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Financial
Statement
Analysis
 
 
K.R. Subramanyam

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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(Vertical analysis)
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Common Size Balance Sheets

 Comparisons of a company’s common-size

statements are useful in revealing any
proportionate changes in accounts within groups
of assets, liabilities, expenses, and other
categories. Still, we must exercise care in
interpreting changes and trends as shown in
Illustration 1.3.

See Page 31+32

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 This section presents ratio analysis as applied to three important areas
of financial statement analysis:
1. Credit (Risk) Analysis
a. Liquidity. To evaluate the ability to meet short-term obligations.
b. Capital structure and solvency. To assess the ability to meet long-term
obligations.
2. Profitability Analysis
a. Return on investment. To assess financial rewards to the suppliers of
equity and debt financing.
b. Operating performance. To evaluate profit margins from operating
activities.
c. Asset utilization. To assess effectiveness and intensity of assets in
generating sales, also called turnover.
3. Valuation
a. To estimate the intrinsic value of a company (stock).
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 Exhibit 1.14 reports results for selected ratios

having applicability to most companies.

See Pages (36-39)

Analysis in an Efficient Market