FINANCIAL ANALYSIS

Mohamed EL AOUFI
email: melaoufi@bmcebank.co.ma
 COURSE OBJECTIVE

Conduct a relevant financial analysis in order

to assess the strengths and weaknesses of a
company

Financial analysis is more than just

“crunching numbers”; it involves
obtaining a broader picture of the
company in order to evaluate
appropriately how it is performing
INTRODUCTION: PRINCIPLES OF
FINANCIAL ANALYSIS
 FINANCIAL ANALYSIS: WHY?

 Assessment of the Company’s financial health

 Company valuation: IPO, M&A, …

 Tool for Decision making: implementation of the

company’s strategy

 Industry benchmark: comparative analysis

 FINANCIAL ANALYSIS: FOR WHOM?

The financial analysis is for:

- Internal use : Management, employees, …

- External use: shareholders, creditors or banks,

government, competitors, suppliers, …

 FINANCIAL ANALYSIS: WITH WHAT?

- Financial statements and notes

- Board of Directors’ Report

- Auditors’ report

- Documents used in financial communication:

annual report, press release, corporate
presentations

- Business plan

- Other sources: industry analysis, investment

banks reports, rating agencies, …
 FINANCIAL ANALYSIS: HOW?

- That is the objective of the course 

- Industry analysis

- Financial statements analysis

- Ratio analysis

- Comparative analysis

- ….
 FINANCIAL ANALYSIS APPROACH

Environment Analysis

Accounting Analysis

Financial Analysis

Source: Vernimmen
 FINANCIAL ANALYSIS APPROACH

A standard financial analysis can be broken down into

four stages:
• Wealth creation (sales trends, margin analysis). . .
• . . . requires investments in capital employed (fixed
assets, working capital). . .
• . . . that must be financed (by internal financing,
shareholders' equity or bank loans and borrowings).
..
• . . . and provide sufficient returns (return on capital
employed, return on equity, leverage effect).
 MY APPROACH

INDUSTRY STRATEGY

BUSINESS
 BUSINESS SURVIVAL

- There are two key factors for business survival:

 Profitability
 Solvency

- Profitability is important if the business is to

generate revenue (income) in excess of the expenses
incurred in operating that business.

- Solvency is important because it looks at the ability

of the business in meeting its financial obligations.
 METHODS USED IN FINANCIAL ANALYSIS

Horizontal analysis/Trend analysis (growth over a

period of time)

Vertical analysis/Common size

analysis/Componet percentages

Comparative analysis (company vs industry/

company vs peers/competitors)

Ratio Analysis
Dupont Analysis : profitability analysis
 PRO FORMA

The pro forma accounting is a statement of the

company's financial activities while excluding
"unusual and nonrecurring transactions"
when stating how much money the company
actually made. Expenses often excluded from
pro forma results include company
restructuring costs, a decline in the value of
the company's investments, change in the
consolidation list, …
 BUSINESS ANALYSIS

Identification of the company’s different business

lines

Market position (size, products, market share,

partnerships, subsidiaries or affiliales, …)

Performance indicators: Revenue, EBITDA, EBIT,

Overheads, margins
 CAPITAL STRUCTURE ANALYSIS

Analyse the sources of financing and the structure of

capital

Net debt: relevant indicator that gives you an idea

about how the company is indebted

Some capital ratios: Debt/Equity, Equity/Assets, …

Working Capital:

- important especially for industrial companies

- Less relevant for diversified businesses
 CASH FLOW ANALYSIS

Cash flows from operations

Cash flow from financing

Cash flow from investing

 PROFITABILITY ANALYSIS

Return on capital employed: ROCE

Return on Equity: ROE –use net income group

share for consolidated activity

Dupont Analysis is important to determine the

sources of profitability (asset turnover, margin
or leverage)
UNDERSTANDING THE WHOLE APPROACH:
HOW WEALTH IS CREATED
 SOME PIECES OF ADVICE

Do your analysis on at least on a 3 year period

Compare the performance of your company with

the industry and peers

Avoid crunching numbers (calculation of growths

and comments)

‘’Trust no 1! do your homework’’

 MAIN IDEA TO KEEP IN MIND

Quality of revenues: sustainability and

stability of earnings:

- Diversification (products, market

segments, )

- Volatility of revenues

- Risk of concentration
INDUSTRY ANALYSIS
SWOT ANALYSIS
 SWOT ANALYSIS: AIRLINE INDUSTRY EXEMPLE

STRENGTHS:

• A major strength of any airline is the product itself:

air travel: fast and safe

• Airline staff is highly trained and experienced, from

pilots and flight attendants to mechanics and
ground staff.

• Business-wise: airlines have the ability to segment

the market, even on the same routes.
 SWOT ANALYSIS: AIRLINE INDUSTRY EXEMPLE

WEAKNESSES:

• Airlines have a high "spoilage" rate compared to

most other industries: Once a flight leaves the gate,
an empty seat is lost and non-revenue is produced.

Aircraft is expensive and requires huge capital

outlays.

• The business requires continual communication

and monitoring. This can be exacerbated during
operational irregularities, e.g. bad weather.
 SWOT ANALYSIS: AIRLINE INDUSTRY EXEMPLE

OPPORTUNITIES:

• Technology advances can result in cost savings,

from more fuel efficient aircraft to more automated
processes on the ground.

• Technology can also result in increased revenue

due to customer-friendly service enhancements like
in-flight internet access
 SWOT ANALYSIS: AIRLINE INDUSTRY EXEMPLE

THREATS:

• A global economic downturn negatively affects the

airline industry.

• The price of fuel is now the greatest cost for many

airlines.

• A terrorist attack anywhere in the world can

negatively affect air travel.

• Government intervention can result in new costly

rules or unexpected new international competition

Source: e-how
PORTER’S MODEL
 SWOT ANALYSIS: AIRLINE INDUSTRY EXEMPLE

• Barrier to entry: High

Cost of R&D
Government regulation

• Industry Competition: High

Advantages gained by first mover advantage (patents)

• Suppliers: supplier power is low

The concentration of the majority of industry sales among
few large pharmaceutical companies has decreased the
bargaining power of suppliers.

• Buyers: buyer power is low

• Substitutes: low (with patents) medium (after patent

expiry)
OPERATIONS ANALYSIS
HOW WE CAN READ AN INCOME STATEMENT
HOW WE CAN READ AN INCOME STATEMENT

Operating profit, which reflects the profits generated by

the operating cycle, is a central figure in income
statement analysis.

First of all, we look at how the figure is formed based on

the following factors:

• sales, which are broken down to show the rate of

growth in volumes and prices, with trends being
compared with growth rates in the market or the sector;
HOW WE CAN READ AN INCOME STATEMENT

• production, which leads to an examination of the level

of unsold products: overproduction can be a serious
problem;

• raw materials used and other external charges, which

need to be broken down into their main components (i.e.
raw materials, transportation, distribution costs,
advertising, etc.) and analyzed in terms of their
quantities and costs;

• personnel cost, which can be used to assess the

workforce's productivity (sales/average headcount,
value-added/average headcount)
HOW WE CAN READ AN INCOME STATEMENT

• depreciation and amortization, which reflect the

company's investment policy.

Further down the income statement, operating profit is

allocated as follows:

• financial expense, which reflects the company's

financial policy.

• nonrecurring items (extraordinary items).

• corporate income tax.

 SOME KEY RATIOS

• OPERATING PROFIT MARGIN

The operating profit margin tells you how much operating

profit a company makes for every $1 it generates in revenue
or sales

Operating profit margins vary by industry: the higher a

company's margin compared to its competitors, the better.

Operating Profit Margin Ratio = Operating Profit/Sales

 SOME KEY RATIOS

• NET PROFIT MARGIN

The profit margin tells you how much profit a company

makes for every $1 it generates in revenue or sales

Net Profit Margin Ratio = Net Income/Sales

 SOME KEY RATIOS

• EBITDA MARGIN

EBITDA: earnings before interest, taxes, depreciation,

and amortization.

Depreciation = non-cash expense of the wear and tear

on fixed assets based on the respective useful lives

Amortization = non-cash expense of writing off

intangible assets over their useful lives.

= EBITDA/Sales