Detailed in-depth notes for the first year 'Financial Management' paper on 'Financial Statement Analysis'. Mainly based on lectures, with summaries of readings (where applicable), learnings from pre-work problems, and personal explanatory notes included where relevant.
Prepared by a student scorin...
Financial Statement Analysis
Overview
The purpose of financial statement analysis
Basics of financial structure and sources of finance
Trend analysis
Common size analysis
Ratio analysis
Cash flow analysis
Real world examples
Analytical concepts
Purpose of financial statement analysis
Different users have different objectives
Users: investors/owners, lenders, suppliers, customers, employees, government, public
Usually look from POV of equity investors and creditors
Basic questions of analysis: performance/ financial status
Financial structure
Gearing ratios compare equity and debt, with averages varying significantly between industries.
Higher gearing means more financial leverage and higher risk
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Sources of finance
Share issue
o Issue rights to existing shareholders (usually at a discount)
o Issue shares on a different capital market (discount usually not needed)
o Costs of underwriting and underwriter's guarantee to purchase shares not sold at a
given price so all shares would be sold out
Loans
o Financial institutions: commercial banks, syndicated loans etc.
o Public markets
, Bonds (issue debt directly to the capital market)
Leasing of assets
Trend analysis
Also called horizontal analysis
Compare the performance of a firm with its own past performance
Select a basis year (assign as 100), a five-year time frame or longer
*Alternatively, express each year as a basis of the previous year
How does the revenue evolve over a period? Do operating costs and operating profit evolve at
the same pace?
Common size analysis
Also called vertical analysis
Compare the performance of a firm with the performance of other firms
The items in the statement of comprehensive income expressed as a percentage of revenue; the
items in the statement of financial position expressed as a percentage of total assets, total
liabilities & shareholders' equity
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