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ADMN1107 Distance Education Chapter 12 – Financial Statement Analysis Financial Statement Analysis - Keys Auditors’ Report Why have it and its limitations Reading the financial statements This includes the notes to the financial statements Why read the notes to the financial statements?

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ADMN1107 Distance Education

Chapter 12 – Financial

Statement Analysis


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Financial Statement Analysis - Keys

  • Auditors’ Report

    • Why have it and its limitations

  • Reading the financial statements

    • This includes the notes to the financial statements

    • Why read the notes to the financial statements?

  • Using the past to predict the future


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Financial Statement Analysis

  • Time-series analysis

    • Year to year analysis with the same company

    • Over a period of 2 or more years

      • Sales

      • Receivables

      • Expenses


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Financial Statement Analysis

  • Cross-Sectional Analysis

    • From one company to another

    • Examples?


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Financial Data

  • There are three general types of types of data

    • Raw Financial Data [F/S Data]

    • Common Size Ratio [Interrelationships]

    • Ratio Data


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Performance Ratios

  • Return on Assets (ROA)

    • Type of return that is earned on the investment in assets

    • Cross industry analysis must be done carefully

  • Return on Equity (ROE)

    • The return the shareholders are earning on their investment in the company


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Performance Ratios

  • Leverage

    • How much is financed by debt holders

    • If a large portion is financed from debt holders then it’s said to be ‘highly leveraged’


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Turnover Ratios

  • Accounts Receivable

  • Inventory Turnover

  • Accounts Payable Turnover


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Short-Term Liquidity Ratios

  • Current Ratio

  • Quick Ratio

    • Includes Cash, Accounts Receivable and Marketable Securities


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Long-term Liquidity Ratios

  • Debt/Equity Ratios

    • Measure of how much debt a company has in relation to equity


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Earnings Per Share

  • Mandatory disclosure for public companies

  • Often quoted and will fluctuate based on certain factors

    • Revenue Projections

    • Quarterly earnings

  • Basic calculates what we know [remove preferred dividends]


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Earnings Per Share

  • Diluted EPS takes a ‘what if’ approach

  • It can get very complicated as it includes things such as:

    • Convertible Bonds

    • Stock Options



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Pitfalls of Ratio Analysis

  • “Rules of thumb” may not work for all industries

  • Comparison between companies may not be valid [size, market share, etc.]

  • A ratio on its own is just a number



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