financial statement analysis
Chapter 3
FINANCIAL STATEMENT ANALYSIS
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-1
Financial Statement Analysis
• Investors often use accounting statements to: – Compare the firm with itself by analyzing how the firm has changed over time
– Compare the firm to other similar firms using a common set of financial ratios
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-2
Why are ratios useful?
• Ratios standardize numbers and facilitate comparisons. • Ratios are used to highlight weaknesses and strengths.
• Ratio comparisons should be made through time and with competitors.
– Trend analysis.
– Peer (or industry) analysis.
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-3
Why are ratios useful?
• Ratio analysis is not merely the calculation of a given ratio.
• to answer such questions as ―Is it too high or too low?‖ and ―Is it good or bad?‖
• Two types of ratio comparisons can be made: cross-sectional and time-series.
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-4
Cross-sectional & time series analysis
Cross-sectional analysis
o
involves the comparison of different firms’ financial ratios at the same point in time. o
called benchmarking, has become very popular.
o
comparison to industry averages (These figures can be found in the Almanac
of Business and Industrial Financial Ratios, Dun & Bradstreet’s Industry
Norms and Key Business Ratios, Business Month, HNX, HOSE,…)
o o Time-series analysis evaluates performance over time.
Developing trends can be seen by using multiyear comparisons.
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-5
Combined analysis
• Combine Cross-sectional & time series analysis • A combined view makes it possible to assess the trend in the behavior of the ratio in relation to the trend for the industry.
Copyright ©2015 Pearson Education, Inc. All
FINANCIAL STATEMENT ANALYSIS
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-1
Financial Statement Analysis
• Investors often use accounting statements to: – Compare the firm with itself by analyzing how the firm has changed over time
– Compare the firm to other similar firms using a common set of financial ratios
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-2
Why are ratios useful?
• Ratios standardize numbers and facilitate comparisons. • Ratios are used to highlight weaknesses and strengths.
• Ratio comparisons should be made through time and with competitors.
– Trend analysis.
– Peer (or industry) analysis.
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-3
Why are ratios useful?
• Ratio analysis is not merely the calculation of a given ratio.
• to answer such questions as ―Is it too high or too low?‖ and ―Is it good or bad?‖
• Two types of ratio comparisons can be made: cross-sectional and time-series.
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-4
Cross-sectional & time series analysis
Cross-sectional analysis
o
involves the comparison of different firms’ financial ratios at the same point in time. o
called benchmarking, has become very popular.
o
comparison to industry averages (These figures can be found in the Almanac
of Business and Industrial Financial Ratios, Dun & Bradstreet’s Industry
Norms and Key Business Ratios, Business Month, HNX, HOSE,…)
o o Time-series analysis evaluates performance over time.
Developing trends can be seen by using multiyear comparisons.
Copyright ©2015 Pearson Education, Inc. All rights reserved.
2-5
Combined analysis
• Combine Cross-sectional & time series analysis • A combined view makes it possible to assess the trend in the behavior of the ratio in relation to the trend for the industry.
Copyright ©2015 Pearson Education, Inc. All