COMPANY ANALYSIS

It is a study of the variables that influence the future of a firm both qualitatively and quantitatively. It involves assessing : the competitive position of a firm, its earning and profitability, the efficiency with which it operates, its financial position and its future with respect to the earning of its shareholders.

Types Of Information
Internal Information consists of data and events made public by firms concerning their operations. The principle information generated internally by a firm is its financial statements. External sources of information are those obtained independently outside the company. They provide a supplement to internal sources by overcoming some of the bias inherent in company generated information.

Financial Analysis
The financial statement of an organization must be analyzed in company analysis to determine the firms past earnings and financial position. The financial statements include: I. The income statement. 2. The balance sheet 3. The statement of changes in financial position.

Operating Results: The income statement

The income statement helps in judging managements performance and assessing the future. The analyst should study the principal areas of the income statement to assess their impact on earnings including. 1) Earnings from regular operations. 2) The Matching Principle: The utility of accounting information for the investment analyst is impaired if expenses and revenues are improperly matched or methods employed are switched over time. 3) Implications of inventory costing methods: Inventory can be valued in a number of the most popular ones being LIFO and FIFO. There are no problems created by either method when prices remain the same. The choice of inventory valuation method is important to the analyst, depending upon the increment of prices and the nature of industry. Firms with large proportion of total assets as inventories can affect reported earnings through the inventory method chosen.

Depreciation accounting: The method of depreciation accounting can affect the net income reported. 5) Provision for income tax: Certain items are treated differently in financial statements and in tax returns of companies e.g. depreciation. Income taxes relating to operating income should be separately considered from taxes related to extraordinary items. 6) Earnings per share 7) Interim Earning reports

Financial position: The balance sheet

This show the assets, liabilities and owners equity in a company and gives the financial strength of a company. Assets are assigned values based on accounting principles. Liability values are set by contracts. Book value of shareholders equity is the difference between assets and liabilities and it is usually different from current market value of equity.

Statement of Cash flow

It provides relevant information about the cash receipts and cash payments of an enterprise during a period.
Ability of the firm to generate positive future net cash flows, to meet its obligations, Firms ability to pay dividends, The firms need for external financing, the reasons for difference between net income and associated cash receipts and payments, and the effects on an enterprises financial position of both its cash and non-cash investing and financing transactions during the period.

Ratio Analysis
Ratio analysis is the most frequently used tools for company analysis. Ratios may be used for trend analysis by compiling ratios over a numbers of years and determining the companys performance over time(trend analysis).

The important ratios include 1) Liquidity ratios: These include i. Current Ratio ii. Acid Test Ratio II) i. Ii. Profitability Ratios Net profit ratios Return on capital employed

III) Leverage/Solvency Ratio i. Debt equity ratio ii. Fixed charges coverage ratio IV. i. ii. iii. iv. Activity ratios Asset turnover ratio Collection period Inventory turnover Working capital turnover.