FINANCIAL ANALYSIS

Joan D. Botona
Financial Analysis
 Financial Analysis is an in-depth inquiry into s firm's financial data,
the story they tell, and the financial possibilities they project. The sources
of data from which the analysis is done come from basic financial
statements: the income statement and the balance sheet.
 The most common application of financial analysis is an inquiry on the
profitability of the business venture and the financial health of the
business. In addition, financial analysis also helps owners of business to
diagnose a situation and to monitor performance.
TYPES OF ANALYSIS

1. Single-period analysis 2. Comparative or trend analysis

 Single-period analysis refers to  Comparative or trend analysis
comparison and measurements compares and measures items on
based upon the financial data of a the financial statements of two or
single period. It reveals financial more fiscal periods. Through this
position and relationships as of a method, the improvement or lack
given period of time. of improvement in financial
position and in the results of
operation is determined.
Financial Ratio

Financial ratio may be defined as relationship between

two quantities on a firm's financial statement or
statements which is derived by dividing one quantity by
another.
Ratio analysis is a technique of financial analysis which
interprets financial data on the basis of the relationship
of financial values compared with established
standards.
CLASSES OF FINANCIAL RATIOS

1. Profitability. Profit is one of the primary reasons why people go

into business. Profitability ratios are those which measure
management's effectiveness as shown by the returns generated on
sales and investment
2. Liquidity. Liquidity ratios measure the firm's ability to meet
current obligations as they fall due. Liquidity refers to the ability of
the firm to pay its bills on time or to meet its current obligations.
3. Solvency. Closely associated with liquidity ratio is the solvency
ratio. Solvency ratios refer to those which measure the ability of the
firm to pay its debt eventually, if it is not paid on time.
Income Statement

The income statement is a report which shows how a

business earned or loses from its operations during a
given The ancor the teaters also called profit and loss
statement.
Financial Statement
 Financial statements are formal records of the financial activities and
position of a business, person, or other entity. They provide valuable
information about a company's financial performance, including its
revenues, expenses, assets, liabilities, and equity.
 Financial statement analysis involves the evaluation of these statements
to gain insights into an organization's financial health, performance, and
value.
Definition

1. Sales are the major source of 4. Sales return is the term
income for most businesses. used for goods that are sent back
There are revenues earned by a for refund.
business  5. When customers keep the
2. Gross profit is obtained by goods at a reduced price, the
subtracting the cost of the goods amount of reduction is called
sold from the sales. sale's allowance.
3. Net income is the difference  6. Operating expenses are
between revenues and all the expenses incurred in doing
expenses. business.
Solution: Case 1. During a school fair, students who manned a softdrinks
booth sold P2,400 worth of softdrinks. The cost of softdrinks was P1,560. An
addition, the group spent P20 for softdrinks straws, P50 for decorations and
P75 for booth rentals. Find (a) the gross profit and (b) the net income.
1. Gross Profit - Net Sales-Cost of goods
Net Sales P2,400
Less: Cost of goods sold....... P1,560
Gross Profit.................................. P 840
2. Net Income Gross Profit-Operating expenses
Gross Profit..............................P 840
Less: Cost of straws. P20
Decorations P50
Rentals P75 145
Net Income... ..........................P 695
Techniques in Financial Statement Analysis

1. Vertical Analysis: This 2. Horizontal Analysis: Also

technique involves expressing known as trend analysis, this
each line item on a financial technique compares financial data
statement as a percentage of a across multiple periods to identify
base amount. It helps to patterns and trends. By analyzing
understand the relative proportion changes in financial statement
of each component to the total and items over time, such as revenues,
identify trends and changes over expenses, and net income, it helps
time. For example, in a vertical to assess the company's
analysis of an income statement, performance and identify areas of
each expense item is expressed improvement or concern.
as a percentage of sales.
3. Ratio Analysis: Ratio 4. Common-Size Analysis:
analysis involves calculating and This technique involves expressing
interpreting various financial ratios each line item on a financial
to assess a company's financial statement as a percentage of a
performance and position. These common base. It helps to compare
ratios provide insights into liquidity, the relative importance of different
solvency, profitability, and items within a statement or between
efficiency. Examples of commonly different companies. For example, in
a common-size balance sheet, each
used ratios include current ratio,
asset and liability item is expressed
debt-to-equity ratio, gross profit as a percentage of total assets or
margin, return on investment, and total liabilities, respectively.
inventory turnover ratio.
5. Cash Flow Analysis: This 6.Comparative Statement
technique focuses on the cash Analysis: This technique
flow statement to assess a involves comparing financial and
company's ability to generate and operational data from different
manage cash. It analyzes the cash periods to understand the changes
inflows and outflows from and trends over time. It includes
operating, investing, and financing Comparative Balance Sheet
activities to evaluate the Analysis, which focuses on the
company's liquidity, cash flow balance sheet, and Comparative
generation, and cash management Profit and Loss Account Analysis,
practices. which compares the profit and loss
accounts of different periods.
 Financial statements are important reports that contain financial information used for decision-making. They
provide a summary of a company's financial data, including assets, liabilities, and equity. Financial analysis is
crucial for various stakeholders, such as government, management, creditors, investors, customers, and the
public. However, it is important to be aware of the limitations of financial statements.

 Analysts may focus on either the balance sheet or the income statement, depending on their specific needs.
The balance sheet shows the company's total resources, liabilities, and equity at a specific point in time.
Assets and liabilities are classified as current or noncurrent, and the net working capital is the difference
between current assets and current liabilities.

 Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities
include accounts payable, short-term loans, and accrued expenses. Fixed assets, such as equipment and
property, have a useful life of more than a year. Long-term investments and intangible assets are also
included in the financial statements.

 Long-term liabilities are obligations payable beyond one year. Stockholders' equity consists of preferred stock,
common stock, paid-in capital, and retained earnings. Retained earnings represent the accumulated profits or
savings of the company.

 It is important to note that the amount of retained earnings does not necessarily reflect cash, as it can be
affected by the distribution of dividends. Overall, financial statements provide valuable information for
analyzing a company's financial position and performance.
THANKS