Lecture 4 Financial Statement Analysis

Lecture 4 Financial Statement Analysis - LECTURE 4...

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Click to edit Master subtitle style 9/13/11 LECTURE 4 Financial Statement Analysis MGCR 211 – Fall 2008
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9/13/11 Overview Financial Statement Analysis l Relevance l Importance of understanding business l Analysis tools & techniques Ratios l Performance l Short-Term liquidity l Long-Term liquidity
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9/13/11 Financial Statement Analysis Users can look at the financial statements to obtain signals about financial health, cash flow and operating efficiency of a company Important to understand relationship between statements and notes and interpret the links to make a knowledgeable decision The challenge is not to calculate the ratio, but rather:
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9/13/11 Financial Statement Analysis When you analyze the financial statement, you usually have a goal. The purpose of your analysis will drive the information that you look at and the ratios that you calculate Typical Scenarios: l Investors (shares of the company) l Creditor (lending money to the company) l Manager of the company
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9/13/11 Financial Statement Analysis Define your role and what is your goal Identify (at a general level) the information that is most relevant to your analysis and explain why Start computing ratios and analyzing numbers Consider the qualitative factors and risks Indicate limitations of financial information & analysis Ensure that you explain why each element analyzed is favorable / unfavorable for your goal
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9/13/11 Financial Statement Analysis Never compute ratios on accounting number without first l Evaluating the firm’s accounting policies for your decision needs l Restating the numbers where appropriate (ex: if you see in the notes that they have not accounted for a contingency, you can adjust that number) l Having an appropriate target in mind for the ratio (industry comparison, historical, other) l Understanding the business and operations
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9/13/11 Understanding the business Important as will give you a general understanding of the context for your analysis. Also, know the full extent of the business. Could get a surprise if they are involved in a line of business that you are not aware of.
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9/13/11 Example – Canadian Tire
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9/13/11 Analysis 2 types of FS analysis exist Time series analysis l Compare information from different time periods for the same company Cross sectional analysis l Compare data from different companies
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9/13/11 Common Size Data Put all the financial statement numbers as a % l % of sales for the income statement l % of total assets for the balance sheet l Advantages: Allows the comparison of corporation of different sizes Considers that some costs are variable in nature l Disadvantages: Sales or total assets are not the only factors
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Lecture 4 Financial Statement Analysis - LECTURE 4...

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