(12) Financial Statement Analysis

(12) Financial Statement Analysis - Chapter 12 Financial...

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Chapter 12 – Financial Statement Analysis Understanding the Business: Obtain this information by reading the first section of the company’s annual report. Once you have an overall view of the types of businesses operated by the company, you should read the financial statements Financial Statements are usually found in the second half of the annual report Reading the Financial Statements: First thing to be read in the FS’s is the auditors report Auditor: States a professional opinion about the fairness of the numbers and disclosures in the FS’s Second step is to read the major FS’s o Look for unusual account titles and dollar values o Once you recognize these things you need to figure out the nature of the item so that you can determine if it’s going to continue in the future or if it’s a non-continuing item o E.g. Unusual account titles might indicate that the company is involved in a new line of business o Read the notes carefully Retrospective vs. Prospective (looking forward) Analysis: Two major types of retrospective data are time-series and cross-sectional analysis. Time-Series Analysis: Examines information from different time periods for the same company. (Look for patterns) Important because it helps the lender determine the company’s ability to repay any money loaned. Cross-Sectional Analysis: Compares data from one company with the data from another company for the same time period. (Use %’s helps to compare companies of different sizes) Raw Financial Data: Data that appear directly in the FS’s Note: In common size statement of earnings, all line items are expressed as a percentage of net revenue (sales) Common Size statements allow you to compare companies of different
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(12) Financial Statement Analysis - Chapter 12 Financial...

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