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ADMS 2500 Module 15- Financial Statement Analysis.docx

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Department
Administrative Studies
Course Code
ADMS 2500
Professor
Brian Gaber

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ADMS 2500 Dec.01/2011 Module 15- Financial Statement Analysis Quantitative Factors Relevant to Investment Decisions - profits, sales, assets and other key data isn’t useful unless it’s compared to other similar amounts for other time periods or for other firms in the industry Gathering Data for Fundamental Analysis (1) Have it delivered to your home - newspaper large urban areas have stock price and quotations printed in business section - tv and radio extensively covered stories - business periodicals available by subscription, devoted to business reporting - annual reports publicly traded corporations mail shareholders a copy (2) look it up online - media websites broadcast video and audio as well as text content - government websites rich source of industry and economic information - corporate website have ‘investor elations’ section where everything is available - security administrator’s website companies whose shares are traded on the stock exchange must file financial information (ex: sedar.com) (3) buy the information - subscribing to trade journals, newsletters and financial services from organizations such as D&B Quantitative Financial Statement Analysis - need to compare for information to be useful - relationships are shown in % or ratios - intrafirm analysis is where two or more years of the same firm are compared - interfrim analysis is where two or more years of different firms are compared (same industry) Intrafirm Perentage Change Analysis - attention is given to total current assets, long term assets, total assets, current liabilities etc - than changes in inventory and receivables are examined ~ these changes could be related to changes in income statement Intrafirm Trend Analysis - trend % are computed to observe % change over time in selected date - most firms provide 5-10 years in annual reports Ex: ~ interested in sales and earnings for this company ~ just by looking, it seems as though there is a fairly healthy growth ~ can calculate, trend percentage by taking year 1 a base year and then divide the data for the other years (called indexes) (215 / 202) x 100% = 106% (year 2) Interfirm Analysis Vertical Analysis and Common-Size Statements - vertical analysis is showing income statement data as a % of sales - common size financial statements have the % of a key figure alone, without the corresponding dollar figure Analysis of Operating Performance: Return on Assets - rate of return analysis deals with firms profitability ~ relates operating income or net income to some base such as average total assets, average shareholder’s equity or the year sales - most important relationships: ~ return on assets ~ return on common shareholder’s equity ~ return on sales Return on Assets - called productivity ratio return on assets = operating income / average total assets - return for one year is earned on assets employed throughout year - obtain approximate average by summing beginning and ending assets / 2 - use income before interest charges - helps see asset utilization Debt Financing and Operating Performance Analysis of Operating Performance: Return on Shareholder’s Equity - measures ultimate profitability of the investment to the common shareholders - can be worked out before taxes however, usually computed after taxes return on shareholder’s equity = net income – preferred dividend requirements average common shareholder’s equity - return is earned on equity invested throughout the year because this amount changes during the year so beginning and ending balances are summed and then /2 Analysis of Operating Performance: Return on Sales return on sales = net income / net sales - are performance indexes used only when comparing similar companies in same industry or comparing different periods of same firm - firms in slow moving products involving fairly long production periods require high profit margins for a respectable rate of return on assets and on the owner’s investment Using the Net Income Figure - which part of business contributes most to net income and future prospects of these parts - analyst determine from statements: ~ how representative net income figure is ~ if it was determined by conservative accounting principles - gains/losses on sale of plant assets or securities, casualty losses are left out of calculation - look at inventory and depreciation effect on net income Earnings Per Share ea
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