week11 notes - Significance Financial statement analysis is...

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Significance Financial statement analysis is a very important part of business. Financial statements are the initial scorecard companies are judged by each quarter and year. From an investor's standpoint, billions of dollars in share price are added or erased, as earnings are reported in financial statements. Financial statements are often the first source an analyst taps into when they look at a company. The statements are a starting point -- analysts look at the company's performance and quickly identify red flags. If a company is performing above or below peers, the analyst digs into these areas. In addition, vast changes in performance since the last financial period are scrutinized. Features There are many ways to analyze a financial statement. Many managers and analysts use trend analysis to display company performance over time. Another tool is using common size analysis, where each row of a financial statement is converted into a percent of sales. Peer analysis is also popular, this technique compares a company to a group of similar companies in key areas. Ratio analysis is another tool. Popular ratios include Price to Earnings (comparing the net income to share price), and the Quick Ratio which compares current assets to current liabilities. These analysis tools are often done in EXCEL using formulas that can quickly produce a company specific performance scorecard. Sponsored Links Better Than a Spreadsheet Yes, it's easy. Nothing to install. Try it Free! Lenders need to know the financial condition of a company seeking a loan. Lenders look at the income and cash flow statements and balance sheet. A company should have the ability to make the interest payments. Lenders want to be comfortable the money they lend will be paid back with interest. Investors examine financial statements to decide if a company is worth investing in. Investors want to know that the business is profitable and will remain so. Investors examine the profit margins in the income statement, as well as the per share earnings. They compare these earnings and earnings growth prospects to other companies to project what price they feel the stock is worth. Suppliers examine financial statements to ensure they get paid. Suppliers want to know when they sell supplies on credit that there is a strong likelihood they will be paid. Suppliers look at the cash and easily liquidated assets of a company on the balance sheet and compare that to short term liabilities (the amount of money owed within a year). If the ratio is too unfavorable, suppliers might be reluctant to do business with the company.
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Insurers look at the income statements and balance sheets to make sure the company continues to be in business and can pay the premium. Insurers want to make sure the company will not be tempted to file false claims to improve cash flows. Before an insurance policy is issued, an insurer reviews financial statements and annual reports.
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