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© PHI Learning, 2008. All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore
© PHI Learning, 2008. All rights reserved.2 Financial Statement Analysis Chapter 11
© PHI Learning, 2008. All rights reserved.3 Objectives of Financial Statement Analysis Evaluation of past performance and financial position Prediction of future performance Chapter 11
© PHI Learning, 2008. All rights reserved.4 Standards of Comparison Rule-of-thumb indicators Can be applied across firms and industries Too general to be of use in specific companies Past performance of the company Past is a useful indicator A firm’s competition is with other firms, not with own past Industry standards Getting comparable firms is difficult Chapter 11
© PHI Learning, 2008. All rights reserved.5 Sources of Information Company reports Stock exchanges Business periodicals Information services Chapter 11
© PHI Learning, 2008. All rights reserved.6 Quality of Earnings What is quality of earnings? Accounting methods and estimates used Extraordinary items Prior period adjustments Discontinuing operations Changes in accounting policies Income from non-operating sources Chapter 11
© PHI Learning, 2008. All rights reserved.7 Using Financial Ratios Profitability Liquidity Solvency Capital market standing Chapter 11
© PHI Learning, 2008. All rights reserved.8 Profitability Profit margin Asset turnover Return on assets or return on investment The Du Pont financial analysis Return on equity Effect of leveraging Earnings per share Chapter 11
© PHI Learning, 2008. All rights reserved.9 Liquidity Current ratio All current assets Quick ratio Excludes inventories Debtor turnover Average debt collection period Inventory turnover Operating cycle Chapter 11
© PHI Learning, 2008. All rights reserved.10 Solvency Debt-to-equity ratio Use of leverage Liabilities-to-equity ratio Interest coverage ratio Chapter 11
© PHI Learning, 2008. All rights reserved.11 Capital Market Standing Price-earnings ratio Dividend-yield Price-to-book ratio Beta Chapter 11
© PHI Learning, 2008. All rights reserved.12 Corporate Disclosure Policy Voluntary disclosure Why do firms provide voluntary disclosures? Factors that influence disclosure level Capital market Competitors Managerial reputation Shareholder litigation Disclosure level and the cost of capital Chapter 11
© PHI Learning, 2008. All rights reserved.13 Efficient Market Hypothesis and Financial Statement Analysis The efficient market hypothesis Accounting information affects stock prices, but... The market is not fooled by accounting method differences Mandatory disclosures do not evoke significant stock price reaction Chapter 11
© Prentice-Hall of India Private Limited, All rights reserved.1 Financial Accounting: A Managerial Perspective Second Edition Prepared by R. Narayanaswamy.
FINANCIAL STATEMENT ANALYSIS. Statement Analysis - 2 FINANCIAL STATEMENT ANALYSIS Objectives Creditors Short term liquidity Long-term solvency Investors.
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 14.
CF Winter Winter Corporate Finance 1.Capital Budgeting Long-term investments which ones? 2.Capital Structure Long-term financing.
12-1 Discontinued Operations Parts of a company’s operations that are eliminated A one-time occurrence Income/loss from discontinued operations separately.
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved CHAPTER 3 Financial Statements Analysis and Long- Term Planning.
Financial Statement Analysis
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Financial Statement Analysis CHAPTER 14.
Chapter 14 Financial Statement Analysis. Who and Why? To understand the economics of a firm and To help forecast its future profitability and risk.
Financial Analysis & Ratios
Chapter 14. To make informed decisions about a company Generally based on comparative financial data 2Copyright (c) 2009 Prentice Hall. All rights.
Steve Paulone Facilitator Things to consider concerning financial ratios: A ratio by itself means very little – you need to compare that result with:
1 Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under.
Chapter Thirteen Financial Statement Analysis Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Ch.13 Financial Statement Analysis. Stockholders Financial Statement Analysis Creditors Will I be paid? How good is our investment?
FINANCIAL STATEMENT ANALYSIS UNIT 12 Analysing financial statements involves evaluating three characteristics of a company: 1. its liquidity 2. its profitability.
- Brijesh Pitroda. The analysis of a Business' Health starts with Financial Statement Analysis.
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Statement Analysis Chapter 14 McGraw-Hill/Irwin.
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