Applying Financial

Statement Analysis

Comprehensive Case –
Campbell Soup
Prelude to Comprehensive
Analysis
 Steps in analyzing financial statement
 Building blocks of analysis
 Analysis Reporting
 Specialization in FSA
Steps in Analyzing Financial
Statement
 First: Explicitly defining the analysis objectives to
achieve an effective (focused) and efficient analysis
(economy of time and effort)  Example: see illustration
CC 1a  short term loan decision (3 months)
 Second: Formulating specific questions and criteria
consistent with the analysis objectives  Example: see
illustration CC 1b  can debtor fulfill his obligation to
repay the debt within 3 months
 Third: Identifying the most effective and efficient tools of
analysis  Example: see illustration CC 1c  liquidity,
current assets turn over, A/P turn over, cash forecasting
 Forth: Interpreting the evidence  Illustration CC 1d
Building blocks of financial
statement analysis
 FSA focuses on once or more elements of
company financial condition or operating
results
 Emphasizing six areas of inquiry with varying
degree of variations  depend on the
objectives of FSA
Prelude to Comprehensive Analysis
Building Blocks of Analysis
Analysis
Analysis emphasizes
emphasizes six six areas
areas of
of inquiry—with
inquiry—with varying
varying degrees
degrees ofof
importance
importance
•• Short
Short‑‑term
termliquidity
liquidity--Ability
--Abilityto
tomeet
meetshort-term
short-termobligations.
obligations.
•• Capital
Capital structure
structure and and solvency--Ability
solvency--Ability to to generate
generate future
future
revenues
revenuesand andmeet
meetlong-term
long-termobligations.
obligations.
•• Return
Return onon invested
invested capital--Ability
capital--Ability toto provide
provide financial
financial rewards
rewards
sufficient
sufficienttotoattract
attractand
andretain
retainfinancing.
financing.
•• Asset
Asset turnover--Asset
turnover--Asset intensity
intensity inin generating
generating revenues
revenues to to
reach
reachaasufficient
sufficientprofitability
profitabilitylevel.
level.
•• Operating
Operating performance
performance and and profitability--Success
profitability--Success
at
at maximizing
maximizing revenues
revenues and and minimizing
minimizing
expenses
expenses from from operating
operating activities
activities
over
overthe
thelong
longrun.
run.
•• Forecasting
Forecastingand andvaluation
valuation ––ability
abilitytotogenerate
generatesufficient
sufficientcash
cash
flows
flowsfund
fundinvestment
investmentneedsneedsandandcreate
createshareholder
shareholdervalue.
value.
Building blocks of financial
statement analysis – Cont’d
 The building blocks are:
Short term liquidity Financing activity
Capital structure and solvency Financing activity

Return on invested capital Operating&investing&

financing act.
Investing activity
Assets turnover
Operating performance and Operating activity

profitability
Forecasting and valuation Operating,investing,finan

cing act.
Reporting on Financial St
Analysis
 Reducing uncertainty through rigorous and
sound evaluation
 Help us in identifying weakness in inference
by requiring explanation
 Force us in organizing our reasoning and to
verify the flow and logic of analysis
 Serve as a communication device
 Reinforce judgment and refining inferences
Reporting on Financial St
Analysis – Cont’d
 We should prepare a good report which
separates interpretations and conclusions of
analysis from the information underlying them
 Good report at least contains 6 sections:
 Executive summary
 Analysis overview
 Evidential matter
 Assumptions
 Crucial factors
 Inferences
Specialization in Financial St
Analysis
 Each company is having unique characteristics
which is affected by the industry-unique
characteristics
 The factors arise from several influences, including
special industry conditions, government regulations,
social concern, and political visibility
 Remember, different industry is having different
accounting standard
 Therefore in analyzing ‘a company’, analyst should
understand the accounting peculiarities and special
factors influences the company