04 FINANCIAL

STATEMENTS ANALYSIS
MANAGEMENT ADVISORY SERVICES ONLINE
REVIEW
 TOPIC OUTLINE
PART 1: Basic Concepts
 Definition of FS Analysis
 Objectives of FS Analysis
 Problem and Limitations of FS Analysis
PART 2: Techniques in FS Analysis
 BASIC CONCEPTS
DEFINITION
FS Analysis involves careful selection of data from financial
statements in order to assess and evaluate the firm’s past
performance, its present condition and future business
potentials.
 BASIC CONCEPTS
OBJECTIVES
The primary objective of FS Analysis is to determine the
extent of firm’s success in attaining its financial goals in the
following areas:
(MASEA)
(1) Maximizing profitability
(2) Ability of the firm to pay its obligations
(3) Safety of the investment in the business
(4) Effectiveness and efficiency of management in
utilizing the resources entrusted to them
(5) Attain stability in operations.
 BASIC CONCEPTS
PROBLEMS AND LIMITATIONS
(1) The nature of the information
(a) Companies have a choice of accounting methods.
These differences impact ratios and make it difficult
to compare companies using different methods.
(b) Companies may have different fiscal year ends
making comparison difficult if the industry is
cyclical.
(2) The need to look beyond ratios
Ratios or any information generated by FS analysis are
not the ultimate goal. The company must interpret and
look beyond this results for a more proper evaluation.
 TECHNIQUES IN FS ANALYSIS
HORIZONTAL ANALYSIS
• It is the process of analyzing the firms’ financial data across two
or more consecutive periods.
• Horizontal analysis is an interperiod and intracompany analysis.
In horizontal analysis, the amount of change and percentage of change
should be shown.
PERCENTAGE CHANGE (%) = AMOUNT OF CHANGE / BASE
CAUTION ABOUT THE BASE:
(1) The base may be last year’s or earlier period data, average
industry data or even chief competitors’ data.
(2) The percentage change is NOT computed if the base is ZERO or
NEGATIVE.
TECHNIQUES IN FS ANALYSIS
VERTICAL ANALYSIS
• Vertical analysis is a method of financial statement analysis in
which each line item is listed as a percentage of a base figure
within the statement.
• Vertical analysis is the process of comparing figures in the FS
of a single period only. (Intraperiod analysis)
• The goal of vertical analysis is to furnish a common size
financial statement. (Intercompany analysis)
• Common size financial statements are financial statements that
translate peso amounts to percentages in relation to a chosen
base.
NOTE: In vertical analysis, only percentages are shown.
TECHNIQUES IN FS ANALYSIS
VERTICAL ANALYSIS
What base to use?
Financial Statement Proper Base
Income Statement Net Sales
Balance Sheet Total Assets
Statement of Cash Flows Total Cash Available
TECHNIQUES IN FS ANALYSIS
RATIO ANALYSIS
Financial ratio is a comparison in fraction, decimal or
proportion of two significant figures taken from the financial
statements.
In comparing balance sheet items with income statement
items in a single ratio, the balance sheet items are being
averaged if the beginning and ending balances are available.
TECHNIQUES IN FS ANALYSIS
RATIO ANALYSIS
Liquidity ratios are ratios used in measuring the ability of
the firm to meet its currently maturing obligations.
TECHNIQUES IN FS ANALYSIS
RATIO ANALYSIS
Activity ratios are ratios that measure the liquidity of
specific assets and efficiency in managing assets.
TECHNIQUES IN FS ANALYSIS
TECHNIQUES IN FS ANALYSIS
RATIO ANALYSIS
Solvency ratios are ratios that measure the ability of the firm
to pay its long-term financing and the extent of a firm’s
financing.
TECHNIQUES IN FS ANALYSIS
RATIO ANALYSIS
Profitability ratios are ratios that measure the overall
performance of the firm.
TECHNIQUES IN FS ANALYSIS
TECHNIQUES IN FS ANALYSIS
RATIO ANALYSIS
Market-test ratios are concerned with the return on
investment for shareholders, and with the relationship
between return and the value of an investment in company's
shares..