FINANCIAL STATEMENT ANALYSIS
Faculty of Banking and Finance
Lecturer: Nghiem Anh Thu, PhD
nghiemanhthu@[Link]
CHAPTER 2. OVERVIEW
❖ PART 1: INTRODUCTION OF FINANCIAL STATEMENTS
❑ BALANCE SHEET
❑ INCOME STATEMENT
❑ CASH FLOW STATEMENT
❖ PART 2: FINANCIAL STATEMENTS ANALYSIS
❑ COMMON-SIZE ANALYSIS
❑ RATIO ANALYSIS
❑ DU PONT ANALYSIS
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CHAPTER 2
FINANCIAL STATEMENTS ANALYSIS
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FINANCIAL STATEMENTS COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS
3 Faculty of Banking and Finance
PART 1. THE FINANCIAL STATEMENTS
Financial statements Definition
Balance sheet Present a company’s financial position at a specific point in time
Income statement Present information on the financial results of a company’s
business activities over a period of time.
Cash flow statement Disclose the sources and uses of cash
Statement of changes in Equity Report changes in the owners’ investment in the business over time
Financial Notes An integral part of the complete set of financial statements
Provide essential information to understand the primary
statements
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01. SOURCE OF ANNUAL REPORTS
❖ Foreign companies
o Companies’ website
o U.S Security and Exchange Commission website ([Link])
❖ Vietnam companies
o Companies’ website
o State Securities Commission of Vietnam ([Link])
o Hochiminh Stock Exchange (HOSE) or Ha noi Stock Exchange (HNX)
o Investment websites: [Link]
o News: [Link]
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1.1 BALANCE SHEET BS is a snapshot of a firm’s accounting value on a particular date?
Company
Balance Sheet
As at 31 December 2019
ASSETS LIABILITIES & OWNERS’ EQUITY
LIABILITIES
Investment Decision ∙ CURRENT ASSETS ∙ Current Liabilities
Financing Decision
∙ FIXED ASSETS ∙ Long-term Liabilities
OWNERS’ EQUITY Can Equity be
negative?
Total Assets Total Liabilities & Owners’ Equity
Total Assets = Total Liabilities + Owners’ Equity Why always balanc
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1.1 BALANCE SHEET
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1.1 BALANCE SHEET Why Balance Sheet Analysis?
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1.2 INCOME STATEMENT
Company
Income Statement
Year
❖ Revenue ❖ Cost of Good Sold
❖ Financial Income ❖ Financial Expenses
❖ Other Income ❖ Selling Expenses
❖ Administration Expenses
❖ Other expenses
❖ Net Accounting Profit before Tax
❖ Income Tax
❖ Net income
Profit = Revenue – Expenses
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Why Income Statement Analysis?
1.2 INCOME STATEMENT
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1.3 CASH FLOW STATEMENT
Company
Cash Flow Statement
Year
❖ Cash Flows from Operating Activities
❖ Cash Flows from Investing Activities
❖ Cash Flows from Financing Activities
Net increase in Cash in the Year
Cash at beginning of Year
Effect of Foreign Exchange Differences
Cash at end of year
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Why Cash Flow Statement Analysis?
Why Cash Flow Statement when already having Income
Statement?
1.3 CASH FLOW STATEMENT
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1.4 FINANCIAL NOTES
❖ General Information
❖ Summary of significant accounting
policies
❖ Additional information for accounts in
the primary financial statements
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01. AUDITOR’S OPINION
❖ True and Fair?
❖ No material misstatement?
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01. DISCUSSION
Q. The financial statements can be manipulated
and therefore they may not present the true and
fair position/performance of a company. Then
why do we still learn Financial Statement
Analysis to support financial and economic
decisions?
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01. ACCOUNTING SCANDALS
☞ ☞ ☞
[Link] [Link] [Link]
YGRMKI FLg
⮚ AGENCY PROLEM
⮚ ACCOUNTING MANIPULATION
⮚ PORFOLIO DIVERSIFICATION
⮚ INSIDER TRADING
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01. IFRS ADOPTION IN VIETNAM
☞ IFRS ROAD MAP ADOPTION IN VIETNAM
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PART 2. FINANCIAL STATEMENT ANALYSIS
❖ DEFINITION OF FINANCIAL STATEMENT ANALYSIS
❖ FINANCIAL STATEMENT ANALYSIS FRAMEWORK
❖ FUNDAMENTAL TECHNIQUE OF FINANCIAL STATEMENT ANALYSIS
❑ COMMON-SIZE ANALYSIS
❑ RATIO ANALYSIS
❑ DU PONT ANALYSIS
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2.1 FINANCIAL STATEMENT ANALYSIS DEFINITION
❖ The role of Financial Reporting: Provide
information about a company’s performance,
financial position, and changes in financial
position that is useful to a wide range of users
in making economic decisions.
❖ The role of Financial Statement Analysis: Use
financial reports prepared by companies,
combined with other information, to evaluate
the past, current and potential performance
and financial position of a company for the
purpose of making investment, credit and
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2.2 FINANCIAL STATEMENT ANALYSIS FRAMEWORK
❖ The Financial Statements Analysis Framework
1. The purpose and context of the analysis
2. Collect input data
3. Process data
4. Analyze/ Interpret the processed data
5. Develop & Communicate the Conclusions and
Recommendations
6. Follow-up
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2.3 ANALYTICAL TOOLS AND TECHNIQUES
❖ COMMON-SIZE ANALYSIS
❖ RATIO ANALYSIS
❖ DU PONT ANALYSIS
PRUFROCK CORPORATION
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CHAPTER 2
FINANCIAL STATEMENTS ANALYSIS
01 02 03 04
FINANCIAL STATEMENTS COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS
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2.3.1 COMMON-SIZE ANALYSIS
❖ DEFINITION:
▪ Common-size analysis involves expressing
financial data, including entire financial
statements, in relation to a single financial
statement item, or Base
▪ Vertical common-size analysis & Horizontal
common-size analysis
▪ In essence, common-size analysis creates a ratio
between every financial statement item and the
Base item
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2.3.1 COMMON-SIZE ANALYSIS
❖ Common-size Analysis of the Balance
Sheet:
▪ Vertical common-size balancesheet:
prepared by dividing each item on the
balance sheet by the same period’ s
Total Asset. Then, expressing the
result as percentages, highlighs the
composition of the balance sheet.
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2.3.1 COMMON-SIZE ANALYSIS
❖ Common-size Analysis of the Balance
Sheet:
▪ Horizontal common-size balancesheet:
prepared by dividing the quantity of
each item by a Base Year quantity of
the item
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2.3.1 COMMON-SIZE ANALYSIS
❖ Common-size Analysis of the Income
Statement:
▪ Vertical common-size income statement:
divides each income statement by revenue.
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CHAPTER 2
FINANCIAL STATEMENTS ANALYSIS
01 02 03 04
FINANCIAL STATEMENTS COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS
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2.3.2 RATIO ANALYSIS
❖ Examine and evaluate the financial conditions of the
firms
❖ Standardize financial information in order to
compare
o The firm itself from year to year
o With other firms in the same industry
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2.3.2 CATEGORIES OF FINANCIAL RATIOS
Financial Ratio Meaning
1. Liquidity Ratios Measures the firm’s short-term solvency
2. Leverage Ratios Measure the firm’s long-term solvency and financial leverage
3. Efficiency Ratios/ Measures the efficiency of asset management and usage
Turnover Ratios
4. Profitability Measures the firm’s ability to control expenses and generate profit
Ratios
5. Market value Measures the market price per share of the stock
Ratios
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[Link] LIQUIDITY RATIOS
❖ Indicates whether the firm has enough cash or cash
equivalent to pay debt just in time
❖ The ability to convert liquid assets to cash
❖ These ratios focus on current asset and current
liabilities
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[Link] LIQUIDITY RATIOS
Current Assets
Current Ratio = Prufrock’s
Current Liabilities
liquidity ratios
Current Assets − Inventory ?
Quick Ratio =
Current Liabilities
Cash + Marketable securities
Cash Ratio =
Current Liabilities
Current Assets − Current Liabilities
Working capital to Total Assets =
Total Assets
Current Assets
Operating cycle Ratio =
Average Daily Operating Expenses
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[Link] LEVERAGE RATIOS/ LONG-TERM SOLVENCY RATIOS
❖ Address the firm’s long-run ability to meet its
obligations, or
❖ The firm’s financial leverage
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[Link] LEVERAGE RATIOS/ LONG-TERM SOLVENCY RATIOS
Total debt
Debt to Total Assets Ratio =
Total Assets Prufrock’s
financial
Total debt leverage ratios
Debt to Equity Ratio =
Total Equity ?
EBIT
Times interest earned Ratio =
Interest expense
Total Assets
Financial leverage Ratio =
Equity
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[Link] EFFICIENCY RATIOS/ TURNOVER RATIOS
❖ The efficiency with which the company uses its
assets.
❖ Sometimes called asset management or utilization
ratios
❖ Describe how efficiently a firm uses its assets to
generage sales
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Prufrock’s
efficiency ratios
?
[Link] EFFICIENCY RATIOS/ TURNOVER RATIOS
COGS 365
Inventory Turnover Ratio = Days Inventory Outstanding =
Average Inventory Inven𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜
𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 365
AR Turnover Ratio = Days AR Outstanding =
Average 𝐴𝑅 AR Turnover Ratio
Purchases 365
AP Turnover Ratio = Days AP Outstanding =
Average AP AP Turnover Ratio
Sales
𝐀ssets Turnover Ratio =
Average Assets
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[Link] PROFITABILITY RATIOS
❖ Shows how well are the firm’s managers maximizing
shareholder wealth
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[Link] PROFITABILITY RATIOS
Net Income
Net profit margin =
Revenue
Prufrock’s
profitability EBIT = Earnings before Tax + Interest Expense
ratios ?
EBITDA = EBIT + Depreciation
Net Income
ROA =
Average Assets
Net Income
ROE =
Average Equity
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[Link] MARKET VALUE RATIOS
❖ The final group is based on information of the
market price per share of the stock.
❖ These measures can be calculated only for publicly
traded companies
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[Link] MARKET VALUE RATIOS
P Market price per share
=
E EPS
Prufrock’s market value
ratios ? Assuming that P Market price per share
=
Prufrock has 33 million B Book value per share
shares & the stock sold
for $88 per share at the Net Income − Preferred Dividends
end of the year EPS =
Average common shares outstanding
EPS & Diluted EPS
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CHAPTER 2
FINANCIAL STATEMENTS ANALYSIS
01 02 03 04
FINANCIAL STATEMENTS COMMON-SIZE ANALYSIS RATIO ANALYSIS DU PONT ANALYSIS
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2.4 DUPONT ANALYSIS
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2.4 DUPONT ANALYSIS
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2.4 DUPONT ANALYSIS
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2.4 DUPONT ANALYSIS
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2.4 DUPONT ANALYSIS
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2.4 PROBLEMS WITH FINANCIAL STATEMENT ANALYSIS
❖ Many firms are conglomerates, owning more or less
unrelated lines of business 🡪 difficult for peer
group analysis and indentifying industry category
❖ Published industry averages are approximations
❖ Different firms use different accounting procedures.
Ex: Inventory 🡪 difficult to compare
❖ Subjective professional judgement
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THANK YOU
Lecturer: Nghiem Anh Thu, PhD
nghiemanhthu@[Link]
0906289935