By Arthur S.

Cayanan

Copyright Arthur S. Cayanan 2013

Identify the objectives for analyzing the financial statements Identify the owners and managers behind the company Identify the trends in the industry where the company operates and the macroeconomic variables that will be crucial to the companys operations

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Look at the external auditors opinion Identify the possible motivations of managers to window-dress the financial statements being analyzed Evaluate the companys accounting policies Apply financial analysis techniques

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For equity investments (short term or long term? for control or not?) For lending (short term or long term loan? working capital loan or project financing?) For appraising managements performance For regulatory purposes For monitoring

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Reputation Integrity Competence Succession Corporate governance Management style Lifestyle

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GDP growth rates Interest rates Foreign exchange rates Demographics Cultural differences Political situation Regulatory environment

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Unqualified Qualified Adverse

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To raise funds (equity or debt financing) To protect managements compensation packages (stock options, bonuses, salary increases) To comply with regulatory requirements To manage taxes To present more stable operations (income smoothing)

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Aggressive or conservative Capitalize or expense Managements judgment and estimates Classification and presentation On or off

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Break-even analysis Financial ratio analysis Common size analysis Trend analysis

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Behavior of Costs - Fixed -Variable Break-even Analysis

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Variable Costs Fixed Costs Contribution Margin

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BREAK-EVEN CHART
Sales

Total Costs

Sales

Variable Costs

Fixed Costs

Volume BP

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Liquidity Ratios Current Ratio = Current Assets/Current Liab. Quick Asset Ratio= Quick Assets/Cur. Liab. Leverage Ratios Total Liabilities/Total Assets Total Liabilities/Stockholders Equity Total liabilities/Tangible Net Worth Interest coverage ratio= EBIT/Interest expense
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Efficiency Ratios Total asset turnover ratio = Revenues/Total assets Accounts receivable turnover ratio = Sales/Acc. Recble Days receivables = 360/ AR T/O Ratio Inventory turnover ratio=CGS/Invty Days inventories = 360/Invty T/O Ratio

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Profitability Ratios Return on Investment (ROI) = NI/Invt Return on equity = Net income/Equity Return on assets= (NI + Interest expense (1t))/Total Assets Gross profit margin= Gross profit/Sales Operating profit margin= Operating income/Sales Net profit margin = Net income/Sales

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ROE = Net profit margin x Turnover ratio x Leverage ratio =Net income/Sales x Sales/Assets x Assets/Equity

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2. 3. 4.

F/S analysis deals only with quantitative data Management can take short run actions to influence ratios. Differences in accounting practices across firms Different formulas can be used

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Amounts are historical. Future may not necessarily be the same as the past. A ratio standing alone has no significance

Copyright Arthur S. Cayanan 2013