Financial Statements Analysis. Annual Reports and Financial Statements as the basic sources of financial analysis

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
• company websites
• Published collections of data
• e.g., Dun and Bradstreet
• 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