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Financial Statement Analysis: K R Subramanyam John J Wild
Financial Statement Analysis: K R Subramanyam John J Wild
Statement
Analysis
K R Subramanyam
John J Wild
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
Overview of Financial
Statement Analysis
1
CHAPTER
1-3
Business Analysis
Equity investors
Creditors
Managers
External Auditors
Directors
Regulators
Lawyers
1-4
Chairperson’s Letter
Industry Statistics
Press Releases
Economic Indicators
Financial press
Regulatory filings
Vision/Mission Statement
Management &
Control Labor Negotiations
Types of
Business Director Oversight
Regulation Analysis
Mergers, Acquisitions
& Divestitures
1-6
Credit Analysis
Trade Non-trade
Creditors Creditors
Provide Provide
Bear risk of Bear risk of
goods or major
default default
services financing
Usually Usually
Most short- Most long-
implicit explicit
term term
interest interest
1-7
Credit Analysis
Credit worthiness: Ability to honor credit obligations
(downside risk)
Liquidity Solvency
Ability to meet short- Ability to meet long-
term obligations term obligations
Focus: Focus:
• Current cash flows • Long-term profitability
• Make up of current • Capital structure
assets and liabilities
• Liquidity of assets
1-8
Equity Analysis
Assessment of downside risk and upside potential
Component Processes of
Business Analysis
Business
Environment &
Strategy Analysis
Industry Strategy
Analysis Analysis
Financial
Analysis
Analysis
Accounting of cash Prospective
Analysis flows Risk
Analysis
Profitability
Analysis Analysis
Accounting Analysis
Financial Analysis
Prospective Analysis
Business Environment
& Strategy Analysis
Accounting Analysis
Financial Analysis
Intrinsic Value
1-13
Operating
Planning
Investing Financing
End of period
1-14
Business Activities
Competition Pricing
Opportunities Obstacles
1-15
Business Activities
Financing activities
• Owner (equity)
• Nonowner (liabilities)
1-16
Business Activities
Investing activities
• Buying resources
• Selling resources
Investing = Financing
1-17
Business Activities
Planning
Investing Activities Financial
Activities Activities
Operating Activities
Revenues and expenses from providing
goods and services
1-18
Planning
Investing Financing
Current: Operating Current:
• Cash • Notes Payable
• Sales • Accounts Payable
• Accounts Receivable • Cost of Goods Sold
• Inventories • Salaries Payable
• Selling Expense
• Marketable Securities • Income Tax Payable
• Administrative Expense
Noncurrent: Noncurrent:
• Interest Expense
Financial Statements
Balance Sheet
Income Statement
Statement of Shareholders’
Equity
Balance Sheet
Colgate Financing
(in $billions)
$9.138 = $7.727 + $1.410
1-22
1-23
Income Statement
Revenues – Cost of goods sold = Gross Profit
Gross profit – Operating expenses = Operating Profit
Colgate’s Profitability
(in $billions)
Additional Information
(Beyond Financial Statements)
Analysis Preview
Comparative Analysis
Analysis Preview
1-30
Analysis Preview
Common-Size Analysis
Analysis Preview
1-32
Analysis Preview
1-33
Analysis Preview
Ratio Analysis
Analysis Preview
Valuation
Valuation - an important goal of many types
of business analysis
Analysis Preview
Debt (Bond) Valuation
Analysis Preview
Equity Valuation
Analysis Preview
Equity Valuation - Free Cash Flow to Equity
Model
Analysis Preview
Equity Valuation - Residual Income Model
Book Organization
Financial Statement Analysis