Financial Statement Analysis & Their Implication To Management

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Financial Statement Analysis

& their Implication to


Management

Presented by
GROUP 7:
PANUELOS, ANGEL
ALTAVANO, MA. ISABELA
SECILLANO, ALYSSA
AGARIN, GILBERT
Financial Statement 01 What is Financial Statement Analysis ?
Analysis & their
Implication to 02 Purpose of Financial Statement Analysis

Management
03 Types of Financial Statement Analysis

What to Know
04 Methods of Financial Statement Analysis

05 Tools of Financial Statement Analysis

06 Importance of Financial Statement Analysis


What is Financial
Statement Analysis ?
Financial Statement Analysis involves
reviewing the financial statements of an
organization to gain an understanding of its
financial situation.

Financial statements usually include a


balance sheet, income statement, statement
of cash flows, and supplementary notes.
Financial Statement Analysis will help
business owners and other interested
people to analyse the data in financial
statements to provide them with better
information about such key factors for
decision making and ultimate business
survival.

Financial Statement Analysis is the collective name for the tools and
relevant information to the decision makers. The purpose of FSA is to
assess the financial health and performance of the company.
PURPOSE:
To use financial statements to evaluate an organisation's
- Financial performance
- Financial position
- Prediction of future performance
To have a means of comparative analysis across time in terms of:
- Intracompany basis (within the company itself)
- Intercompany basis (between companies)
- Industry Averages (against the particular industry's averages)
To apply analytical tools and techniques to financial statements to
obtain useful information to aid decision making.
Financial Statement Analysis involves analyzing the information
provided in the financial statements to:
Provide information about the organisation's:
- Past performance
- Present condition
- Future performance

Assess the organisation's:


- Earnings in terms of power, persistence,
quality, and growth.
- Solvency
TYPES OF FINANCIAL STATEMENT ANALYSIS:

1. According to Material Used

Internal Analysis
Analysis by the owners, management and employees
Carried out to find the strength and weakness of the company
To find the growth rate of the company
To carry out the future actions
External Analysis
Analysis done by the external parties by investors, financial analysts,
lenders, and general public
The purpose is to know the financial and operating performance
To know about the credit worthiness
To know about the safety of their investment
TYPES OF FINANCIAL STATEMENT ANALYSIS:
2. According to Modus Operandi

Horizontal Analysis
Analysis of financial statements for different periods
It explains whether there is a growth over a period of years
This analysis may be conducted for two years or any number
of years
Is a percentage analysis of changes in comparative financial
statement
Vertical Analysis:
Analysis of Financial Statements for one period only
Is a percentage analysis used to show the relationship of
each component to the base total within a single statement.
TYPES OF FINANCIAL STATEMENT ANALYSIS:

Horizontal Analysis

FORMULA:
Comparison year amount - Base year amount x 100
Base year amount

Vertical Analysis:

FORMULA:
Statement line item x 100
Total base figure
EXamplE IN HORIZONTAL ANALYSIS
VERTICAL ANALYSIS- BALANCE SHEET EXAMPLE
VERTICAL ANALYSIS- INCOME STATEMENT EXAMPLE
Methods of Financial Statement Analysis:

Comparative Balance Sheet


Comparative Income Statement
Common-size Statements
Solvency Analysis
Trend Analysis
Liquidity Analysis
Ratio Analysis
TOOLS OF FINANCIAL STATEMENT ANALYSIS

The commonly used tools are:

Financial Ratio Analysis


Comparative Financial Statement Analysis
- Horizontal Analysis
- Vertical Analysis
FINANCIAL RATIO ANALYSIS

Financial Ratio Analysis involves calculating and analyzing


ratios that use data from one, two, or more financial statements.
Ratio analysis also expresses relationships between different
financial statements.
Financial Ratios can be classified into 5 main categories:
1. Profitability Ratios
2. Liquidity or Short-Term Solvency Ratios
3. Asset Management or Activity Ratios
4. Financial Structure or Capitalisation Ratios
5. Market Test Ratios
PROFITABILITY RATIOS

3 ELEMENTS OF THE PROFITABILITY ANALYSIS:

• Analysing on sales and trading margin


– focus on gross profit
• Analysing on the control of expenses
– focus on net profit
• Assessing the return on assets and return on equity
PROFITABILITY RATIOS

Gross Profit Margin = Gross Profit


Net Sales
Operating Profit Margin = Operating Profit
Net Sales
Net Profit Margin/ Return on Sales = Net Income
Net Sales
LIQUIDITY ANALYSIS OR SHORT-TERM

SHORT-TERM FUNDS MANAGEMENT


Working capital management is important as it signals the
firm’s ability to meet short term debt obligations.
The short-term analysis focuses on routine expenses.
It analyzes the short-term capability of the company for
day-to-day payments of trade creditorss, short-term
borrowings, statutory payments, salaries, etc.
Its main objective is to verify that the appropriate liquidity is
maintained thoroughly for the given period and that all
liabilities are met without default.
SOLVENCY analysis OR LONG TERM

LONG TERM FUNDS MANAGEMENT


Measures the riskiness of business in terms of debt gearing.
The long-term analysis is also termed solvency
analysis.
The focus of this analysis is to ensure the good
solvency of the company quickly and check whether
the company can pay all the long-term liabilities and
obligations.
It gives stakeholders confidence about the entity’s
survival with proper financial health.
COMPARATIVE FINANCIAL STATEMENT ANALYSIS

HORIZONTAL ANALYSIS/ TREND ANALYSIS

It is the study of financial trends over time that analysts and


investors use to evaluate businesses and make predictions
about the future outcomes of a company's decisions.
It takes historical financial data, such as ratios, metrics, or
values, and compares them over several accounting periods.
VERTICAL ANALYSIS/ COMMON SIZE ANALYSIS/
COMPONENT PERCENTAGES

Vertical analysis is the proportional analysis of a


financial statement, where each line item on a financial
statement is listed as a percentage of another item.
The most common use of vertical analysis is within a
financial statement for a single reporting period, so
that one can see the relative proportions of account
balances.
IMPORTANCE/USES OF FINANCIAL STATEMENT ANALYSIS
THANK YOU!

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