Week 11. Analysis and interpretation of financial
statements
Instructor:
Jihwan Yeon Ph.D.
Learning Objectives
•
Learn about four types of financial analysis
•
Identify the major categories of ratios that can be used for analyzing financial statements
•
Calculate key ratios for assessing the financial performance and position of
•
Explain the significance of the ratios calculated.
a business
Financial Analysis
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Provide an assessment of the financial health of a business;
●
Can be helpful when comparing the financial health of different businesses;
●
Highlight the financial strengths and weaknesses of a business;
●
There is no generally accepted list of financial ratios, nor is there a standard method of
calculating many ratios.
Users of Financial Analysis
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Company managers:
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Investors:
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Financial institutions:
Procedure
1)
Collect information
2)
Analyze
3)
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4)
Report
Interpret
Financial Analysis
Four Types of Financial
Analysis
Financial Analysis
Horizontal Analysis
Trend Analysis
Vertical Analysis
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Vertical Analysis
Vertical Analysis
➢
Common Size Analysis
Common-size income statement: An income statement in which each account is
expressed as a
➢
Common-size balance sheet: A balance sheet in which each account is
as a
expressed
Ratio Analysis
Ratio Analysis
Ratio Analysis
•
•
•
•
•
Profitability
Efficiency
Liquidity
Financial gearing
Investment
Profitability
Example 6.1
Profitability
Example 6.1
Profitability
Example 6.1
Efficiency
Example 6.1
Efficiency
Efficiency
Example 6.1
Efficiency
Efficiency
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Example 6.1
Efficiency
Efficiency
Example 6.1
Efficiency
Example 6.1
Liquidity
Example 6.1
Liquidity
Example 6.1
Financial Gearing
●
Financial gearing demonstrates the degree to which a firm's activities are funded by
owner’s equity versus creditor's funds (liabilities)
Financial Gearing
Example 6.1
Financial Gearing
Example 6.1
Investment
Investment
Example 6.1
Investment
Example 6.1
Investment
Example 6.1
Investment
Comparison
•
Compare with earlier years
•
Compare with those of other companies in the same industry
•
Compare with industrial average: based on many companies operating under different
circumstances
•
Compare with the company’s plan
Limitations of Ratio Analysis
●
Based on past historical information (vs. future performance)
●
Accounting adjustments (e.g. depreciation, allowance of doubtful debts and accruals)
can potentially change the numbers significantly
●
Errors in the financial statements
●
Companies have different year ends, which makes comparison difficult
●
Many options when calculating ratios
Financial Reporting
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After you have analyzed and interpreted the information from the financial statements,
a written report of the analysis is required.