W11_lecture_handout_slides

W11_lecture_handout_slides - Week 11: Financial Statement...

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1 Week 11: Financial Statement Analysis Text: Ch.8 (LO 6), Ch.9 (LO 1-4) Lecture Exercises: Telstra and Foster’s profitability Self-Study Exercises: 9.10, E9.2, E9.3, E9.6, E9.10, Announcements: The self-study exercises for this week are critical for helping you complete the group assignment Outline Definition and Users of FSA Ratio Analysis Ratio Properties Methods of Ratio Analysis Financial Ratio Analysis Assessing Profitability
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2 Definition of FSA • FSA uses historical financial information from annual reports to form opinions about the firm’s current financial position and financial performance and make recommendations about its future – FSA relies heavily on the use of ratios • To analyse the financials of a company, one must have good knowledge of the business environment and the accounting policies of that company – Remember that numbers simply reflect real decisions related to operations, investments and financing of the business (so-called business fundamentals), as well as the managerial discretion on accounting choices Users of FSA • All stakeholders use FSA: – Resource providers include shareholders (equity), creditors (debt), employees (labour), environment (natural resources), government (public goods) – Recipients of goods and services include customers and the society – Regulatory bodies include the tax office, corporate regulators, enforcing bodies, statistical bureau etc – Different stakeholders are interested in different information (e.g. prospective investors are interested in future cash, whereas creditors like current cash) – The managers also use FSA to improve the business and to decide what information to release to the market
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3 Ratio Analysis • Comparing numbers as reported in the annual report makes little sense, because these are nominal figures that are subject to scale, monetary unit and other irregularities • For instance, how do you compare: – A company’s profit reported in millions of $, to another company’s profit reported in thousands of ? – The profitability of Telstra to the profitability of Dyesol? Which was more profitable relative to what was available to the company ? – The increase in cash in one firm to the increase in cash of another firm? Where did that cash come from? Was it because of increased sales or something else? • Remember you can only say that something is ‘good’ or ‘bad’ if you have a benchmark to compare it with Ratio Analysis • Comparisons must be done on a relative basis , and this is where ratio analysis is useful, e.g.: – What is the profitability of a firm relative to the resources that were available? – What is financial position of the firm relative to its competitors? – What is the rate of return claimed by the shareholders
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This note was uploaded on 09/06/2011 for the course ECON 1001 at University of Sydney.

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W11_lecture_handout_slides - Week 11: Financial Statement...

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