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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

ADMN1107 Distance Education

Chapter 12 – Financial

Statement Analysis

financial statement analysis keys
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
financial statement analysis
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
financial statement analysis4
Financial Statement Analysis
  • Cross-Sectional Analysis
    • From one company to another
    • Examples?
financial data
Financial Data
  • There are three general types of types of data
    • Raw Financial Data [F/S Data]
    • Common Size Ratio [Interrelationships]
    • Ratio Data
performance ratios
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
performance ratios7
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’
turnover ratios
Turnover Ratios
  • Accounts Receivable
  • Inventory Turnover
  • Accounts Payable Turnover
short term liquidity ratios
Short-Term Liquidity Ratios
  • Current Ratio
  • Quick Ratio
    • Includes Cash, Accounts Receivable and Marketable Securities
long term liquidity ratios
Long-term Liquidity Ratios
  • Debt/Equity Ratios
    • Measure of how much debt a company has in relation to equity
earnings per share
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]
earnings per share12
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
pitfalls of ratio analysis
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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