Post on 09-Jul-2015
LIBR 230 Week 9Company and Financial Statement Analysis
Financial Statement Analysis
Next hour or so…
Learn about the 3 major financial statements that all organizations should use
How to read them and interpret data about them
What they say about an organization’s viability
How they are used to create additional data points for analysis (ratios)
Three main financial statements:
Balance sheet Income statement Statement of Cash flows
All three are based upon the accounting
equation• The accounting equation balances
assets, liabilities and equity
• Can be expressed multiple ways but normally:
• ASSETS = LIABILITIES + EQUITY
• ASSETS – LIABILITIES = EQUITY
• The goal is to balance expenses/costs and assets/earnings in order to understand VALUE
Assets• Current Assets (Cash anything that can
be converted to cash easily like certain investments, accounts receivable, owed money)
• Fixed assets (Stuff that has value and is used to run a business including land, buildings, equipment, fixtures etc.)
• Non-current assets (securities, intellectual property, structured payments)
Liabilities
• Current (due within year)
• Long term (longer term obligations)
Equity
• What’s left over after liabilities are paid off
• Technically it is the owner’s claim against the business or organization or what they are entitled to should the concern fail, collapse or cease to exist
• With a going concern (business still operating) equity is increased by profit or operational reductions and decreased by losses or operational increases
Three financial statements
1. Balance sheet (assets against liabilities at a moment in time)
2. Income statement (summary of results of operations (revenue and espenses) for a year including management/creation of all assets and liabilities)
3. Statement of cash flows (tracks the flow of cash in and out of a business)
Solvency and Liquidity
• Important concepts for evaluating a business or organization’s financial position
• Solvency means do they have enough assets to meet liabilities?
• Liquidity means how much of their assets are liquid/cash and can be called upon to grow the business or be used in an emergency?
• Liquidity and solvency are closely tied to profitability since they indicate inflows (income, operations) and outflows (debt, liabilities, operations)
How do you determine a company’s financial position?
• Read the statements themselves
• Check the balance sheet for assets and liabilities
• Review the income statement to see the trend in terms of sales and income from operations, net income
• Look at the statement of cash flows to see year end cash and change in cash
• Use ratios to look for relationships between portions of the statements to draw deeper conclusions
Balance Sheet
Look at the following:• Current assets • Total Assets• Current Liabilities • Total liabilities• Current compared to total is important in order to
determine short term compare to long term• Give clues to solvency and liquidity
Income Statement
Look at:• Revenue/total revenue• Operating income (profit minus operating
expenses)• Net income (total revenue minus total
expenses)• Good to look at bot of these to “smooth out”
operational events that may be one time• Shows is the business is operating profitably;
Can sales cover expenses?
Cash-flows
Easiest!
• Just look at opening cash and closing cash• Change in cash to see delta/different• Do they have enough cash on hand (judgment call!)
Ratios
• Useful because they help us understand individual items from the financial statements by putting them in context of related items
• Establish relationships between data from various places in order to make judgments
• Can be used to predict and/or establish solvency, liquidity, profitability
Simplest Ratios:• Quick Ratio (acid test ratio)• Current Ratio• Return on assets• Revenue per employee
Horizontal analysis is “trend” analysis
Applied to financial statement items (revenue, assets, liabilities, etc.) and ratios (current, return on assets, etc.)
Look at year to year changes for the same item
Example: What is the three year trend in sales?
Vertical analysis is also called ‘benchmarking’
Also applied to financial statement items or ratios
Compare your company’s financial statements or ratios to industry averages
• Horizontal• Vertical
Analysis Tools