TRANSCRIPT
Financial Statement Analysis and Financial Forecasting
To start this Advanced Financial Management Course, in this module, we will discuss financial statement
analysis and financial forecasting. You may remember learning this chapter in financial management course,
but there are some new things that I wanted to work through with all of you. And more importantly, we will
show in this module how financial statement analysis and financial forecasting can allow executives to plan a
project for what it's going to take from a financial perspective to grow their business. So this chapter is going
to be a nice combination of new material and a refresher.
In this module, we will start by discussing standardized financial statements for comparison purpose.
Standardized financial statements make it easier to compare financial information, particularly as the
company grows. Also, it is useful for comparing companies of different sizes, particularly within the same
industry. Then we will move to discuss how to compute and interpret important financial ratios. Do you still
remember what key financial ratios we use in the marketplace to analyze the firm's financial health? The main
categories of ratios are, short-term solvency or liquidity ratios, long-term solvency or financial language ratios,
asset utilization or turnover ratios, profitability ratios, and market value ratios. Please review the chapter on
financial management analysis and the financial models, if you need to refresh more memory on financial
statements and financial ratios.
Ratios also allow for better comparison through time or between companies. As we look at each ratio, ask
yourself how is the ratio computed? Or what is the ratio trying to measure and why? Or what is the unit of the
measurement? And what does the value indicate? Or how can we improve the company ratio? More
importantly, I would like you to remember, if you have not realized yet, is that ratios by themselves are not
very helpful. So we do not care so much for the ratio's numbers and most ratios do not even have any unit.
More importantly, we use ratios to perform time-trend analysis in which we see how the firm's performance is
changing through time. And we use ratios to perform peer group analysis in which we compare similar
companies or within industries. That's why we need benchmarking, although it is difficult for diversified firms.
In this module, we will also discuss the use and purpose of financial forecasting, in which we particularly focus
on how the size of external financing is determined. After assuming a certain level of future firm growth, we
will perform sales forecast in which we assume many cashflows depend directly on the level of sales.
Following our sales forecast, we will construct pro forma statements basically by setting up the plan as
projected, we call pro forma financial statements. So financial forecasting, we will be able to see the asset
requirements, meaning the additional assets that will be required to meet sales projection. And we will see
the financial requirements, meaning the amount of financing needed to pay for the required assets. Most
likely during our financial forecasting process, we will need to use a plug variable on what type of financing
that will be used to make sure the balance sheet is balanced in the end.
By the end of the start module, I would like you to take away the fundamental financial analysis and
forecasting skills by examining the firm's financial statements and ratios. The appropriate ratios for a firm
should be determined by its industry, by management strategy in the state of general economy. You need to
keep all of that in mind when you are determining a ratio. For example, future growth rate, that it must be
evaluated within the context of the industry, what management plans to do with the firm going forward, and
what the state of the economy is expected to be going forward.
Page 1 of 2
Copyright ©2022 Wake Forest University. All rights reserved
In July 2020, the COVID situation has thrown the sales forecast of many industries into disarray. So 2020
forecasting is going to be extremely difficult and now, obviously, historical information is pretty useless to try
to predict what 2022 might look like, or even for 2023, there is a huge question mark. But uncertainty about
the future state of economy is what we have to deal with in finance every day, and it still requires us to fully
understand how to effectively extract information from financial statements and use them to wrong
reasonable forecasting, giving a changing nature of the future.
Content Summary
Why Learn FSA and FF?
Allows executives to plan a project from a financial perspective to grow their business.
Standardized Financial Statements
Compare financial information over time.
Compare companies of different sizes.
Key Financial Ratios
Short-term solvency (liquidity) ratios
Long-term solvency (leverage) ratios
Asset utilization (turnover) ratios
Profitability ratios
Market value ratios
Ratio Analysis
How is the ratio computed?
What is the ratio trying to measure and why?
What is the unit of measurement?
What does the value indicate?
How can we improve the company’s ratio?
Ratios are not very helpful by themselves.
Ratios are used for:
Time-trend analysis
o Measures performance changes over time.
Peer group analysis
o
o
Compares similar companies or within industries.
Uses benchmarking.
Financial Forecasting
Sales forecast
o
Pro forma statements
Projected financial statements
Asset requirements
o
Financial requirements
Plug variable
o
Determines financing type to ensure balance sheet is balanced
Page 2 of 2
Copyright ©2022 Wake Forest University. All rights reserved
0
