financial statement analysis: methods overview financial statement analysis: methods overview
Post on 19-Dec-2015
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Financial Statement Analysis:
Methods Overview
Financial Statement Analysis:
Methods Overview
I. Business Strategy Analysis
II. Accounting Analysis
III. Financial Analysis
IV. Prospective Analysis
• accrual accounting and economic reality
• evaluation of historical performance
• forward looking view of performance
•qualitative assessment of profit potential
I. Business Strategy Analysis
II. Accounting Analysis
III. Financial Analysis
IV. Prospective Analysis
• accrual accounting and economic reality
• evaluation of historical performance
• forward looking view of performance
•qualitative assessment of profit potential
a) Industry analysis
b) Competitive strategy analysis
a) Industry analysis
b) Competitive strategy analysis
I. Business Strategy Analysis:
a qualitative assessment of profit potential
Industry Analysisexample: Porter’s 5 Forces
rivalry with existing firms threat of new entry new Products bargaining power of suppliers bargaining power of buyers
a) Industry analysis
b) Competitive strategy analysis
a) Industry analysis
b) Competitive strategy analysis
I. Business Strategy Analysis:
a qualitative assessment of profit potential
Competitive Strategy Analysis
product differentiation strategy
cost leadership strategy
niche strategy
I. Business Strategy Analysis
II. Accounting Analysis
III. Financial Analysis
IV. Prospective Analysis
• accrual accounting and economic reality
• evaluation of historical performance
• forward looking view of performance
•qualitative assessment of profit potential
a) industry analysisb) firm strategy analysis
a) evaluate accounting quality
b) understand managerial reporting discretion
consequences of accrual accounting
II. Accounting Analysis
Accounting Analysis:evaluating accounting quality
Do the financial statements reflect economic reality?
what are the constraints?what are the sources of distortion?
GAAP regulation legal capital market auditors
a) evaluate accounting quality
b) understand managerial reporting discretion
consequences of accrual accounting
Accounting Analysis
Accounting Analysis:evaluating accounting quality
Do the financial statements reflect economic reality?
when do managers have incentives to reveal truth?
when do managers have incentive to obscure truth?
I. Business Strategy Analysis
II. Accounting Analysis
III. Financial Analysis
IV. Prospective Analysis
a) accounting qualityb) managerial discretion
• evaluation of historical performance
• forward looking view of performance
•qualitative assessment of profit potential
a) industry analysisb) firm strategy analysis
a) Ratio analysis
b) Cash flow analysis
a) Ratio analysis
b) Cash flow analysis
III. Financial Analysis
evaluation of historical performance
Financial Analysis:evaluation of historical performance
Ratio Analysis
profitability: ROA, ROE
liquidity: working capital
turnover: asset turns
leverage: debt to equity
a) Ratio analysis
b) Cash flow analysis
a) Ratio analysis
b) Cash flow analysis
Financial Analysis
evaluation of historical performance
Cash flow analysis:
• is there sufficient cash to carry out plans?
• does the firm generate cash flow internally?
• borrowing profile: long and short matching?
I. Business Strategy Analysis
II. Accounting Analysis
III. Financial Analysis
IV. Prospective Analysis
a) accounting qualityb) managerial discretion
• evaluation of historical performance
• forward looking view of performance
•qualitative assessment of profit potential
a) industry analysisb) firm strategy analysis
a) ratio analysisb) cash flow analysis
a) Forecasting
b) Valuation
a) Forecasting
b) Valuation
Prospective Analysis
forward looking view of performance
Prospective Analysis:forward looking view of performance
• benchmarks: behavior of inputs, aggregate data
• starting point: models, analysts, line by line
• comprehensive forecasts: I/S, B/S, CF
Forecasting
a) Forecasting
b) Valuation
a) Forecasting
b) Valuation
Prospective Analysis
forward looking view of performance
Prospective Analysis:forward looking view of performance
• DCF
• comparables, Multiples
• accounting based valuation
Valuation
I. Business Strategy Analysis
II. Accounting Analysis
III. Financial Analysis
IV. Prospective Analysis
a) accounting qualityb) managerial discretion
• evaluation of historical performance
• forward looking view of performance
•qualitative assessment of profit potential
a) industry analysisb) firm strategy analysis
a) ratio analysisb) cash flow analysis
a) forecasting
b) valuation