Lecture 9&10

Business Strategy & Analysis
Costin Ciora, Assistant Professor

The Bucharest University of
Economic Studies (ASE)
Lectures 9&10
Lecture 9 & 10
Financial Analysis
Costin Ciora - Business Strategy & Analysis 2

What is financial analysis?
Financial statement analysis is a method

used to examine the activity of a company from
the economic point of view.
Financial statement analysis is based on the

financial statements (mainly on the annual
information).

Cause
Effect
Result

Factors 2nd
rank
Factors 1st
rank
Factors 2nd
Phenomenon rank
Factors 1st Factors 2nd

rank rank

Example
A technology company produces 120
computers at a price of 1.000$ each.
Revenues (Turnover) of company
120 computers x 1.000 $ = 120.000$

Example
Quantity
Turnover
Price
120
units
120.000$ x
1000$
Financial Statement Analysis Framework
(set by CFA Institute)
1. Establishing the purpose and context of the analysis
2. Collect input data
3. Process data
4. Interpret the processed data
5. Develop and communicate conclusions and recommendations
6. Follow-up

1. Establishing the purpose and context of the analysis
Example of purposes and TIME for analysis
- Evaluating the company’s financial position or

performance
- Having a credit rating
- For mergers of acquisitions
- For management of the company – annual reports
- Mergers & acquisitions
Output:
- Objective of the analysis
- Analysis questions
- Timetable and budget
2. Collect input data
Financial statements
Economic data> macroeconomic ones, sector
Interview with the managers
Statistic information about a sector
Output:
- Spreadsheets
- Datatables and interview sheets

Input data
• Company overview
• Macroeconomic level
• Industry
• Competitors
• Risks
• Growth Strategies
• Company’s financial statements
• Company’s non-financial indicators

3. Process data
Using analysis methods to process the collected data.
The analyst will>

- Compute variation of indicators
- Ratios
- Create charts
& other methods depending on the objective
Output:
- Adjusted financial statements

4. Interpret the processed data
Perform the interpretation of results
Output:
- Interpretations & analytics

5. Develop and communicate conclusions and
recommendations
The analyst will prepare a financial analysis report, answering the

initial questions and include some chapters like: business summary,
historical performance and forecasts
Output:
Analytical report and conclusions

Source: Twitter Opens Up With I.P.O. Filing. The New York Times
http://dealbook.nytimes.com/2013/10/03/twitter-discloses-its-i-p-o-
plans/?ref=business
6. Follow-up
Regularly the analyst will gather data to see the

evolution of the company.
Output:
Updated reports and recommendations

In brief:
Purpose
Collect
FOLLOW-
input
UP
data
Financial
Analysis
Framework
CONCLUSIONS
Process
data
Interpretation

What are the information
sources used in financial
analysis?

Financial Analysis
Financial Statements
Balance Sheet
Income Statement
Cash-flow
Statement

Balance Sheet
- Also called the Statement of financial position
- It presents the resources of the company (ASSETS) and the company’s

obligations which is the DEBT (Liabilities)
- Owner’s equity is the difference between ASSETS and DEBT (Liabilities)
LIABILITIES
- Current liabilities
ASSETS
- Noncurrent liabilities
- Non-current assets
- Current assets
EQUITY

Balance Sheet
- Also called the Statement of financial position
- It presents the resources of the company (ASSETS) and the company’s

obligations which is the DEBT (Liabilities)
- Owner’s equity is the difference between ASSETS and DEBT (Liabilities)
ASSETS – LIABILITIES = Owner’s equity

Example of a Balance Sheet

Income Statement
Presents the revenues, expenses and results (profits or loss).
Also called Statement of operations of “Profit and Loss” Statement

Cash-flow Statement
Cash-flow statement classifies the cash-flows of the company in 3 directions:

- Operating
- Investing
- Financing
CASH FLOWS FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVIES

Key figures

Break Even Analysis
A company can reach performance by reaching “break-even”. As the word tells us,
at this point the company “breaks” it’s current results to “even”,
where
Revenues = Costs
Profit = 0

Break Even Analysis
Expenses (Costs)
REVENUES
Fixed Variable
Expenses Expenses

Break Even Analysis
Expenses (Costs)
Quantity x Unit costs
REVENUES
Quantity x Unit Price
Fixed Variable
Expenses Expenses
Fixed Quantity x Variable unit
costs

Break Even Analysis
Case study: Mobile producer
Revenues: number of mobile sold x unit price

Break Even Analysis
Total expenses= Fixed expenses + Variable expenses
Fixed expenses: rents, management salaries, advertising – do not

depend on the volume of production
Variable expenses (direct productive): components, , raw material,

workers salaries – depend on the volume of production

Break Even Analysis

Break Even Analysis
!"#$% $#&$'($(
Break-even (no. of units) =
)'"* +,"-$ ./0,"012$ 3'"* -4(*

Break Even Analysis
!"#$% $#&$'($(
Break-even (no. of units) =
)'"* +,"-$ ./0,"012$ 3'"* -4(*
Unit price = 310$

Variable unit price = 220$
Fixed expenses = 3.447.000$
Calculate break-even point

Break Even Analysis
!,##$,%%%
Break-even (no. of units) = =
!&%'((%
38,300 -./01
Revenues at break-even point= 38,300 units x 310$ = 11,873,000$
Fixed expenses = 3,447,000 $
Variable expenses = 38,300 units x 220$ = 8,426,000$
Profit = 0

Break Even Analysis
We consider the maximum production capacity to be 45,000

units
Break-even/Maximum production capacity=
38,300/45,000 = 85,11%

Break Even Analysis
We consider the maximum production capacity to be 45,000

units
Maximum Revenues = 45,000 units x 310$= 13,950,000 $

Fixed expenses
= 3,450,000$
Variable expenses = 45,000 units x 220$ = 9,900,000$
Maximum profit =
= 600,000$

Break Even Analysis
If we want to obtain a profit of 450,000$, how many

units to we need to sell?

Break Even Analysis
Revenues – Total expenses = 450,000$

Break Even Analysis

(q x p ) - (Fexp + q x vc) = 450,000$
q x(p-vc) – Fexp = 450,000$

Break Even Analysis

(q x p ) - (Fexp + q x vc) = 450,000$
q x(p-vc) – Fexp = 450,000$
qx(310$-220$)=450,000$+3,447,000$
q x 90$ = 3,897,000$

Break Even Analysis

(q x p ) - (Fexp + q x vc) = 450,000$
q x(p-vc) – Fexp = 450,000$
qx(310$-220$)=450,000$+3,447,000$
q x 90$ = 3,897,000$
q = 43,300 units

Break Even Analysis
!"#$% $#&$'($()*#&$+,$% &-./",

No. of units for expected profit =
0'", 1-"+$ 234-"456$ 7'", +.(,
!"#$% $#&$'($()*#&$+,$% &-./",

0'", 1-"+$ 234-"456$ 7'", +.(,

Break Even Analysis
!"#$% $#&$'($()*#&$+,$% &-./",

0'", 1-"+$ 234-"456$ 7'", +.(,
8,::;,<<<):=<,<<<
No. of units for expected profit = = 43,300 units
8><2??<

Break Even Analysis
38,300 units is the number of units needed to reach break-even

Break Even Analysis
45,000 units is the maximum production capacity

Break Even Analysis
43,300 units is the number of units needed to be sold to reach a PROFIT of

450,000$

Break Even Analysis
43,300 units is the number of units needed to be sold to reach a PROFIT of

450,000$
600,000$ is the maximum profit

Break Even Analysis

Turnover – the total revenues that a
company obtains from its
current operations
Average turnover = Turnover / Value of production
- Revenue obtained from the sale of one unit of good or

service
Marginal turnover = ΔTurnover / Δproduction
- The variation of revenues generated by an increase of one

unit of the volume of production
Example
2012 2011
Turnover ($) 14,300 12,200
Production (units) 18,100 14,500
How did the turnover increased?
How did the production increased?

Example
2012 2011
Turnover ($) 14,300 12,200
Variation % Variation
Turnover ($) 2,100 17,21%
Production (units) 3,600 24,82%

Example
2012 2011
Turnover ($) 14,300 12,200
What is the level of average turnover?
What is the level of marginal turnover?

Example
2012 2011
Turnover ($) 14,300 12,200
2012 2011 % variation
Average 0.79 $/unit 0.84 $/unit = (0.79-0.84)/0.84

turnover = -0.0595 = -5.95%

Example
2012 2011
Turnover ($) 14,300 12,200
Marginal turnover = ΔTurnover / Δproduction
= 2100/3600 = 0.5833
A 1 unit increase in production will lead to 0.5833 $ increase

in turnover

Where can we find value of
turnover/revenues?

Answer: In the Income Statement

Source: T-MOBILE
Annual report

Turnover – the total revenues that a
company obtains from its
current operations
Market position or market share

Market share
TC
Market _ share = n
´100
åT
i =1
i
Tc = Turnover of the company
∑Ti = Sum of revenues of companies in a sector

Global market share held by the leading smartphone operating systems in sales to end
users from 1st quarter 2009 to 2nd quarter 2013
90.00
80.00 79.00
74.40
72.40
70.00 69.70
64.20
60.00
56.90
52.50
50.00 50.90
43.40
40.00
36.40
30.00 30.50
25.30 23.80 22.50 20.90
20.00 18.80
17.10 17.20 16.90 18.20 18.20
15.40 16.60 15.80
14.10 15.00 13.90 14.20
13.00
10.00 10.50 9.60
2.00 3.50
0.00 1.60
Q1 '09 Q2 '09 Q3 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13
Android iOS Microsoft RIM Bada* Symbian

Comparison of
Global market share held by the leading smartphone operating systems in
sales to end users
Q2 '13
Q2 '10 2.70
0.40 0.30
3.30
17.20 14.20
40.90
14.10
79.00
4.90
18.70
0.90
Android iOS Microsoft RIM Bada* Symbian Android iOS Microsoft RIM Bada* Symbian
Source: Gartner, Statista

Role of financial ratios?
• - are an important management tool for strategic and

operating decisions
• - can determine if a company is profitable
• - if the company’s liquidity level is adequate

Categories of Financial Ratios
Liquidity
ratios
Asset
Market
management
value ratios
ratios
Financi
al Ratio
Financial Leverage /
efficiency Solvency
ratios Ratios
Profitability
ratios

What questions ratios answer?
• Liquidity: does he business have enough money to pay bills?
• Asset management ratios: how has the business used its fixed
and current assets?
• Leverage / Solvency Ratios: does the company has a lot of debut

or is it mainly financed by shares?
• Profitability: has the business made a good profit compared to its

turnover?

Liquidity ratios : does he business
have enough money to pay bills?
• Current ratio = Current assets / Current liabilities

• - expresses the ability to meet current obligations based on
the current assets
Value < 1 = liquidity problems
Value > 1 = the company has the ability to meet current

obligations based on current assets
Very high value = management might not be using assets in a

efficient way

Liquidity ratios
• Quick ratio = (Current assets – Inventory) / Current

liabilities
• - expresses the ability to meet current obligations
based on the most liquid assets
This ratio is more rigorous, because numerator

eliminates inventory

Liquidity ratios
• Cash ratio= (Cash + Short-term marketable) /

Current liabilities
It represent a reliable measure of a company’s

liquidity in a crisis situation.

Asset management ratios: how has the
business used its fixed and current
assets?
• Inventory turnover= Cost of sales /

Inventory
- It measures how many times did the company turn

its inventory over during the year.
- High value means that inventories are highly
marketable

Asset management ratios
• Receivable turnover= Turnover/ Accounts
reveivable
- the number of times we were able to convert

receivables into cash. High values are desired.

• Payable turnover= Cost of goods sold/
Accounts payable
- The number of times we were able to convert our

payables into cash

• Asset turnover ratio = Turnover / Total
assets
- Measures the overall efficiency of the business –

the percent of sales the company is able to
generate from its assets

• Days of inventory on hand =
• = (Inventory / Cost of goods sold) x 365
- Average number of days it takes to sell inventory

to customers
- - a lower number of days is a sign of efficient

management

• Average collection period=
• = (Accounts receivables/ Turnover) x 365
- The average number of days required to convert

receivables into cash
- - a lower number of days is desired

• Number of days of payables=
• = (Accounts payables/ Cost of sales) x
365
- The average number of days it takes to pay

payables in cash

• Net trade cycle=
• = Average collection period +
• Number of days of payables +
• Days of inventory on hand
- The average number of days it takes to pay

payables in cash

Leverage / Solvency Ratios: does the
company has a lot of debut or is it
mainly financed by shares?
• Debt to asset ratio= Total debt/ Total

assets
- It measures the level of debt in relation with the

company’s investment in assets

• Debt to equity ratio= Total debt/ Total

equity
- Compares the funds provided by creditors with the

funda provided by the shareholder

• Equity to assets ratio= Total equity/total

assets
- Compares the fund provided by shareholders with

the company’s assets

• Financial Leverage= Total assets/total

equity
- Measure how much the company uses equity and

debt to finance its assets. As debt increases,
financial leverage increases.

RETURN ON SALES
Gross profit margin = Gross profit/Revenue
Operating profit margin = Operating profit / Revenue
Net profit margin = Net profit / Revenues
89
RETURN ON INVESTMENT
OPERATING Return on Assets = Operating profit/ Total assets
ROA – Return on Assets = Net profit/ Total assets
ROE – Return on Equity = Net income / Equity
90
Expense ratios
OPERATING expense ratio= Cost of sales/ Revenues
Ratio at cost = Operating profit/Cost of sales
91
Market value ratio = measure the
economic status of a company in the
market place
• Earnings per share=

• = Net profit / Number of shares
- Expresses the earnings of a company on “a per
share” basis. A high EPS is desirable.

Market value ratio = measure the
economic status of a company in the
market place
• Price to Earnings Ratio= = Price of a

stock/ Earnings per share

Limitations of ratios
• - INTERPRETATION is necessary
• - beware of different accounting policies
• - ratios CANNOT predict the future
performance

Case Study: PETROBRAS
95
96
References
• ACCA P3 – Business Analysis, Kaplan Publishing, 2012
• Vaughan Evans – Key strategy tools, Pearson Publishing, 2013
• Martin Reeves, Knut Haanaes, Janmejaya Sinha - Your strategy

needs a strategy. How to Choose and Execute the Right
Approach. Harvard Business Review Press, 2015

Thank you for your attention!
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Business Strategy & Analysis

Costin Ciora, Assistant Professor

Costin Ciora - Business Strategy & Analysis 2

Financial statement analysis is a method

Financial statement analysis is based on the

Costin Ciora - Business Strategy & Analysis 3

Costin Ciora - Business Strategy & Analysis 4

Factors 1st Factors 2nd

Costin Ciora - Business Strategy & Analysis 5

Revenues (Turnover) of company

120 computers x 1.000 $ = 120.000$

Costin Ciora - Business Strategy & Analysis 6

1. Establishing the purpose and context of the analysis

2. Collect input data

4. Interpret the processed data

5. Develop and communicate conclusions and recommendations

Costin Ciora - Business Strategy & Analysis 8

Example of purposes and TIME for analysis

- Evaluating the company’s financial position or

Costin Ciora - Business Strategy & Analysis 11

Costin Ciora - Business Strategy & Analysis 12

Using analysis methods to process the collected data.

The analyst will>

Costin Ciora - Business Strategy & Analysis 13

Perform the interpretation of results

Costin Ciora - Business Strategy & Analysis 14

The analyst will prepare a financial analysis report, answering the

Costin Ciora - Business Strategy & Analysis 16

Regularly the analyst will gather data to see the

Costin Ciora - Business Strategy & Analysis 18

Costin Ciora - Business Strategy & Analysis 19

Costin Ciora - Business Strategy & Analysis 20

Costin Ciora - Business Strategy & Analysis 21

- Also called the Statement of financial position

- It presents the resources of the company (ASSETS) and the company’s

Costin Ciora - Business Strategy & Analysis 22

- Also called the Statement of financial position

- It presents the resources of the company (ASSETS) and the company’s

ASSETS – LIABILITIES = Owner’s equity

Costin Ciora - Business Strategy & Analysis 23

Costin Ciora - Business Strategy & Analysis 24

Presents the revenues, expenses and results (profits or loss).

Also called Statement of operations of “Profit and Loss” Statement

Costin Ciora - Business Strategy & Analysis 25

Cash-flow statement classifies the cash-flows of the company in 3 directions:

CASH FLOWS FROM OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES

CASH FLOWS FROM FINANCING ACTIVIES

Costin Ciora - Business Strategy & Analysis 27

Costin Ciora - Business Strategy & Analysis 29

Costin Ciora - Business Strategy & Analysis 30

Costin Ciora - Business Strategy & Analysis 31

Costin Ciora - Business Strategy & Analysis 32

Case study: Mobile producer

Revenues: number of mobile sold x unit price

Costin Ciora - Business Strategy & Analysis 33

Total expenses= Fixed expenses + Variable expenses

Fixed expenses: rents, management salaries, advertising – do not

Variable expenses (direct productive): components, , raw material,

Costin Ciora - Business Strategy & Analysis 34

Costin Ciora - Business Strategy & Analysis 35

Costin Ciora - Business Strategy & Analysis 36