financial statement analysis

Topics: Financial ratios, Financial ratio / Pages: 21 (2304 words) / Published: Sep 5th, 2014
Chapter 3
FINANCIAL STATEMENT ANALYSIS

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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

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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.

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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.

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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.

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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.

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