OVERVIEW OF CHAPTER 1.

SW

FINANCIAL STATEMENT ANALYSIS WEEK 1

CHAPTER OUTLOOK
Considering financial statement analysis (FSA) in the broader context of business
analysis.
Use a company to illustrate the importance of assessing financial performance in light of
industry and economic conditions.
Then focus on financial statement users, how FSA addresses their needs.
Major types of business activities and how they’re reflected in financial statements.
 i.e.:
WHY WE LEARN THIS? Equity & debt valuation
Credit risk assessment
Business analysis is the process of Earning predictions
evaluating company’s economic Audit testing
prospects & risks in order to Compensation negotiations
make business decisions
Business Analysis
Typical questions from equity
investor: Typical questions from creditors &
What’re co business prospects? Are lenders:
co’s market expected to grow?
Financial Strengths & weaknesses? What Co’s business plans & prospects?
Statement strategic initiatives has been taken or What co needs for future financing?
Analysis plan to take in response to business What’s likely sources for payment
opportunities & threats? interest & principal? How much
What’s earning potential? Recent cushion does co have in earnings & CF
earning performance? Profitability to pay interest & principal?
drivers? Earning growth estimation? What’s the likelihood that the co
What’s co’s current financial unable to meet its financial
condition? What risks & rewards does obligations? How volatile are co’s
co’s financing structure portray? earnings & CF? Does the co have
Financial strength? financial strength to pay its
Compare to domestic & global commitment in period of poor
competitors? profitability?
Reasonable price for co’s stock?
 What?
TYPES OF BUSINESS ANALYSIS the process of evaluating company’s
economic prospects & risks

Credit Analysis Equity Analysis Why?

Is the evaluation of the Equity investors hold residual To improve business decisions (goal)s
creditworthiness of a company interest.
(ability to pay its bills). Equity analysis is symmetric How?
Focus on risk, not profitability. that it must assess both By evaluating available information
Sensitivity of profits to downside & risks & upside about co’s financial situation, its
downturns in business. Profit potential. management, its plan & strategies,
level  as long as in the level of Tools: Technical analysis or and its business environment
margin of safety. charting  search for
Tools: Liquidity analysis; patterns in the price or vol Other uses:
Solvency analysis. history of stock price to Managers  strategic changes in operating,
What creditor concern in ST predict future movements. investing, & financing activities.
credit  more current financial Fundamental analysis  Mergers, acquisitions, & divestirures 
conditions. looking for intrinsic value by company restructuring.
LT credit  more detailed analyzing & interpreting key Financial management  company value.
forward looking analysis i.e. CF factors for the economy, Directors  protecting shareholders’ interest.
projection, evaluation of industry, and company. Regulators  audit.
Intrinsic value: value of company (its stock) Labor unions  bargaining negotiations.
extended profitability determined through fundamental analysis
without reference to its market value (stock Customers  profit estimation from mutual
(sustainable earning power). price) transactions.
 COMPONENT PROCESS OF BUSINESS ANALYSIS (1)
Business
Environment &
Strategy Analysis To estimate company value – intrinsic
Quality of financial analysis value – requires valuation model. Inputs
depends on the reliability and of the model are prospective CF or
Industry Analysis Strategy Analysis
economic content of the earnings & cost of capital. To forecast
financial statements, which future payoffs, we need to do
requires accounting analysis prospective analysis
Financial Statement Analysis

Financial
Analysis
Accounting Prospective
Analysis Analysis
Profitability Analysis of Risk
Analysis Cash Flows Analysis

Cost of capital Intrinsic

estimate value
 COMPONENT PROCESS OF BUSINESS ANALYSIS (2)
Business Strategy analysis is the evaluation
Industry analysis assess Environment & of co’s business decision and its
both industry prospects Strategy Analysis success establishing competitive
and the degree of actual advantage. Competitive strategy for
and potential competition co’s product mix & cost structure
Industry Analysis Strategy Analysis

Evaluating the extent to

which a co’s accounting Accounting limitations: 3 forms of distortions that can create
reflects economic reality. 1) Comparability problems; when accounting risk in FSA:
different co adopt different accounting 1) Estimation errors by managers.
for similar transactions/events. 2) Earnings management when managers
Accounting 2) Accounting distortions; when
Analysis try to manipulate or window-dressing FS.
discretion in accounting can deviate 3) When accounting standards fails to
accounting information from the capture economic reality.
underlying economics.

Evaluation of earnings quality

Include:
Evaluation of earnings persistence (sustainable earning power)
COMPONENT PROCESS OF Process of converting forecasts of

Valuation
Main objective of future payoffs into an estimate of
BUSINESS ANALYSIS (3) business analysis company value, using certain valuation
model and company’s cost of capital
Profitability analysis: estimation.
evaluate company’s RoI.

CF analysis: evaluate how Risk analysis: evaluate Prospective analysis output:

company’s obtaining & company’s ability to meet expected future payoffs used to
deploying its funds. Provides its commitment. Covers estimate company value.
insights into company’s future liquidity, solvency, Subjective process – often
financing implications. earnings variability. referred to as an art, not a science.

Financial Statement Analysis

Financial
Analysis
Prospective
Analysis
Profitability Analysis of Risk
Analysis Cash Flows Analysis

Cost of capital Intrinsic

estimate value
 FINANCIAL STATEMENT BASIS OF ANALYSIS
Value of investments always equals
the value of financing obtained. Any
PLANNING ACTIVITIES excess of financing not invested is
simply reported as cash or noncash
assets.
FINANCING ACTIVITIES
Company’s goals and
objectives that captured in a
business plan, which describes INVESTING ACTIVITIES
company’s purpose, strategy, Methods that company use to
and tactics for its activities. raise the money needed.
Two major sources of external OPERATING ACTIVITIES
financing: equity investors & Company’s acquisition &
creditors. maintenance of investments
Equity financing: Contributed for purposes its operations
& Reinvested. (selling products/providing The “carrying out” of the
Creditor financing: Debt & services), and for the purpose business plan given its
Operating debt. of investing excess cash. financing and investing
Operating assets & Financing activities. Usually involve 5
assets. possible components: R&D,
Current and Noncurrent assets. procurement, production,
marketing, and administration.
CLASS ACTIVITIES 1
1) APA AKTIVITAS PERUSAHAAN TERSEBUT?
2) BAGAIMANA POSISI PERUSAHAAN TERSEBUT DALAM INDUSTRI?
3) BAGAIMANA PLANNING ACTIVITIES PERUSAHAAN?
4) IDENTIFIKASI FINANCING ACTIVITIES PERUSAHAAN!
5) BREAK DOWN INVESTING ACTIVITIES PERUSAHAAN!
6) IDENTIFIKASI OPERATING ACTIVITIES PERUSAHAAN!
 FINANCIAL STATEMENT REFLECT BUSINESS ACTIVITIES
STATEMENT OF STATEMENT OF CASH
BALANCE SHEET INCOME STATEMENT
SHAREHOLDER’S EQUITY FLOWS

Accounting equation is the I/S measures company’s The statements of R/E, C/I, and Earnings do not typically equal
basis of accounting system: financial performance between changes in capital accounts. net cash flows, except over the
Assets = Liability + Equity. B/S dates. It represents life of a company. Accrual
Total investing = Total operating activities of a accounting yields numbers
financing; or company. different from CF accounting.
Total investing = Creditor Earnings or NI, indicates the
financing + Owner financing. profitability of the company. To
B/S reflecting a point in time. measure the exact change in
Operating activities can affect equity, use comprehensive
both sides of the equation. If income.
profitable, both investing
(assets) and financing (equity)
increase.
ADDITIONAL Management’s Discussion and Analysis, Management Report, Auditor Report, Explanatory Notes,
INFORMATION Supplementary Information, Proxy Statements.
 ANALYSIS TOOLS
CAPITAL
STRUCTURE &
SOLVENCY
COMPARATIVE COMMON SIZE
FSA FSA
LIQUIDITY
OPERATING
PERFORMANCE
CREDIT (RISK)
ASSET ANALYSIS RATIO CASH FLOW
ROI
UTILIZATION ANALYSIS ANALYSIS
PROFITABILITY
ANALYSIS DEBT
VALUATION
VALUATION
PER VALUATION
EQUITY
VALUATION
PBR
CLASS ACTIVITIES 2
LAKUKAN ANALISIS TERHADAP LAPORAN KEUANGAN PERUSAHAAN SELAMA 3
TAHUN TERAKHIR MENGGUNAKAN METODE BERIKUT INI:
1) COMPARATIVE ANALYSIS
2) COMMON SIZE ANALYSIS
3) RATIO ANALYSIS