Financial Statements Analysis.
Annual Reports and Financial Statements as the basic sources of
financial analysis
Contents
- the
procedure of financial statements analysis (FSA);
- Information
needed for FSA;
- the
annual report and its main sections;
- financial
statements: the contents and significance for financial analysis;
- the
interpretation of financial statements;
- the
main techniques of FSA.
The procedure of financial statements
analysis
- Collecting the information
- Analysis of information
- Interpretation
- The use of the information for decision making purposes
Collecting the information
Prospects for the sector. Key
question:
- What are the drivers the sector profits?
- General economic and stock market factors –how do they affect the sector?
- Key risks ( interest rate, foreign exchange risk, market
risk, taxation and so on).
Collecting the information
- The company’s business and strategies
- Strategy;
- Key operational and geographical segments;
- Performance;
- Risks ( operational, credit, liquidity, market, reputational and so
on).
The main techniques of financial
statements analysis
- Horizontal analysis is a line–by-line comparison of financial
information over a series of reporting periods;
- Vertical analysis - the proportional analysis
of a financial statement, where each line item on a financial statement
is considered as a percentage of the total amount;
- Trend analysis - analysis of changes of every
items of financial statements over a series of reporting periods;
- Ratio analysis- analysis of the financial ratios
system
Horizontal analysis
| |
2010 |
2011 |
2012 |
Current assets
|
1000,0 |
1100,0 |
1150,0 |
Fixed assets |
2000,0 |
2500,0 |
2800,0 |
Total assets |
3000,0 |
3600,0 |
3950,0 |
Vertical analysis
| |
2010 |
2011 |
2012 |
Current assets
|
33,3% |
30,55% |
29,1% |
Fixed assets |
66,7% |
69,46% |
70,9 |
Total assets |
100,0% |
100,0% |
100,0% |
Vertical analysis ( example)
- AAA Company Income Statement s for the Year Ended December 31, 2012
- Amount Percent
- Sales $ 18,000 100.00 %
- Cost of Goods Sold 7,000 38.89 %
- Gross Profit $ 11,000 61.11 %
- Selling Expenses
- Advertising $ 500 2.78 %
- Commissions 750 4.17 %
- Delivery Fees 1,200 6.67 %
- Salaries 5,000 27.78 %
- Total Selling Expenses $ 7,450 41.39 %
- General & Administrative Expenses
- Insurance $ 800 4.44 %
- Rent 1,200 6.67 %
- Depreciation 200 1.11 %
- Utilities 400 2.22 %
- Total General & Administrative
- Expenses $ 2,600 14.44 %
- Operational Profit $ 950 5.28 %
Trend analysis
| |
2010 |
2011 |
2012 |
Current assets
|
100,0 |
110,0% |
115,0% |
Fixed asset |
100,0 |
125,0% |
140,0 |
Total assets |
100,0% |
120,0% |
131,6% |
Ratio analysis
- Liquidity ratios;
- Profitability ratios;
- Capital Structure ratios;
- Efficiency Ratios;
- Investment Valuation Ratios
Sources of Data
- Annual reports
- Published collections of data
- Investment sites on the web
The Annual Report
- The annual report is a comprehensive report on
a company`s activities throughout the preceding year. Annual reports
are intended to give all interested users information about the company's
activities and financial performance.
The main sections of annual report
- Financial statements
- Other reports:
- Shareholder information
- Financial summary
- Chairman`s statement
- Corporate governance
- Other information
Financial Statements
- Balance Sheet (Statement of Financial Position)
- Income Statement (Statement of Comprehensive Income)
- Statement of Cash Flows
- Statement of Shareholder`s Equity
- Notes
Statement of Financial Position
(Balance Sheet)
A financial statement that summarizes
a company's assets, liabilities and shareholders' equity at a specific
point in time.
Balance Sheet helps to answer:
What we have?
What we owe?
What we`re worth?
Balance Sheet Basics
Fundamental equations of Balance
Sheet
- Assets = Liabilities + Shareholders' Equity
Shareholders'
Equity = Net Assets
- Net Assets = Assets - Liabilities
Assets
What we have
- Current assets are assets which can either be converted to cash or used
to pay current liabilities within 12 months.
Typical current assets
include:
cash,
short-term investments, accounts receivable, inventory.
- Long term assets - the value of a company`s property,
equipment and other capital assets expected
to be useable for more than one year, minus depreciation.
Typical
long term assets include:
- Long-term Investments
- Property, Plant and Equipment
- Intangible assets, such as goodwill, patents and copyrights.
LIABILITIES
What we owe
LIABILITIES
- Current Liabilities- are those obligations of the
business which are expected to be paid off within a year.
- Short-term loans
- Accounts Payable
- Current Portion of Long-term Debt
- Long-term Liabilities are those obligations of the
business which are expected to continue for more than one year. These
include loans payable and mortgages payable.
Net assets
What we`re worth
Stockholders Equity (Net Assets) = Assets – Liabilities
Stockholders Equity
- Common stocks
- Additional Paid-in Capital
- Retained Earnings
Statement of Financial Position
- Balance Sheet
- ASSETS
- Current Assets
- Cash
- Accounts Receivable
- Inventory
- Fixed Assets
- Property and Equipment—net of depreciation
- Total
- LIABILITIES
- Current Liabilities
- Short-term loans
- Accounts Payable
- Current Portion of Long-term Debt
- Long-term Liabilities
- Long-term debt
- Stockholders Equity
- Common stock
- Additional Paid-in Capital
- Retained Earnings
- Total
The Income Statement
- The income statement presents the results of a business for a stated
period of time.
- The primary purpose of the income statement is to report a company's
earnings to investors over a specific period of time.
The Income Statement
- Revenue
- Cost of sales
- Gross profit
- Administrative expenses
- Distribution expenses
- Research and development expenses
- Other expenses
- Profit before tax
- Income tax expense
- Profit (Loss) for the year
Statement of Cash Flows
- The statement
of cash flows describes the cash
flows into and out of the business. Its particular focus is on the types
of activities that create and use cash.
- Cash flows in the statement are divided into the
following three areas:
- Operating activities. These
constitute the revenue-generating activities of a business.
- Investing activities. These
constitute payments made to acquire long-term assets, as well as cash
received from their sale.
- Financing activities. These
constitute activities that will alter the equity or borrowings of a
business.
Statement of Cash Flows
- Cash flows from operating activities
- Cash receipts from customers
- Cash paid to suppliers
- Cash paid to employees
- Interest paid
- Income taxes paid
- Net cash from operating activities
- Cash flows
from investing activities
- Purchase of property, plant, and equipment
- Proceeds from sale of equipment
- Net cash used in investing activities
- Cash flows
from financing activities
- Proceeds from issuance of common stock
- Proceeds from issuance of long-term and short
term debt
- Dividends paid
- Net cash used in financing activities
- Net increase
in cash and cash equivalents
- Cash and cash equivalents at beginning of period
- Cash and cash equivalents at end of period