
• The most popular and widely used tools of financial analysis
• Simple arithmetic operations,but its interpretation is more complex.
• To be meaningful, a ratio must refer to an economically important relation (eg. Sales
price and its cost)
• Ratios are only the starting point of analysis!
• Factors affecting ratios:
o Internal operating activities.
o The effects of economic events.
o Industry factors,
o Management policies.
o Accounting methods.
• Always remember that any limitations in accounting measurement impact the
effectiveness of ratios.
• Usually interpreted in comparisons with:
1. Prior ratios
2. Predetermined standards
3. Ratios of competitors
• The variability of a ratio across time is often as important as its trend.
• Lihat exhibit 1.14!
Valuation
1. Debt Valuation 2. Equity Valuation
Practical Considerations in Valuation:
1. Free Cash Flow to Equity Model 2. Residual Income Model
Analysis in an Efficient Market