LECTURE 1: OVERVIEW OF FINANCIAL

STATEMENT ANALYSIS

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 Overview of financial analysis
 Industry analysis
 Strategy analysis
 Principal financial statements
 Analysis tools
◦ Comparative analysis
◦ Common size analysis
◦ Ratio analysis
 Valuation

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 Business
Environment &
Strategy Analysis

Industry Strategy
Analysis Analysis

Financial
Analysis

Cash Prospective
Profitability
flow Risk Analysis
Accounting Analysis Analysis
Analysis
Analysis
Cost of Capital Estimate Intrinsic Value 3
 Process to generate performance
expectations through industry analysis and
competitive strategy analysis

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 Process to evaluate accounting quality by
assessing accounting policies and estimates

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 Process to evaluate performance using
ratios and cash flow analysis

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 Process to make forecasts and value
business

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 Value chain analysis
 Porter’s Five Forces
 Buyer power
 Supplier power
 Rivalry among firms
 Threat of new entrants
 Threat of substitutes
 Economic attributes framework
 Demand - Marketing
 Supply - Financing
 Manufacturing

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 Nature of product or service
 Degree of integration within value chain
 Degree of geographical diversification
 Degree of industry diversification

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 Cost leadership: supply same product or
service at a lower cost
 Differentiation: supply a unique product or
service at a cost lower than the price premium
customer will pay

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 Balance sheet
 Income statement
 Cash flow statement
 Notes to financial statements

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 A snapshot of the resources of a firm and
the claims on those resources at a specific
time.
 Assets = Liabilities + Owners’ equity
 Assessing the quality of the Balance Sheet

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 Information about the operating
profitability of a firm for a particular
time period
 Net income = Revenues + Gains
- Expenses – Losses
 Based on accrual basis
 Assessing the quality of earnings

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 Reports for a period of time the net cash
flows from the three principal business
activities: operating, investing and
financing

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 Comparative analysis
 Common size analysis
 Ratio analysis

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 An important goal of many business
analysis
 To estimate the intrinsic value of a company

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 Problem 1.9
 Problem 1.12
 Problem 1.14

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