Basics of Analysis

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The Users of Financial Statements
Investors
Analysis of past and present information to predict the future prospects
of the entity
Creditors
Short-term creditor focus on current resources
Long-term creditors consider the future prospects of the firm
Firm Manager
Analyze information from the perspective of both investors and
creditors

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Ratio Analysis
Looks at the pairing of financial data in order to get a picture of
the performance of the firm.
Financial ratios are usually expressed as a percent or as times per
period.
It is widely used in financial statement analysis.

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Ratio Analysis
Liquidity ratios
Measures a firm’s ability to meet its current obligations
Borrowing capacity (leverage) ratios
Measures the degree of protection for long-term creditors
Profitability ratios
Measures the earning ability of a firm

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Ratio Analysis
Explained in comparison with
Prior ratios
Competitor’s ratios
Industry ratios
Predetermined standards
Trend and variability of a ratio are important considerations

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Complexities and Context
Use of average data from balance sheet
Necessary when comparing with income statement data
Return on asset (ROA), Return on equity (ROE)
Analysis must be performed and understood within the context
of
Native accounting principles
Native business practices and culture

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Limitation of Ratio Analysis
Historical Information
Historical data may not reflect the future performance
Inflationary effects
If Inflation has occurred between periods, the number across different
periods is not comparable.
Seasonal effects
Manipulation of financial statements
The information of the statement may manipulate by the firm’s
management.

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Seasonal effects
Quarter 2019/
1
2019/ 2019/ 2019/ 2020/ 2020/ 2020/ 2020/ 2021/ 2021/ 2021/ 2021/ 2022/ 2022/
2 3 4 1 2 3 4 1 2 3 4 1 2

HERAN
( He Lianshuo, Gross 34.04 37.51 37.67 34.29 36.99 39.02 40.42 39.11 37.81 37.76 39.08 29.94 29.33 34.69
margin
5283)
Gamania Gross 41.51 40.31 44.8 42.33 38.91 39.35 40.14 32.4 39.33 35.77 42.49 50.44 46.74 39.35
( Game Orange ,
6180 ) margin

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Common-Size Analysis
A technique that converts all financial statement information into
the percentage or absolute value, compared to the amount of
selected accounting item or industry value.
The use of percentages is usually preferable to the use of absolute amounts
Easier to compare to other companies
Easier to compare to industry

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Common-Size Analysis
Vertical analysis
Convert the accounting items into a percentage of a base figure within
the statement
All amounts of a year expressed as a percentage of a base amount of the
same year (eg, net sales revenue, total assets)
Horizontal analysis
Compare the accounting items over different time periods
Amounts for comparative years are expressed as a percentage of the
base year amount

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Exhibit 5-1: Melcher Company—
Vertical Common Size

Each financial statement element is presented as a percentage of a

designated base which is sales revenue on the income statement
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Exhibit 5-1: Melcher Company—
Horizontal Common Size

Each financial statement element is presented as a percentage

of a base amount from a selected year
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Year-to-Year Change Analysis
Use both absolute and percentages
Guidelines
When an item has value in the base year and none in the next period,
the decrease is 100%
A meaningful percent change cannot be computed when one number is
positive and the other number is negative
No percent change is computable when there is no figure for the base
year

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Year-to-Year Change Analysis

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Industry Variations
Financial components vary by type of industry
Merchandising (profit by sell products)
Inventory is a principal asset
Sales may be primarily for cash or on credit
Service (profit by provide service)
Inventory is low or nonexistent

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Industry Variations
Manufacturing (profit by adding value to raw materials)
Large inventory holdings
Substantial investment in plant assets
Cost of sales often represents the major expense

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Industry Variations

Does not have

the inventory

Service Firm

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Industry Variations
High inventories
High cash

Merchandising Firm

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Industry Variations

High inventories

High PPE

Manufacturing Firm

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Example in Taiwan
Merchandising
◦ 2912,統一超 (PRESIDENT CHAIN STORE CORPORATION)

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Example in Taiwan
Manufacturing
◦ 2330,台積電 (Taiwan Semiconductor Manufacturing)

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Example in Taiwan
Service
◦ 3130,一零四(104 Corporation)

Inventory is nonexistent

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Comparisons
Provides meaning for analysis of ratios and financial data
Common types
Trend analysis
Standard Industrial Classification (SIC) Manual
◦ The U.S. Department of Labor provides Web site that details the SIC manual
Taiwan Stock Exchange (TWSE) Industry list

Industry Averages and Comparison with Competitors

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Comparisons: Trend Analysis
A study of the financial history of a firm
It reveals whether the ratio is
Falling
Rising
Relatively constant
Highlight
Effective management
Evidence of problems

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Comparisons: SIC
Classifies business by industry
Defines industries in accordance with the composition and
structure of the economy
Coding structure
Two-digit major group number
Three-digit industry group number
Four-digit industry number

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Comparisons: TWSE
Classifies business by industry
The list is create by Taiwan stock exchange ( 台灣證券交易所 )
34 industries in Taiwan
https://tw.stock.yahoo.com/

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