Financial Statement Analysis

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Presentation transcript:

Financial Statement Analysis Basics of financial statement analysis Comparative analysis Tools of analysis Horizontal analysis Balance sheet Income statement Vertical analysis Ratio analysis Liquidity, solvency and profitability ratios Limitations of financial statement analysis Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 3

Basics of Financial Statement Analysis Comparing financial statement information of a company can be done: On an intracompany basis: compare current year with prior years On an intercompany basis: with other competing companies Based on industry averages Important to also review other financial and non-financial information Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Tools of Analysis Commonly used tools to evaluate financial data: Horizontal analysis: evaluate a series of data over a period of time Vertical analysis: evaluate data as a percentage of a total amount Ratio analysis: expresses the relationship among selected financial data within the same period Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 6

Horizontal Analysis (Trend Analysis) Compares a series of financial data To determine the increase or decrease over time Horizontal percentage of base-period amount Expresses specified amount as a percent of a base year Horizontal percentage change for period Measures change in any one specific period Copyright John Wiley & Sons Canada, Ltd.

Horizontal Analysis Balance Sheet Copyright John Wiley & Sons Canada, Ltd.

Horizontal Analysis Income Statement Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 10

Vertical Analysis (Common Size Analysis) Expresses financial statement data as a percentage of a base amount Commonly used base amounts are: Balance sheet: total assets; total liabilities and shareholders’ equity Income statement: net sales Useful for intracompany and intercompany comparisons Copyright John Wiley & Sons Canada, Ltd.

Vertical Analysis Balance Sheet Copyright John Wiley & Sons Canada, Ltd.

Vertical Analysis Income Statement Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 14

Copyright John Wiley & Sons Canada, Ltd. Ratio Analysis Expresses the relationship between selected financial statement items Classified into: Liquidity ratios: measure short-term ability to meet obligations and unexpected cash needs Solvency ratios: measure ability to survive over long periods of time Profitability ratios: measure operating success for a specific time period Copyright John Wiley & Sons Canada, Ltd.

Ratio Analysis Liquidity Ratios Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 17

Ratio Analysis Solvency Ratios Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 19

Ratio Analysis Profitability Ratios Copyright John Wiley & Sons Canada, Ltd.

CHAPTER 18: Financial Statement Analysis Identify the need for, and tools of, financial statement analysis. Explain and apply horizontal analysis. Explain and apply vertical analysis. Identify and use ratios to analyze liquidity. Identify and use ratios to analyze solvency. Identify and use ratios to analyze profitability. Recognize the limitations of financial statement analysis. Copyright John Wiley & Sons Canada, Ltd. 21

Limitations of Financial Analysis Alternative accounting principles: reduces intercompany comparability IFRS versus ASPE Other Comprehensive income: generally excluded from analysis, should be assessed if significant Quality of information: full and transparent reporting aids in accurate financial analysis Economic factors: Irregular items (e.g. – discontinued operations) must be excluded Losses make it difficult to calculate and interpret ratios Copyright John Wiley & Sons Canada, Ltd.

Copyright John Wiley & Sons Canada, Ltd. Copyright © 2013 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (the Canadian copyright licensing agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these files or programs or from the use of the information contained herein. Prepared by: A. Davis, MSc, BComm, CA, CFE Copyright John Wiley & Sons Canada, Ltd.