Financial Analysis and

Reporting
Introduction
By: Dhaine Liezl E. Robles
BSBA-FM3
Business Survival:

There are two key factors for business survival:

• Profitability
• Solvency

• Profitability is important if the business is to generate

revenue (income) in excess of the expenses incurred in
operating that business.
• The solvency of a business is important because it looks at
the ability of the business in meeting its financial obligations.
Financial Statement Analysis:

• Financial Statement Analysis will help the business owners and

other interested people to analyse the data in financial
statements to provide them with better information about such
key factors for decision making and ultimate business survival.
• It is a collective name for the tools and techniques that are
intended to provide relevant information to the decision
makers.
• It consists of the comparisons of the same company over the
period of time and comparisons of different companies either in
the same industries or different industries.
Users of Financial Statement Analysis:

• Trade Creditors
• Suppliers of Long-term Debt
• Investors
• Management
Financial Statement Analysis:

Purpose:
• To use financial statements to evaluate an organization’s
- Financial Performance
- Financial Position
- Prediction of future performance
• To have a means of comparative analysis across time in terms
of:
- Intracompany basis (within the company itself)
- Intercompany basis (between companies)
- Industry averages (against that particular industry’s averages)
• To apply analytical tools and techniques to financial statements
to obtain useful information to aid decision making.
Financial Statement Analysis:

FSA involves analysing the information provided in the financial

statements to:
• Provide information about the organization’s:
- Past performance
- Present condition
- Future performance
• Assess the organization’s:
- Earning in terms of power, persistence, quality and growth.
- Solvency
Types of Financial Analysis:

• On the basis of materials used:

- External Analysis
- Internal Analysis

• On the basis of modus operandi:

- Horizontal Analysis
- Vertical Analysis
On the basis of material used:

• Externals: It is carried out by outsiders of the business -

investors, credit agencies, Government agencies, creditors etc.
Who does not access to internal records of the company –
depending mainly on public accounts.

• Internal: It is carried out by persons who have access to

internal records of the company – executives, manager etc. – by
officers appointed by the Government or courts in legal
litigations etc. under power vested in them.
Financial Statements:

• Income Statement (used for reporting a company’s financial

performance over a specific accounting period)
• Balance Sheet (a financial statement that report a company’s assets,
liabilities, and shareholder’s equity at a specific point of time)
• Cash Flow Statement (a financial statement that aggregates a
company’s cash inflows and outflows from operations, investing, and
financing over a set period of time)
• Statement of Changes in Equity (a business’ financial statement that
measures that changes in owner’s equity throughout a specific period
of time)
Effective Financial Statement Analysis:

• To perform an effective FAS, you need to be aware of the

organization’s:
- Business Strategy
- Objectives
- Annual report and other documents like articles about the
organization in newspapers and business reviews.

These are called individual organizational factors.

Effective Financial Statement Analysis:

Requires that you:

• Understand the nature of the industry in which the
organization works. This is an industry factor.
• Understand that the overall state of the economy may
also have an impact on the performance of the
organization.

 Financial Statement Analysis is more that just ‘crunching

numbers’, it involves obtaining a broader picture of the
organization in order to evaluate appropriately how that
organizations is performing.
Standards of Comparison:

• Rule-of-thumb Indicators (financial analyst and bankers use

this or the benchmark financial ratios)
1. Understand the nature of the problem.
2. Evaluate the data available.
3. Consider the level of risk involved.
4. Compare several options.
• Past performance of the company
• Industry Standards
Sources of Information:

• Company Reports
- Directors Report
- Financial Statement
- Schedules and notes to the Financial Statement
- Auditor’s Report
• Stock Exchange
• Business Periodicals (a publication that focuses on providing
news and analysis, and information related to business and the
corporate world)
• Information Services (refer to broad category of activities that
involve providing access to, retrieval of, and dissemination of
information)
 Techniques of Financial Analysis:

The commonly used techniques for financial statement

analysis are:
• Financial Ratio Analysis
• Comparative Statement Analysis
• Horizontal Analysis
• Vertical Analysis
• Common Size Statement Analysis
• Trend Analysis
 Financial Ratio Analysis

• Financial Ratio Analysis involves calculating and analysing ratios

that use data from one, two or more financial statements.
• Ratio Analysis also expresses relationships between different
financial statements.
• Financial Ratios can be classified into 5 main categories:
- Profitability Ratios
- Liquidity of Short-Term Solvency Ratios
- Asset Management/Activity Ratios
- financial Structure/Capitalization Ratios
- Market Test Ratios
 Profitability Ratios

• Profitability ratio is a class of financial metrics used to asses a business’

ability to generate earnings relative to it’s revenue, operating costs,
balance sheet assets, or shareholder’s equity.

3 elements of profitability analysis:

• Analysing on sales and trading margin
- Focus on growth profit
• Analysing on the control of expenses
- Focus on net profit
•Assessing the return of assets and return on equity
• They can be separated into two categories:
- Return Ratios (measures the return a company produces)
- Margin Ratios (measures the ability of the company to generate a profit)
 Profitability Ratios
Most common profitability ratio:
• Gross Margin (tells you about the profitability of your goods and
services)
• Gross Profit Margin (shows the portion of sales attributable to profit
before accounting for operating costs)
• Operating Margin (measures the profit a company makes on a
dollar/peso of sales after accounting for the direct costs involved in
earning those revenues)
• Return on Assets (measures how effectively the company produces
income from it’s assets)
• Return on Equity (measures how much a company makes for each
dollar/peso that investors put into it)
 Profitability Ratio Formulas

• Operating Margin = Operating profit

Net Sales × 100

• Return on Assets = Net Profit * 100 . × 100

Average Total Assets

• Return on Equity = Net Profit * 100 . × 100

Shareholder Investment

• Operating Margin = Gross profit × 100

Net Sales

• Gross Margin = Gross profit × 100

 Profitability Ratio Formulas

• Gross Margin = Gross profit × 100

Net Sales
Example:
Imagine that you run a company that sold $50,000,000 in running shoes
last year and had a gross profit of $7,000,00. what was your company’s
gross margin for the year?

•Gross Margin = Gross profit × 100

Net Sales
•Gross Margin = $7,000,000 . × 100
$50,000,000
•Gross Margin = 14%
 Profitability Ratio Formulas

• Operating Margin = Operating profit

Net Sales × 100
Example:
Let’s say you make and sell computers. Last year, you generated net
sales of $100,000,000, and your operating income was $12,000,000.
what was your operating margin?

•Operating Margin = Operating profit × 100

Net Sales
•Operating Margin = $12,000,000 . × 100
$100,000,000
 Profitability Ratio Formulas

• Operating Profit Margin = Gross profit

Net Sales × 100
Example:
Let’s say you make and sell luxury bags. Last year, you generated
net sales of $100,000,000, and your gross profit was $12,000,000.
what was your operating profit margin?

•Operating Margin = Operating profit × 100

Net Sales
•Operating Margin = $12,000,000 . × 100
$100,000,000
 Profitability Ratio Formulas

• Return on Equity = Net income * 100 .

× 100
Shareholder investment
Example:
Imagine that your social media company just went public last
year, resulting in a total investment of $100,000,000. your
company’s net income was $10,000,000. what is the return on
equity

•Return on Equity = (Net income/Shareholder investment)× 100

•Return on Equity = ($10,000,000/$100,000,000)× 100
 Profitability Ratio Formulas

• Return on Assets = Net Profit * 100 . × 100

Average Total Assets
Example:
Imagine that you’re the president of a large company that
manufactures steel. Last year, your company had a net income
of $25,000,000, and a total value of it’s assets of
$135,000,000. what was your return on assets last year?

•Return on Assets = (Net profit/Assets) × 100

•Return on Assets = ($25,000,000/$135,000,000) × 100
Comparative Financial Statement Analysis

• Comparative financial statement analysis is the most

commonly used technique for analyzing financial statements. It
involves comparing financial document, such as income
statements, balance sheets, and cash flow statements from
different periods, to identify trends, patterns, and changes.
• Horizontal analysis (represents changes over years or period
and examines many reporting period also known as base-year
analysis)
• Vertical Analysis (represents amounts as percentages of a base
figure typically focusing on one reporting period)
Horizontal Analysis Formula

•Horizontal Analysis (absolute) = Amount in Comparison Year –

Amount in base year

•Horizontal Analysis (%) = Amount in Comparison Year – Amount in base year

× 100
Amount in base year
Vertical Analysis Formula

• Vertical Analysis = Income Statement Item × 100

(Income Statement) Total Sales

• Vertical Analysis Balance Sheet Item .× 100

(Balance Sheet) = Total Sales (Liabilities)
Common-Size Statement Analysis

• Common-size analysis lets you see how certain figures in your

business change from one year to the next to help you spot
trends.
• An income statement in which each line item is expressed as a
percentage of the value of sales, to make analysis easier.
• Allows companies to compare various financial metrics easily
by expressing them as a percentage of a base figure.
Trend Analysis

• It determines the direction upwards or downwards.

• Under this analysis the values of an item in different years is
expressed in relation to the value in one year called the base
year.
•Taking the value of the item in the base year to be equal to
100.
•The values of the item in different years are expressed as
percentages to this value.
Limitations of Financial Statement Analysis

• We must be careful with financial statement analysis.

- Strong FSA does not necessarily means that the organisation
has a strong financial future.
- FSA might look good but there may be other factors that can
cause an organization to collapse.
• Financial Analysis is only a Means
• Ignores the price level changes
• Financial Statements are essentially Intrim Reports
• Accounting Concept and Conventions
• Influence of personal judgements
• Disclose only monetary facts
"Today the greatest single source of wealth
is between your ears."
-Brian Tracy
Outro
By: Dhaine Liezl E. Robles
BSBA-FM3