CHAPTER
18
FINANCIAL STATEMENT
ANALYSIS
Financial Statement Analysis
• Collection period = number of days receivables are
outstanding. = 365 / Receivable turnover
• When investors (and bankers) make decisions, they
want to compare numbers.
• For example, when you see that Canadian Tire reports
collection period of 26 days on its balance sheet as of
Dec 31, 2013.
• This number itself does not indicate anything.
• If we see that collection period was 28 days in 2012 and
29 days in 2011, then we can say that Canadian Tire’s
collection period is improving over time.
COMPARATIVE ANALYSIS
• Three types of
comparisons:
– Intracompany basis
– Intercompany basis
– Industry averages
Intracompany basis
• This basis compares an item or financial
relationship inside a company in the current
year with one or more prior years.
• Intracompany comparisons are useful for
finding changes in financial relationships and
discovering trends.
• For example, Canadian Tire investors can
compare collection period of 2013 vs.
collection period of 2012.
Intercompany Basis
• This basis compares an item of one company
with the same item of another
company.(competitor)
• Intercompany comparisons are useful for
understanding a company’s competitive
position.
• For example, Canadian Tire’s collection
period for the year can be compared with the
collection period of Wal-Mart.
Industry Average
• This basis compares an item with industry average.
• These industry averages are determined and published
by financial rating agencies such as Bloomberg, The
Financial Post and Statistics Canada.
• Comparisons with industry average gives information
about how well a company is performing within its
industry.
• For example, if industry average of collection period is
23 days, then Candian Tire’s collection period number
of 26 days now looks like a bad number.
Financial Statement Analysis
• To analyze a company, we usually start with its
financial statements.
• However, we should also review other financial
information and non-financial information in the
company’s annual report.
• A company’s annual report includes a management
discussion and analysis of the company’s financial
position and a summary of key ratios from prior years.
• Non –financial information includes the company’s
mission, goals, its market position, people and
products.
Financial Statement Analysis
• We should also consider the economic circumstances
that a company is operating in.
• Economic measures such as the rates of interest,
inflation, unemployment and changes in supply and
demand can have a significant impact on a company’s
performance.
• For example, right now Canada and US are in “rising
interest rate” period, which is great for insurance
companies like Manulife and Sunlife where as this
period has negative impact on banks.
COMPARATIVE ANALYSIS
• Three tools:
– Horizontal analysis
(intracompany basis)
– Vertical analysis
(intracompany and
intercompany)
– Ratio analysis (used
in all 3 types)
HORIZONTAL ANALYSIS
Change
since base
period
Current year amount — Base year amount
———————————————————————
Base year amount
ANY COMPANY INC.
Assumed Net Sales
For the Year Ended December 31 (in millions)
2003
2002
2001
2000
1999
$ 6,562.8
$ 6,295.4
$ 6,190.6
$ 5,786.6
$ 5,181.4
121%
119%
112%
100%
127%
Classwork / Homework
• Watch Youtube clip: “Financial
Performance 2 Horizontal Analysis”
• P957 E18.1, E18.3A
• P962 P18.1