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SCM - Chapter 5 FS Analysis

This document discusses financial statement analysis. It explains that financial statement analysis examines trends in key financial data, compares metrics across companies, and analyzes financial ratios to forecast a company's financial health. It also outlines objectives of financial statement analysis for different stakeholders. The general approach involves background studies, short-term solvency analysis, capital structure analysis, operating efficiency analysis, and examining quality of earnings, assets, and transparency of financial reporting. Key financial ratios are grouped into liquidity, activity, leverage, and profitability ratios to assess different aspects of a company's financial performance and health.

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ANSLEY CATE C. GUEVARRA
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42 views2 pages

SCM - Chapter 5 FS Analysis

This document discusses financial statement analysis. It explains that financial statement analysis examines trends in key financial data, compares metrics across companies, and analyzes financial ratios to forecast a company's financial health. It also outlines objectives of financial statement analysis for different stakeholders. The general approach involves background studies, short-term solvency analysis, capital structure analysis, operating efficiency analysis, and examining quality of earnings, assets, and transparency of financial reporting. Key financial ratios are grouped into liquidity, activity, leverage, and profitability ratios to assess different aspects of a company's financial performance and health.

Uploaded by

ANSLEY CATE C. GUEVARRA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Financial Statement Analysis I – Chapter 4

 PURPOSE: forecasting the financial health of the company


 Examining trends in key financial data, comparing financial data across companies, and analyzing
key financial ratios
 Expected financial conditions:
o Predetermined standards – rule of thumb
o Past performance
o Competitors’ performance or industry average

Objectives of FSA:
 Current shareholders/owners – investment income; company’s overall performance, stability,
and sound capital structure
 Potential investors – “sold companies;” stable earnings and dividends with limited or moderate
growth; the trend for financial flexibility, rapid growth, and diversification
 Short-term creditors – firm’s short-term liquidity; pay current obligations
 Long-term creditors – long-term security of their interest income; to maintain successful
earnings and cash flows to meet continuing financial commitments  solvency ratio (e.g., net to
asset ratio)

General Approach to FSA:


1. Background study and evaluation of firm industry, economy, and outlook
2. Short-term solvency analysis
 Analysis of the company’s ability to meet near-term demand for cash and normal
operating requirements
3. Capital structure and long-term solvency analysis
 Evaluation of the amount and proportion of debt in a firm’s capital structure to assess
its ability to service debt
 Use of financial leverage to maximize the returns to the owners
4. Operating efficiency and profitability analysis
 How well assets have been employed by management in terms of generating revenues
and maximizing returns on such resources
5. Other conditions:
a. Quality of earnings
o Meet internal earnings target
o Meet external expectations
o To even-out income – income smoothing
o Provide “window dressing” for an IPO or a loan – strong and profitable as
possible
 Reverse window dressing – to obtain government subsidies or
exemptions form tariff and taxes
o To arrive at a performance measure that best reflects both financial reality and
the future operating potential of the company

Techniques to manage earnings:


ª Strategic matching
ª Change in methods or estimates with little or no disclosure
ª Departure from accounting standards
 International capitalization or deferment of expenditures that should
have been expensed;
 Non-provision of losses due to uncollectibility of receivables;
 Failure to recognize impairment losses on PPE
ª Fictitious transactions

Total income before taxes Pxx


Add (Deduct)
Gain on disposal of assets (if any) (xx)
Excess of share in equity income over dividends received (xx)
Unrealized gains on investors in trading/available-for-sale securities (xx)

Provision for estimated shutdown costs (xx)


Research and development costs xx
Impairment loss on fixed assets xx
Gain on early extinguishments of debt (xx)
Adjusted income from normal operations Pxx

b. Quality of assets and relative amount of debt


c. Transparent financial reporting: the best practice

Financial Statement Analysis I – Chapter 5

FINANCIAL RATIO ANALYSIS


 Comparison in fraction, proportion, decimal, or percentage form of two significant figures
 Direct relationship between two or more quantities in the SFP and income statement

1. Liquidity ratio – measure the firm’s ability to meet cash needs as they arise (e.g., payments of
A/P, bank loans, and operating costs)
 Current ratio – measure of short-term debt-paying ability

2. Activity ratio – measure the liquidity of specific assets and efficiency in managing assets (e.g.,
A/R, inventory, and fixed assets)

3. Leverage ratio – measure the extent of a firm’s financing, with debt relative to equity and its
ability to cover interest and other fixed charges (e.g., rent and sinking fund payments)

4. Profitability ratio – measure the overall performance of the firm and its efficiency in managing
assets, liabilities, and equity

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