AFM101 Chapter Notes - Chapter 13: Financial Statement Analysis, Time Series, Financial Statement

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM101
• Professor: Donna Psutka

Document Summary

Investors should evaluate future net earnings and growth potential of business based on: economy-wide factors, industry factors, individual company factors. A useful starting point for financial statement analysis is the return on equity (roe) profitability. A high roe can be achieved through: Product differentiation => able to charge higher prices => higher profit margins => higher roe. Cost advantage => operate more efficiently => offer lower prices to customers. Roe = net profit margin x total asset turnover ratio x financial leverage. Net earnings = net earnings x net sales x avg. Time series analysis: information for a single company is compared over time (i. e. sales). Comparison with similar companies: comparing a company with another one in the same line of business (i. e. rona, Analysts prefer to compare two companies that are very similar instead of using industry-wide comparisons diversity of companies (i. e. what they sell/offer) Ratio analysis: measures relationship b/t two financial statement amounts.