Financial

Statement
Analysis

K R Subramanyam
John J Wild

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 Perkenalan….
 Satria Yudhia Wijaya
 Dosen Tetap di S1 Akuntansi
 Jabatan akademik : Lektor
 Bid.Ilmu : Akuntansi Keuangan
 Masa kerja : 1998-2021 (23 tahun)
 Pendidikan : S1 Akuntansi UPNVJ & S2 Ilmu Akuntansi UI
(M.S.Ak)
 Email : [email protected]/ 081290994341
 Posisi saat ini : Lembaga Pengembangan Pembelajaran
dan Penjaminan Mutu (LP3M)
 Mata kuliah diampu : Akuntansi Keuangan, Teori Akuntansi,
Seminar Akuntansi, dan Analisa Laporan Keuangan

1-2
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Overview of Financial
Statement Analysis

1
CHAPTER
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Preview
• Business analysis is the process of evaluating a
company’s economic prospects and risks.
• This includes analyzing a company’s business
environment, its strategies, and its financial position and
performance.
• Usefulness in a wide range of business decisions, such
as whether to invest in equity or in debt securities,
whether to extend credit through short- or long-term
loan, how to value a business in an initial public offering
(IPO), and how to evaluate restructurings including
mergers, acquisitions, and divestitures.
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• Financial statement analysis is the application of

analytical tools and techniques to general-purpose
financial statements and related data to derive
estimates and inferences useful in business analysis.
• Financial statement analysis reduces reliance on
hunches, guesses, and intuition for business decisions.
• It decreases the uncertainty of business analysis.
• It does not lessen the need for expert judgment but,
instead, provides a systematic and effective basis for
business analysis.
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Business Analysis

Evaluate Prospects Evaluate Risks

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Information Sources for Business

Analysis
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Credit Analysis Credit analysis is the

evaluation of the
creditworthiness of a
company.
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Credit Analysis
Credit worthiness: Ability to honor credit obligations
(downside risk)

Liquidity Solvency
Ability to meet short- Ability to meet long-
term obligations term obligations
Focus: Focus:
• Current cash flows • Long-term profitability
• Make up of current • Capital structure
assets and liabilities
• Liquidity of assets
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Equity Analysis
Assessment of downside risk and upside potential

Technical analysis / Fundamental Analysis

Charting
Determine Intrinsic value
• Patterns in price or without reference to
volume history of a market price
stock
• Predict future price • Analyze and interpret
movements key factors
– Economy
– Industry
– Company
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Technical analysis / Charting

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Technical analysis / Charting

 1-16

Equity Analysis
Assessment of downside risk and upside potential

Technical analysis / Fundamental Analysis

Charting
Determine Intrinsic value
• Patterns in price or without reference to
volume history of a price
stock
• Predict future price • Analyze and interpret
movements key factors
– Economy
– Industry
– Company
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Industry analysis

• Industry analysis is the usual first step since

the prospects and structure of its industry
largely drive a company’s profitability.
• Under this framework, an industry is viewed as
a collection of competitors that jockey for
bargaining power with consumers and suppliers
and that actively compete among themselves
and face threats from new entrants and
substitute products.
• Industry analysis must assess both the industry
prospects and the degree of actual and potential
competition facing a company.
 1-20

Strategy analysis
• Strategy analysis is the evaluation of both a
company’s business decisions and its success
at establishing a competitive advantage.
• This includes assessing a company’s
expected strategic responses to its business
environment and the impact of these
responses on its future success and growth.
• Strategy analysis requires scrutiny of a
company’s competitive strategy for its product
mix and cost structure.
 1-21

Accounting Analysis

Process to evaluate and adjust financial

statements to better reflect economic reality

Accounting
Risk
the uncertainty in financial
statement analysis due to
accounting distortions
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Financial Analysis
Process to evaluate financial position and
performance using financial statements

Profitability analysis — Evaluate return

on investments Common tools

Risk analysis ——— Evaluate riskiness

& creditworthiness Cash
Ratio
flow
analysis
analysis
Analysis of — Evaluate source &
cash flows deployment of funds
 1-23

Prospective Analysis
Process to forecast future payoffs

Business Environment
& Strategy Analysis

Accounting Analysis

Financial Analysis

Firm Intrinsic Value

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Dynamics of Business Activities

Business Activities Time
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Business Activities
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Business Activities

Financing activities
• Owner (equity)
• Nonowner (liabilities)

Creditor
• Debt creditor
• Operating creditor
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Business Activities

Investing activities
• Buying resources
• Selling resources

Investing activities
• Operating asset/Financial asset
• Current/Non-current asset Investing = Financing
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Business Activities

Operating Activities
Revenues and expenses from providing
goods and services
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Financial Statements Reflect Business Activities

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Financial Statements
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Balance Sheet

Total Investing = Total Financing

= Creditor Financing + Owner Financing
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Income Statement
Revenues – Cost of goods sold = Gross Profit
Gross profit – Operating expenses = Operating Profit

Colgate’s Profitability
(in $billions)

$12.238 - $5.536 = $6.701 Gross Profit

$6.701 - $4.5411 = $2.160 Operating profit
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Statement of Cash Flows

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Additional Information
(Beyond Financial Statements)
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Analysis Preview

Comparative Analysis

Purpose: Evaluation of consecutive financial

statements
Output: Direction, speed, & extent of any
trend(s)
Types:  Year-to-year Change Analysis
 Index-Number Trend Analysis
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Analysis Preview
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Index-Number Trend Analysis

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Analysis Preview
Common-Size Analysis

Purpose :  Evaluation of internal makeup

of financial statements
 Evaluation of financial statement
accounts across companies
Output: Proportionate size of assets,
liabilities, equity, revenues, &
expenses
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Analysis Preview
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Analysis Preview
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Analysis Preview
Ratio Analysis
Purpose : Evaluate relation between two or
more economically important items
(one starting point for further analysis)
Output: Mathematical expression of relation
between two or more items
Cautions:  Prior Accounting analysis is important
 Interpretation is key - long vs short term
& benchmarking
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Analysis Preview
Valuation
Valuation - an important goal of many types
of business analysis

Purpose: Estimate intrinsic value of a

company (or stock)
Basis: Present value theory (time value of
money)
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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
 1-54

Analysis in an Efficient Market

• The efficient market hypothesis, or EMH, deals
with the reaction of market prices to financial and
other information.
• There are three common forms of EMH.
1. The weak form EMH asserts that prices reflect
fully the information contained in historical
price movements.
2. The semistrong form EMH asserts that prices
reflect fully all publicly available information.
3. The strong form EMH asserts that prices
reflect all information including inside
information
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Microprudential Surveillance

• OJK as an institution that regulates and oversees

the financial industry.
• OJK Surveillance background :
1. Business conglomerate.
2. Integration of financial products and services
3. Hybrid Product
4. Arbitration regulations
5. Cross-sectoral coordination
6. Consumer Protection
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Microprudential Surveillance

• OJK was formed with the aim that all activities

inside the financial services sector is organized
regularly, fair, transparent, accountable and able
to realize financial system that grows sustainably
and stable, and able to protect interests
consumers and society alike.
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Microprudential Surveillance
System Supervision Finance in Indonesia
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Microprudential Surveillance

OJK's main task is to make arrangements and

Surveillance of:
1.Financial service activities in the Banking sector;
2.Financial service activities in the Market sector
Capital; and
3.Financial services activities in the Insurance sector,
Pension Funds, Financing Institutions, and other
Financial Services Institutions.
 1-59

Microprudential Surveillance
Macroprudential vs. Microprudential Surveillance
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Book Organization