Financial Management Part 1

Financial Management
Part 1
GSBM
Confidential — SyCip Gorres Velayo & Co. 2019 USSC Status Meeting
Agenda
1 Understanding Financial Statements
2 Techniques used in Financial Statement Analysis
a. Vertical Analysis
b. Horizontal Analysis
c. Ratio Analysis
3 Corporate Radar and Early Warning Signs-

Bankruptcy Prediction Models
4 Financial Benchmarking
5 Actual business application
Confidential — SyCip Gorres Velayo & Co. Philippine Christian University-Graduate School of Business Management 2019 USSC Status Meeting
Understanding Financial Statements
Objectives of Financial Statements

Sample Financial Statement
► The objective of general purpose financial statements is to provide information about the financial position,
financial performance, and cash flows of an entity that is useful to a wide range of users in making economic
decisions. To meet that objective, financial statements provide information about an entity's: [IAS 1]
► assets, liabilities, equity, income and expenses, including gains and losses contributions by and
distributions to owners (in their capacity as owners) and cash flows.
► That information, along with other information in the notes, assists users of financial statements in predicting
the entity's future cash flows.
► Financial statements should be relevant, reliable and comparable.
► Financial statements are intended to be understandable by readers who have "a reasonable knowledge of
business and economic activities and accounting and who are willing to study the information diligently
Users of Financial Statements

► Owners and managers require financial statements to make important business decisions that affect its
continued operations. Financial analysis is then performed on these statements to provide management with
a more detailed understanding of the figures. These statements are also used as part of management's
annual report to the stockholders.
► Employees also need these reports in making collective bargaining agreements (CBA) with the management,
in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.
► Prospective investors make use of financial statements to assess the viability of investing in a business.
Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus
providing them with the basis for making investment decisions.
► Financial institutions (banks and other lending companies) use them to decide whether to grant a company
with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance
expansion and other significant expenditures.
Components of Financial Statements
A complete set of financial statements includes: [IAS 1.10]
► a statement of financial position (balance sheet) at the end of the period
► a statement of profit or loss and other comprehensive income for the period (presented as a single statement, or
by presenting the profit or loss section in a separate statement of profit or loss, immediately followed by a
statement presenting comprehensive income beginning with profit or loss)
► a statement of changes in equity for the period
► a statement of cash flows for the period
► notes, comprising a summary of significant accounting policies and other explanatory notes comparative
information prescribed by the standard.
Statement of Financial Position(Balance Sheet)
► The balance sheet is a report of a company's financial worth in terms of book value. It is broken into three
parts to include a company’s assets, liabilities, and shareholders' equity. Short-term assets such as cash and
accounts receivable can tell a lot about a company’s operational efficiency. Liabilities include its expense
arrangements and the debt capital it is paying off. Shareholder’s equity includes details on equity capital
investments and retained earnings from periodic net income. The balance sheet must balance with assets
minus liabilities equaling shareholder’s equity. The resulting shareholder’s equity is considered a company’s
book value. This value is an important performance metric that increases or decreases with the financial
activities of a company.
Understanding Basic Financial Statements
Statement of Profit or Loss and Comprehensive Income(Income Statement)
► The income statement breaks down the revenue a company earns against the expenses involved in its
business to provide a bottom line, net income profit or loss. The income statement is broken into three parts
which help to analyze business efficiency at three different points. It begins with revenue and the direct costs
associated with revenue to identify gross profit. It then moves to operating profit which subtracts indirect
expenses such as marketing costs, general costs, and depreciation. Finally it ends with net profit which
deducts interest and taxes.
► Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit
margin, and net profit margin which each divide profit by revenue. Profit margin helps show the company's
status in terms of profitability.
Statement of Changes in Equity
► Stockholders' equity is often referred to as the book value of the company and it comes from two main
sources. The first source is the money originally and subsequently invested in the company through share
offerings. The second source consists of the retained earnings the company accumulates over time through
its operations. In most cases, especially when dealing with companies that have been in business for many
years, retained earnings is the largest component.
► Stockholders' equity refers to the assets remaining in a business once all liabilities have been settled.
► This figure is calculated by subtracting total liabilities from total assets; alternatively, it can be calculated by
taking the sum of share capital and retained earnings, less treasury stock.
► A negative stockholders' equity may indicate an impending bankruptcy.
Statement of Cash Flows
► The cash flow statement provides an overview of the company's cash flows from operating activities,
investing activities, and financing activities. Operating activities includes cash flow from the company's
regular operations. While, investing activities include cash flows involved with firmwide investments. The
financing activities section includes cash flow from both debt and equity financing. The bottom line shows
how much cash is available.
What you might want to ask on cash balance What you might want to ask on receivable balance
1. Do we have enough cash to pay our bills? 1. Are we collecting what is owed to us in a timely way?
2. Is there too much cash used in non-intrest bearing 2. Are there amounts we will never receive? Do we have an
accounts? allowance for doubtful accounts?
3. Is our cash balance increasing or decreasing(trend)? 3. Are receivable secured?
4. Have we protected the restricted cash? 4. What are current vs.longterm portions?
5. What is the company's cash ratio? 5.What is breakdown of accounts receivable?
What you might want to ask on inventory balance What you might want to ask on property, plant and
equipment
1. Do we have too much on inventory on hand? 1. Have we invested enough(too much) in property and
equipment?Is there any non-performing ppe?
2. Is the inventory too old? 2. Do we need to upgrade our equipment or technology?
3. Do we need to replenish? 3. Did we have a regular review of the useful life?
What you might want to ask on other asset accounts
1. What accounts composed other assets? 2. How much is the other assets and for what purpose?
What you might want to ask on liability balance What you might want to ask on equity balance
1. What and how much you owe including interest? 1. Is there restricted retained earnings?
2. How much are accrued expenses? 2. Is there capital defeciency?
3. What is the status of the company's credit line? 3. How much is the cumulative retained earnings?
4. What are the age of these liabilities? 4. How much dividends have been declared?
5. What is the status of liabilities in terms of security? 5. Is there additional capitalization made?
6. How much of the liabilities are short-term or long-term?
What you might want to ask on expenses What you might want to ask on income
1. Why expenses are rising? 1. Decreasing sales or revenue and profit margin?
2. Significant increase in interest expense? 2. How much of the income is related to non-operation?
3. Details of miscellaneous expenses or other expenses? 3. Sales or revenue recognized during the last day of the month
or at year-end
Understanding Financial Statement
What Is Financial Statement Fraud?

► Financial statement fraud is the manipulation of the information used to prepare the financial statements
released to the public and financial institutions. Manipulating these statements allows the business to
portray a better but false financial picture, or to hide a disbursement of money, liabilities or assets.
1. Manipulating Timing
(i) Early Recognition of Revenues
(ii) Postponing Expenses
2. Falsifying Entries
(i) Fictitious revenues
(ii) Manipulating liabilities and expenses
(iii) Valuing assets
 Therefore, reliance to the audited financial statement is encouraged to minimize the risk of having
inaccurate financial information. Audited financial statement includes auditor's report with unqualified
opinion indicates assurance that these financial statements are free of material mistatements.
Understanding Financial Statement
Example of Financial Statement Fraud?(Cookie jar accounting)
► One famous case of cookie jar accounting ended with the computer giant Dell paying a $100 million penalty to the
Securities and Exchange Commission (SEC) in July 2010.
► The SEC argued that Dell would have missed analysts’ earnings estimates in every quarter between 2002 and 2006 had
it not dipped into its reserves to cover the shortfalls in its operating results.
► In this case, the cookie jar reserves reportedly consisted of undisclosed payments that Dell received from chip giant Intel
in return for agreeing to use Intel’s CPU chips exclusively in its computers.
► The SEC also alleged that Dell did not disclose to investors that it was drawing on these reserves.
► In fact, the Intel payments made up a huge chunk of Dell’s profits, accounting for as much as 72% of its quarterly
operating income at their peak. Dell’s quarterly profits fell significantly in 2007 after the arrangement with Intel ended.
► The SEC also alleged that Dell claimed that the decline in profitability was due to an aggressive product pricing strategy
and higher component prices, but the real reason was that it was no longer receiving payments from Intel.
Financial Statement Analysis
What Is Financial Statement Analysis?
► Financial statement analysis is the process of analyzing a company's financial statements for decision-
making purposes. External stakeholders use it to understand the overall health of an organization as well as
to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for
managing the finances.
► Several techniques are commonly used as part of financial statement analysis. Three of the most important
techniques include horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares
data horizontally, by analyzing values of line items across two or more years. Vertical analysis looks at the
vertical affects line items have on other parts of the business and also the business’s proportions. Ratio
analysis uses important ratio metrics to calculate statistical relationships.
Financial Statement Analysis
Limitations on the use of financial statement
► Dependence on historical costs. Financial Statements i.e. Balance Sheet records all the transactions at cost. In case
of assets, depreciation are provided and deducted from book value to arrive at a written down value. Financial
statements can therefore be misleading if most assets are recorded at historical cost
► Inflationary effects. If the inflation rate is relatively high, the amounts associated with assets and liabilities in the
balance sheet will appear inordinately low, since they are not being adjusted for inflation. This mostly applies to long-
term assets.
► Based on specific time period. A user of financial statements can gain an incorrect view of the financial results or cash
flows of a business by only looking at one reporting period. Any one period may vary from the normal operating results of
a business, perhaps due to a sudden spike in sales or seasonality effects. It is better to view a large number of
consecutive financial statements to gain a better view of ongoing results.
► Not always comparable across companies. If a user wants to compare the results of different companies, their
financial statements are not always comparable, because the entities use different accounting practices. These issues
can be located by examining the disclosures that accompany the financial statements.
► Subject to fraud. The management team of a company may deliberately skew the results presented. This situation can
arise when there is undue pressure to report excellent results, such as when a bonus plan calls for payouts only if the
reported sales level increases. One might suspect the presence of this issue when the reported results spike to a level
exceeding the industry norm, or well above a company’s historical trend line of reported results.
► No discussion of non-financial issues. The financial statements do not address non-financial issues, such as the
environmental attentiveness of a company's operations, or how well it works with the local community. A business
reporting excellent financial results might be a failure in these other areas.
Financial Statement Analysis- Vertical Analysis
Definition
► 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. Thus, line items on an income statement can be stated as a percentage
of gross sales, while line items on a balance sheet can be stated as a percentage of total assets or liabilities,
and vertical analysis of a cash flow statement shows each cash inflow or outflow as a percentage of the total
cash inflows.
► Vertical analysis makes it easier to understand the correlation between single items on a balance sheet and
the bottom line, expressed in a percentage.
► Vertical analysis can become a more potent tool when used in conjunction with horizontal analysis, which
considers the finances of a certain period of time.
► For the Statement of Financial Position the divisor is Total Assets
► For the Statement of Comprehensive Income the divisor is Net Sales(Revenue)
► For the Cash Flow Statement the divisor is the total cash inflows
Financial Statement Analysis- Horizontal Analysis
Definition
► Horizontal analysis is used in financial statement analysis to compare historical data, such as ratios, or line
items, over a number of accounting periods. Horizontal analysis can either use absolute comparisons or
percentage comparisons, where the numbers in each succeeding period are expressed as a percentage of
the amount in the baseline year, with the baseline amount being listed as 100%. This is also known as base-
year analysis(two-dated financial report) or trend analysis(minimum of five-year dated financial report).
► Horizontal analysis is used in the review of a company's financial statements over multiple periods.
► It is usually depicted as a percentage growth over the same line item in the base year.
► Horizontal analysis allows financial statement users to easily spot trends and growth patterns.
► It can be manipulated to make the current period look better if specific historical periods of poor performance
are chosen as a comparison.
Financial Statement Analysis-Horizontal Analysis
Note: In horizontal analysis, 2007 is the base year and 2008 is the comparison year. All items on the balance sheet and income statement for the
year 2008 have been compared with the items of balance sheet and income statement for the year 2007.
Financial Statement Analysis-Horizontal Analysis
Horizontal analysis does not fully discloses the weaknesses or strengths of a company. The following are the main
purposes of horizontal analysis:
(1). to see the trend of various income statement and balance sheet figures of a company.
(2). to evaluate whether the management is achieving its objectives or not.
(3). to investigate unexpected increases or decreases in financial statement items.
(4). to evaluate overall performance of the company
Ratio Analysis
► Financial ratios are created with the use of numerical values taken from financial statements to gain
meaningful information about a company. The numbers found on a company’s financial statements –
balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and
assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.
► Ratio analysis is one of the oldest methods of financial statements analysis. It was developed by banks and
other lenders to help them chose amongst competing companies asking for their credit. Two sets of financial
statements can be difficult to compare. The effect of time, of being in different industries and having different
styles of conducting business can make it almost impossible to come up with a conclusion as to which
company is a better investment.
► https://www.readyratios.com/finan/index.html
Ratio Analysis
► https://www.readyratios.com/finan/index.html
Ratio Analysis
Asset Utilization Ratios

Asset utilization ratio is a ratio to determine the efficiency of managing assets in generating revenue.
Leverage Ratios
Financial leverage is the amount of debt that a company uses to buy more assets. Leverage is
employed to avoid using too much equity to fund operations. An excessive amount of financial leverage
increases the risk of failure, since it becomes more difficult to repay debt.
Liquidity Ratios
Liquidity measures the ability of the company to meet financial obligations as they come due, without
disrupting the normal ongoing operations.
Profitability Ratios
Profitability measures the extent to which a company generates a profit. Profitability analysis focuses
on the relationship between revenues and expenses and on the level of profits relative to the size of
investment in the business
Ratio Analysis
Asset Utilization Ratios
a. Asset Turnover Ratio – The Total Assets Turnover Ratio shows how efficiently the total assets of the
firm are employed to generate sales. This ratio gives an idea to the investor and the creditor about how the
company is managed and assets are utilized to generate revenues. The formula to calculate this ratio is:
Asset Turnover Ratio = Net Sales/ Average Total Assets
The higher the value of ratio, the better is the utilization of total assets of the company and therefore, higher
ratios are more favorable. This shows that the company is able to generate revenues with the minimum
amount of total assets without raising additional capital.
b. Return on Asset (ROA) – The Return on Asset (ROA) shows how well a company can convert its
investment in assets into profits. It is the ratio that measures the ability of a company to convert the money
spent on purchasing the assets into net income and profits. It is also referred to as Return on Investments. The
formula to calculate this ratio is:
Return on Asset Ratio = Profit after tax/ Average Total Assets
where, Average total assets = (Assets in the beginning+ Assets at the end of the financial year) / 2
A higher value of Return on Asset ratio shows that the company is able to earn more profit with fewer
investments and hence is able to utilize its assets more efficiently and therefore, higher ratios are more
favorable.
Ratio Analysis
Leverage Ratios
a. Debt Ratio – The debt ratio measures the proportion of assets paid for with debt. This ratio can be
used to determine the solvency of a company. A high ratio implies that the bulk of company financing is coming
from debt; this is a risky financial structure, since the borrower is at risk of not being able to pay for the
associated interest expense or paying back the principal. A low debt ratio reflects a conservative financing
strategy of using only equity to pay for assets and therefore, lower ratios are more favorable. Lenders and
creditors use the debt ratio to estimate the amount of lending risk they will incur by extending credit to a
company. They are more likely to lend when the debt ratio is closer to 0% than when the ratio is closer to
100% (or more).
The formula to calculate Debt Ratio is:
Debt Ratio = Total debt(liabilities) ÷ Total assets
Ratio Analysis
Leverage Ratios
b. Debt to Equity Ratio – The debt to equity ratio measures the riskiness of a company's
financial structure. The ratio reveals the relative proportions of debt and equity financing of the business. This
is closely monitored by lenders and creditors, since it can provide early warning that an organization is so
overwhelmed by debt if it has high debt to equity ratio which means that it is unable to meet its payment
obligations therefore, lower ratios are more favorable. This is also a funding issue. When a company has a
high debt to equity ratio, it has imposed on itself a large block of fixed cost in the form of interest expense,
which increases its breakeven point. This situation means that it takes more sales for the company to earn a
profit compared to without the debt. In terms of Debt to Equity ratios lower ratios are more favorable.
The formula to calculate Debt to Equity Ratio is:
Debt to Equity Ratio = (Long-term debt + Short-term debt + Leases) ÷ Equity
Ratio Analysis
Liquidity Ratios
a. Current Ratio – The Current Ratio is the part of the liquidity ratio that helps to determine the
company’s ability to pay off its short-term obligations with its current assets. A company uses current assets
such as cash, cash equivalents, marketable securities and receivables to meet its short-term debt. Generally,
the current assets more than twice the current liabilities are considered favorable as it shows the company’s
readiness to meet its obligations when they arise. Current liabilities are generally the obligations that are
expected to become due within 12 months and these are in the form of loans and advances, creditors, bills
payable, etc.
The formula to calculate current ratio is:
Current Ratio = Current Asset/ Current Liabilities
A higher value of current ratio shows the readiness of a company to pay for its current obligations when they
arise. Thus, the higher the ratio the higher is the liquidity of the company and therefore, higher ratios are more
favorable.
Ratio Analysis
Liquidity Ratios
b. Acid-Test Ratio – The Acid Test Ratio also referred to as a Quick Ratio is calculated to determine the
ability of a company to pay off its current liabilities with Quick Assets. Generally, all the current assets are the
quick assets, however inventory is subtracted from its value because inventories are not readily convertible
into cash. The acid-test ratio is a key indicator for the investor to know if the company is capable of paying its
short-term bills on time.
Ideally, the quick ratio equal to or more than 1 is considered favorable; that shows the company is having more
liquid assets and do not rely heavily on the inventories.
The formula to calculate Acid-test Ratio is:
Acid-test Ratio = Quick Asset/ Current Liabilities
A higher value of Acid-test Ratio shows a higher debt-paying capacity of a firm and therefore, higher
ratios are more favorable.
Ratio Analysis
Liquidity Ratios
c. Cash Ratio – The Cash Ratio shows how quickly the firm can pay off its liabilities relative to cash,
bank balances and marketable securities since these are considered as the most liquid component of the
current assets. This ratio measures the ability of a firm to meet its current obligations with the cash or cash
equivalents. It is the most stringent liquidity ratio and is considered as an important decision factor for the
creditors regarding how much amount is to be lent to the company. The high value of cash ratio shows
sufficient cash balance and that the company is capable of paying the current debts.
The formula to calculate Cash Ratio is:
Cash Ratio = (Cash and Bank Balances+ Current Investments) / Current Liabilities
A higher value of cash ratio results in more lending from the creditors due to a safety of returns and therefore,
higher ratios are more favorable.
Ratio Analysis
a. Gross Profit Margin Ratio – The Gross Profit Margin Ratio shows how efficiently the company has
generated revenues from the sale of goods and services. This ratio measures the amount of profit generated
after deducting the direct expenses related to the production of goods and services. The gross profit is the
difference between the revenues generated and the cost of goods sold or cost of services. This ratio also
shows the margin left after considering the manufacturing cost. The manufacturing cost includes the material
cost, employee benefits cost, manufacturing expenses, etc.
The formula to calculate Gross Profit Margin Ratio is:
Gross Profit Margin Ratio = Gross Profit/Net Sales
Where, Gross Profit = Revenues – Cost of goods sold or Cost of services
A higher value of gross profit ratio shows that the company is selling goods and services at a high-profit
percentage and therefore, higher ratios are more favorable.
Ratio Analysis
b. Net Profit Margin Ratio – The Net Profit Margin Ratio shows the net income earned from the sale of
goods and services or how much profits are generated at a certain level of sales. This ratio shows the earnings
or the revenues left for the shareholders, both equity and preference shareholders after making the payment of
all the operating expenses, interest, taxes, etc. The net profit margin is all about how much a company can
save from the sale of one unit. The overall success of the company can be measured by this ratio. A high value
of net profit margin ratio shows that the company is following the correct pricing policy and is efficiently
controlling the cost of production.
The formula to calculate Net Profit Margin Ratio is:
Net Profit Margin Ratio = Net Profit after tax/Net Sales
A higher value of net profit margin ratio is better because it shows the ability of the company to pay a profit
share to the shareholders and pay off the loans taken from the creditors and therefore, higher ratios are more
favorable.
Ratio Analysis
Interpreting Financial Ratios
Horizontal analysis is an industry jargon for comparison of the same ratio over time. Once a ratio is calculated,
it is compared with what the value was in the previous quarter, the previous years, or many years in case the
analyst is trying to make a trend. This provides more information of two grounds. They are:
 Horizontal analysis clarifies whether the company has a stable track record or is the value of the ratio
influenced by one time special circumstances.
 Horizontal analysis helps to unveil trends which help analysts unveil trends in the performance of the
business. This helps them make more accurate future projections and value the share correctly.
Ratio Analysis
Interpreting Financial Ratios
Cross sectional ratio analysis is the industry jargon used to denote comparison of ratios with other companies.
The other companies may or may not belong to the same industry. Cross sectional analysis helps an analyst
understand how well a company is performing relative to its peers. In a way this removes the effect of business
cycles. There are many variations of cross sectional analysis. They are as follows:
 Industry Average: The most popular method is to take the industry average and compare it with the ratios of
the firm. This provides a measure of how the company is performing in comparison to an average firm.
 Industry Leader: Many companies and analysts are not satisfied with being average. They want to be the
industry leader and therefore benchmark against them.
 Best Practice: In case, the company is the industrial leader, then it usually crosses the industry border and
seeks inspiration from anyone anywhere in the world. They benchmark with the best practices across the
globe.(Benchmarking)
Corporate Radar and Early Warning Signs-Bankruptcy Prediction Models
The exact definition of financial distress is not determined yet. From the perspective of theoretical analysis,
financial distress has different degrees (Bruynseels & Willekens, 2012). Mild financial distress may be reflected
as temporary cash flow difficulty, such as the concepts like insolvency, default and etc. The most serious one is
called the business failure, or bankruptcy (Sun, Li, Huang & He, 2014). Business failure leads to the
discontinuity of the firm’s operation, and it has a significant effect on anyone who is related to the firm
(creditors, stockholders, suppliers, among others). Consequently, the establishment of reliable business failure
prediction models is of importance to the current corporate firms (Zopounidis & Doumpos, 1999).
Over the course of time, various models have been developed in order to identify and predict bankruptcy within
organizations. However, these models have a lot of limitations. Some of these models are not applicable to all
industries, whereas there are some others that do not provide consistent results. However, there are a couple
of models that are widely used across various industries.
Altman Z-Score Model
Credit scoring models were generally applied to assess the credit worthiness of borrowers. A widely accepted model was
proposed by Edward Altman (1968), which included the financial ratios with appropriate weights to assess the financial
health of the firms. This model could also be used to predict bankruptcy. The linear equation proposed by Altman (1968)
was:
Z = 1.2X1 + 1.4X2 + 3.3 X3 + 0.6X4 + 1.0X5
Where:
X1 = working capital/total assets
X2 = retained earnings/total assets
X3 = earnings before interest and taxes/total assets
X4 = market value equity/book value of total liabilities
X5 = sales/total assets
Z is overall index
Interpretation of the Altman Z-score values
Z-score values less than or equal to 1.81 means that the company is experiencing financial difficulties and is high risk.
While, Z-score for values between 1.81 to 2.67 means that the company is considered to be in the grey area. In this
condition, the company has financial problems that must be dealt by the management. In this grey area, there is a
possibility that the company may go bankrupt depending on how the management will take immediate action to tackle the
problems. For the Z-score values >2.67, providing an assessment that the company is in a very healthy state so that the
probability of bankruptcy is very little.
Taffler Z-Score Model
Formulated in 1977, this model is another frequently used bankruptcy model. Its basic idea is similar to the
previous model, while this one used only four partial indicators namely:
Z = 0.53R1 + 0.13R2 + 0.18R3 + 0.16R4
Where:
R1 = earnings before taxes / current liabilities
R2 = current assets / total liabilities
R3 = current liabilities / total assets
R4 = sales / total assets
Interpretation of the Taffler Z-score values

Zones of discrimination of this model are 0.3 and 0.2. That means that if the overall result is higher than 0.3,
the company is in the “safe zone” with no significant risk of bankruptcy. The result between 0.2 and 0.3
presents “grey zone” with some potential risk of bankruptcy and the necessity to make some decisions for
improving of the position of the company. Results below 0.2 present “distress zone” with significant risk of
bankruptcy (Taffler 1983).
Criticisms on these models
 Uses Data From Financial Statements

Bankruptcy prediction models use data from financial statements. This data may not be accurate a lot
of the time because of the limitations as discussed earlier.
 Coefficients need to be updated because of time and since Industries have changed
Many models like the Altman Z score rely on coefficients. These coefficients provide the weight to the
particular ratio. However, it is important to note that the data on which the Altman model is based was collected
in the 1960s and 1970s. It is therefore plausible to assume that the data has now become outdated and that
the companies must update the coefficients.
It also needs to be understood that the data on which the Altman Z model has been created was
collected from companies in the manufacturing domain. Business models have undergone a transformation
since that time. These models were developed when tech companies like Google, Microsoft, and Facebook did
not even exist.
To sum it up, the bankruptcy models are not anywhere close to perfect. However, not using them isn’t an
option either. Hence, it is important for the investor to be aware of when these models aid in decision making
and when they don’t!
Financial Benchmarking
What is financial benchmarking?
 “Benchmarking is the continuous process of measuring products, services, and practices against the
toughest competitors or those companies recognized as industry leaders.”
 Financial benchmarking involves running a financial analysis and making a comparison of the results in
order to assess a company's overall competitiveness, efficiency and productivity.
 The process of comparing and measuring your organization’s workflow against other businesses across the
globe to gather information on different practices, processes, and measures that further helps your
organization to boost its performance is referred to as benchmarking.
 Financial benchmarking is all about defining, collecting, analyzing and using internal and external financial
data to improve business processes, become cost-efficient, and enhance productivity.
 Financial benchmarking will allow your business to understand how your organization is running financially
against other businesses in your domain, which further assists you in exploring areas that can be improved,
leading to more profits and positive cash flow.
Financial Benchmarking
Next Topic
1 Financial Modelling, Forecasting and

Budgeting
THANK YOU
Confidential — SyCip Gorres Velayo & Co. 2019 USSC Status Meeting

Financial Management Part 1

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Financial Management

1 Understanding Financial Statements

2 Techniques used in Financial Statement Analysis

3 Corporate Radar and Early Warning Signs-

5 Actual business application

Objectives of Financial Statements

► Financial statements should be relevant, reliable and comparable.

Users of Financial Statements

A complete set of financial statements includes: [IAS 1.10]

► a statement of financial position (balance sheet) at the end of the period

► a statement of changes in equity for the period

► a statement of cash flows for the period

Statement of Financial Position(Balance Sheet)

Statement of Profit or Loss and Comprehensive Income(Income Statement)

Statement of Changes in Equity

► A negative stockholders' equity may indicate an impending bankruptcy.

Statement of Cash Flows

3. Is our cash balance increasing or decreasing(trend)? 3. Are receivable secured?

5. What is the company's cash ratio? 5.What is breakdown of accounts receivable?

2. Is the inventory too old? 2. Do we need to upgrade our equipment or technology?

3. Do we need to replenish? 3. Did we have a regular review of the useful life?

What you might want to ask on other asset accounts

2. How much are accrued expenses? 2. Is there capital defeciency?

6. How much of the liabilities are short-term or long-term?

What Is Financial Statement Fraud?

Example of Financial Statement Fraud?(Cookie jar accounting)

What Is Financial Statement Analysis?

► For the Statement of Financial Position the divisor is Total Assets

► For the Statement of Comprehensive Income the divisor is Net Sales(Revenue)

Asset Utilization Ratios

Asset Utilization Ratios

The formula to calculate Debt Ratio is:

Debt Ratio = Total debt(liabilities) ÷ Total assets

The formula to calculate Debt to Equity Ratio is:

Debt to Equity Ratio = (Long-term debt + Short-term debt + Leases) ÷ Equity

Interpreting Financial Ratios

Interpreting Financial Ratios

Interpretation of the Taffler Z-score values

Criticisms on these models

 Uses Data From Financial Statements

1 Financial Modelling, Forecasting and

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