BUSN1001 Study Guide - Final Guide: Financial Statement Analysis, Financial Analysis, Financial Statement
Financial Analysis
• A process of selecting, evaluating, and interpreting financial data, along with other
pertinent information, in order to formulate an assessment of a company's present
and future financial condition and performance.
Who uses financial statement analysis?
• Managers - for strategic and operational decision making.
• Investors and financial analysts - to evaluate management performance and to make
investment decisions.
• Creditors - to make lending decisions.
• Auditors - to assess the reasonableness of financial statement values.
• Suppliers - to assess opportunities and ability to repay.
Logical Analysis Approach
1. Understand what decision the analysis is for.
2. Learn about the enterprise, the industry.
3. Calculate ratios, trends, forecasts, etc.
4. Find comparative information.
5. Integrate and organise the analysis.
6. Draw conclusions.
Step 1:
Purpose
• Financial analysis is needed for many purposes:
o Valuation (shares, options, etc.)
o Ability to repay debt
o Probability of continuing as a going concern
o Competitive analysis
o Issuing equity (IPO, SEO)
o Commercial disputes
Step 2:
Learn About
the
Company
• What is the company business money?
o How do they create value? Primary products, sales regions
• Critically review management statements
o Read management discussion of operations; New releases
(ASX website).
o Compare to competitors, comments from press or by
analysts, compare to recent trends for company or for
industry.
• Analyse company strategy
o Read about company strategies (competition within industry).
Step 3:
Financial
Analysis
• Basic techniques:
1. Common-size Statements/Vertical Analysis
o By calculating all balance sheet figures as percentages of total
assets and all income statement figures as a percentage of
total revenue, the size of the company can be approx.
factored out.
o Eg: All income statement figures/total revenue.
o Eg: All balance sheet figures/total assets.
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Document Summary
Financial analysis: a process of selecting, evaluating, and interpreting financial data, along with other pertinent information, in order to formulate an assessment of a company"s present and future financial condition and performance. Who uses financial statement analysis: managers - for strategic and operational decision making. Logical analysis approach: understand what decision the analysis is for, learn about the enterprise, the industry, calculate ratios, trends, forecasts, etc, find comparative information, integrate and organise the analysis, draw conclusions. Analysis: financial analysis is needed for many purposes, valuation (shares, options, etc. , ability to repay debt, probability of continuing as a going concern, competitive analysis. Ratios: profit margin = operating profit after tax/sales. Indicate how firms manage various resources: effectiveness of utilisation of resources, eg: total asset turnover; inventory turnover; debtors turnover, total asset turnover = sales/total assets. Indicate the company"s the ability to meet short- term obligations: current ratio = current assets/current liabilities, quick ratio = (ca - inventory)/cl.
