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Business Analysis
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Credit Analysis
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Credit Analysis
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Prospective Analysis
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Accounting Analysis
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Financial Analysis
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Analysis Preview
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Business Activities
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Information Sources for Business

Analysis
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Financial Statements
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Additional Information
(Beyond Financial Statements)
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Balance Sheets
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Balance Sheet

Total Investing = Total Financing

= Creditor Financing + Owner Financing

Colgate Financing
(in $billions)
$12.724 = $10.183 + $2.541
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Income Statement
Revenues – Cost of goods sold = Gross Profit
Gross profit – Operating expenses = Operating Profit

Colgate’s Profitability
(in $billions)

$16.734 - $7.144 = $9.590 Gross Profit

$9.590 - $5.749= $3.841 Operating profit
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Income Statement
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Statement of Cash Flows

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Statement of Cash Flow

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Retained Earnings, Comprehensive Income, and Changes in

Capital Accounts
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In which of the previous financial

statements would an analyst find the
investing, financing and operating
activities reflected?
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Analysis Preview
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Comparative Income Statements

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Common Size Balance Sheets

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Common Size Income Statements

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Analysis Preview
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Analysis in an Efficient
Market
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Book Organization
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Analysis Preview
Debt (Bond) Valuation

Bt is the value of the bond at time t

It +n is the interest payment in period t+n
F is the principal payment (usually the debt’s face value)
r is the investor’s required interest rate (yield to maturity)
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Analysis Preview
Equity Valuation

Vt is the value of an equity security at time t

Dt +n is the dividend in period t+n
k is the cost of capital
E refers to expected dividends
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Analysis Preview
Equity Valuation - Free Cash Flow to Equity
Model

FCFt+n is the free cash flow in the period t + n [often

defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E refers to an expectation
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Analysis Preview
Equity Valuation - Residual Income Model

BV is the book value at the end of period t

t

Rit+n is the residual income in period t + n [defined as

net income, NI, minus a charge on beginning
book value, BV, or RIt = NIt - (k x BVt-1)]
k is the cost of capital
E refers to an expectation
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Ratios

 We can compute numerous ratios using a company’s financial

statements.
 Some ratios have general application in financial analysis, while
others are unique to specific circumstances or industries
 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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Ratios
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Ratios
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Ratios