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FM 202

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14 views28 pages

FM 202

Uploaded by

surbitodrea
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Analysis of Financial

Statement

GROUP 4
TORRES, SHENA G.
Surbito, Drea T
Jhonna Mae Tambiga Egera
Chelsey Lagos
●ANALYSIS OF FINANCIAL
STATEMENT

● Financial statement analysis is the process of


extracting information from financial statements to
better understand a company's current and future
performance and financial condition.
●ANALYZING THE BROADER
BUSINESS ENVIRONMENT
● Quality analysis depends on an effective business
analysis. The broader business context in which a
company operates must be assessed as its financial
statements are read and interpreted.

● Some of these questions about a company's business


environment are:
● Life cycle: At what stage in its life is this company? Is it
a startup, experiencing growing pains? Is it strong and
mature, reaping the benefits of competitive advantages?
Is it nearing the end of its life, trying to milk what it can
from stagnant product lines?
●Outputs: What products does it sell? Are its products new,
●
established or dated? Do its products have substitutes? How
complicated are its products to produce?

●Buyers: Who are its buyers? Are buyers in good financial


condition? Do buyers have substantial purchasing power? Can
the seller dictate sales terms to buyers?

●Inputs: Who are its suppliers? Are there many supply sources?
Does the company depend on a few supply sources with potential
● Inputs: Who are its suppliers? Are there many supply
sources? Does the company depend on a few supply sources
with potential for high input costs?
● Competition: In what kind of markets does it operate? Are
markets open? Is the market competitive? Does the
company have competitive advantages? Can it protect itself
from new entrants? At what cost? How must it compete to
survive?
● Financing: Must it seek financing from public markets? Is
it going public? Is it seeking to use its stock to acquire
another company? Is it in danger of defaulting on debt
covenants? Are there incentives to tell an overly optimistic
story to attract lower cost financing or to avoid default on
debt?
● Financing: Must it seek financing from public markets? Is
it going public? Is it seeking to use its stock to acquire
another company? Is it in danger of defaulting on debt
covenants? Are there incentives to tell an overly optimistic
story to attract lower cost financing or to avoid default on
debt?
● Governance: How effective is its corporate governance?
Does it have a strong and independent board of directors?
Does a strong audit committee of the board exist, and is it
populated with outsiders? Does management have a large
portion of its wealth tied to the company's stock?
● Risk: Is it subject to lawsuits from competitors or
shareholders? Is it under investigation by regulators? Has it
changed auditors? If so, why? Are its auditors independent?
Does it face environmental and/or political risks?

● BASICS OF PROFITABILITY ANALYSIS


● The primary goal of financial management is to maximize
shareholders' wealth, not accounting measures such as net
income or earnings per share (EPS). However, accounting
data influence stock prices and this data can be used to see
why a company is performing the way it is and where it is
heading.
Financial Analysis involves
● comparing the firm's ● evaluating trends in the
performance to that of firm's financial position
other firms in the same over time.
industry, and
LIMITATIONS OF FINANCIAL
STATEMENTS ANALYSIS
● Information derived by the analysis ● Limitations inherent in the accounting data
are not absolute measures of the analyst works with. These are brought
performance in any and all of the about by among others: (a) variation and
lack of consistency in the application of
areas of business operations. They
accounting principles, policies and
are only indicators of degrees of procedures, (b) too-condensed presentation
profitability and financial strength of data, and (c) failure to reflect change in
of the firm. purchasing power.
● Limitations of the performance measures or ● Analysts should be alert to the
tools and techniques used in the analysis. potential for management to
Quantitative measurements are not absolute influence the outcome of financial
measures but should be interpreted relative to
statements in order to appeal to
the nature of the business and in the light of
past, current and future operations. Timing of creditors, investors and others.
transactions and the use of averages can also
affect the results obtained in applying the
techniques in financial analysis.
FINANCIAL RATIO ANALYSIS
● Financial ratio-is a comparison in fraction, proportion,
decimal or percentage of two significant figures taken from
financial statements

● The ratio can be categorized as follows:


● Liquidity ratios.
● Asset management ratios.
● Debt management ratios.
● Profitability.
Analysis of liquidity or short-term
solvency
● Liquidity refers to both an enterprise's ability to pay short-
term bills and debts and a company's capability to sell assets
quickly to raise cash. Solvency refers to a company's ability to
meet long-term debts and continue operating into the future.
● CURRENT RATIO
● The current ratio is a liquidity ratio that measures a company’s
ability to pay short-term obligations or those due within one
year. It tells investors and analysts how a company can
maximize the current assets on its balance sheet to satisfy its
current debt and other payable.
Formula of current ratio
Quick or acid test ratio
● Acid-test ratio (also known
as quick ratio) is a measure
of a company's liquidity,
which is its ability to pay
its short-term obligations
using only its most liquid
assets. It is calculated by
dividing the sum of a
company's cash, cash
equivalents and marketable
securities by its total
current liabilities.
Cash flow liquidity ratio
● The cash flow liquidity
ratio consider cash flow
from operating activities
from the statement of cash
flows in addition to the
truly liquid assets, cash and
marketable securities.
Analysis of asset liquidity and asset
management efficiency
● Account receivable turnover-Accounts receivable turnover
ratio is a measure of how efficient your collections are,
referring to the number of times your company collects its
average accounts receivable in a given period. You
calculate AR turnover ratio by dividing your net credit
sales by your average accounts receivable for the period.
Average collection period- the average number of days it takes a
business to collect and convert its accounts receivable into cash. It is
one of six main calculations used to determine short-term liquidity, that
is, the ability of a company to pay its bills (current liabilities) as they
come due.

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