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Financial reporting & financial statement analysis

Financial statement analysis tools and techniques
Week four
 FCES Students’ Council Financial Reporting Week 4

techniques ‫ و ايه هي ال‬financial statements ‫ لل‬analysis ‫في الجزء اللي فات ابتدينا نتكلم عن ازاي بنعمل‬
...‫اللي بنستخدمها و في الجزء ده هنكمل‬

 Cash Flow Analysis

It is primarily used as a tool to evaluate the sources and uses of funds (Cash flow
statement). It classifies cash receipts and cash payments into operating, investing, and
financing activities. provides insights into how a company is obtaining its financing and
deploying its resources. It also is used in cash flow forecasting and as part of liquidity
analysis.
‫ سواء دفعته او خدته وانها ال‬cash ‫ قبل كدا وعارفين انها بتهتم بال‬cash flow statement ‫اتكلمنا عن ال‬
operating, ‫ لتالت حاجات‬activities ‫ وبتقسم ال‬... accrual basis‫ الوحيدة اللي مش بتطبق ال‬statement
‫ للشركه‬funds ‫ عشان اقدر اقيم بيها مصادر واستخدامات ال‬analysis ‫ بعملها‬... financing and investing
liquidity analysis ‫ او استخدمها في ال‬finance ‫ بعرف ازاي اجيب‬analysis ‫وعن طريق ال‬
 Valuation
Valuation is concerned with determining the fair value of a company. There are
different techniques to determine the fair value. These techniques usually result in
different results. These techniques include:

‫ للشركه بمعني‬fair or market value‫ الرابع اللي هنتكلم عنه وده بيهتم بال‬technique ‫ هو ال‬valuation‫ال‬
‫ان لو انا جيت أصفي الشركة قيمتها تبقى كام دلوقتي؟‬
1. Valuation using multiples:
estimates the value of an asset by looking at the pricing of comparable assets
relative to a common variable like earnings, cash flows, book value, or sales. This
method focuses on the use of multiples to determine industry average ratios to
value a company. According to this method, other companies in the industry are
comparable to the company being valued and that the market prices these
companies correctly.
‫ وزي ما بقارن‬...‫ مشابهه ليها‬asset‫ عن طريق ان اشوف سعر‬asset ‫ ده بحدد قيمه ال‬technique ‫في ال‬
‫ ده بيتهم باستخدام ال‬technique‫ال‬...‫ اقدر اعرف قيمة شركه لو قارنتها بشركه تانيه‬asset‫ ب‬asset
‫ عشان اعرف اقارن الشركه بيها‬industry average ratios‫ عشان يعرف يحدد ال‬multiples
2. Discounted cash flow valuation:
relates the value of an asset to the present value of expected future cash flows on
that asset. The intrinsic value of an asset is determined by the cash flows you expect
that asset to generate over its life and how uncertain you feel about these cash
flows.

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 FCES Students’ Council Financial Reporting Week 4

‫ يعني بحسب دلوقتي قيمتها كل‬present value of expected cash flow‫ ب ال‬asset ‫اما هنا بربط قيمه ال‬
‫ بتاعت‬life‫ زي ما احنا عارفين ان ال‬...‫ خالص‬depreciated ‫ لحد لما تبقى‬asset‫الفلوس اللي هتجيبها ال‬
‫ لما بتحسب ال‬%011 ‫ وممكن تتغير اي وقت فانت مش بتبقي متاكد بنسبة‬estimated ‫ بتبقى‬asset‫ال‬
expected cash flow
 Ratio analysis
Ratio analysis is one of the most popular and widely used techniques of financial
analysis. It an analytical technique that typically involves a comparison of the
relationship between two financial items.

... ‫ مشهور وبيستخدموه اغلب الشركات‬technique ‫ وبيعتبر اكتر‬ratio analysis‫ بقى هو ال‬technique ‫اخر‬
.two Financial items ‫وهو عبارة عن مقارنة بين حاجتين او‬
While a ration calculation is a simple mathematical operation, its interpretation is
not easy. A ratio should reflect an economically important relation to be
meaningful. Ratio interpretation helps in determining areas that require further
investigations

ratios‫ ال‬...‫ ده مش سهل خالص‬ratio‫ بيبقى عبارة عن مسأله بسيطة بس انك تترجم ال‬ratio‫لما بتحسب ال‬
‫ بقدر‬ratio ‫ بمعني ان لما بحلل ال‬...‫بتساعد ان اعرف المناطق اللي في نسبة شك او محتاج أعرف اكتر عنها‬
.‫اعرف سبب الزيادة او النقصان عشان اخد قرار يخصها‬
 Ratio Analysis Objectives
 Standardize financial information for comparisons.

items‫بيطلع معلومات بشكل موحد عشان اقدر استخدمها لما بقارن بين ال‬
 Evaluate current operations.
‫ بتاعت الشركة‬operations‫بقدر اقيم ال‬
 Compare performance with past performance.
past performance‫ للشركة ب ال‬performance‫اقارن ال‬
 Compare performance against other firms or industry standards.
competitors ‫ بتاع ال‬performance‫ او نتائجها بال‬performance ‫إما هنا بقارن‬
 Study the efficiency of operations.
‫ كلها بشكل سليم وال ال‬resources‫ وهل انا بقدر استخدم ال‬efficiency ‫بقيس ال‬
 Study the risk of operations.
operations ‫ من ال‬risk ‫بدرس ال‬
Ratio analysis involves methods of calculating and interpreting financial ratios to
analyze and monitor the firm’s performance for different parties:
ratios‫ بيهتموا بالنتائج بتاعت ال‬three parties ‫في‬

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Current and prospective shareholders are interested in the firm’s current and future
level of risk and return, which directly affect share price.
.‫ والعائد بتاعه عشان ده بيأثر بشكل رئيسي علي سعر السهم‬risk‫ بيهتم يعرف مستوى ال‬shareholder ‫ال‬

Creditors are interested in the short-term liquidity of the company and its ability to
make interest and principal payments.

‫ وهل الشركه هتقدر تدفع الفوايد واالقساط دلوقتي او حتى لما اصفى الشركة هقدر‬liquidity ‫ بيهتم بال‬creditors‫ال‬
‫اسدد كل الديون وال ال‬
Management is concerned with all aspects of the firm’s financial situation, and it
attempts to produce financial ratios that will be considered favorable by both owners
and creditors.
‫ بتاعها وبتهتم تحسب‬financial position ‫ بتهتم بكل حاجة تخص الشركه او ليها عالقة بال‬management ‫ال‬
creditors ‫ و ال‬shareholders‫ بطريقة مرضية لل‬ratio‫ال‬
Factors Affecting Ratio Analysis include:
1. Internal operating activities

‫ بتاعي زاد‬profit ‫ اكتر وبالتالي ال‬revenues ‫لو مثال االنتاج بتاعي زاد فكدا انا حققت‬
2. Economic events
‫ بتاعي‬business‫ يأثروا علي ال‬recession ‫ او ال‬inflation‫ازاي ممكن ال‬
3. Industry factors

‫عليهم وال ال؟‬competitive advantage ‫هل عندي منافسين في السوق؟ ولو عندي انا مكاني ايه بينهم؟ او عندي‬
4. Management policies
‫هل االدارة بتدير الشركة بشكل مظبوط وال ال؟‬
5. Accounting methods.
‫ بستخدم‬depreciation‫ زي مثال في ال‬method ‫ مظبوط وبستخدم انهي‬standards‫هل انا ماشي علي ال‬
‫ وال حاجة تانية‬straight line
Types of Ratio Comparisons
 Cross-sectional analysis
is the comparison of different firms’ financial ratios at the same point in time;
involves comparing the firm’s ratios to those of other firms in its industry or to
industry averages.

‫ وطبعا الزم تكون النتائج في‬industry ‫ الشركات التانية في نفس ال‬ratios ‫ للشركه ب‬ratios ‫هنا بقارن ال‬
‫نفس السنة يعني ماينفعش اقارن لشركة السنادي مع شركة تانية بنتائج السنه اللي فاتت‬

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 Benchmarking
- is a type of cross-sectional analysis in which the firm’s ratio values are compared
to those of a key competitor or group of competitors that it wishes to emulate.
competitive ‫ عشان احافظ علي ال‬key competitors‫ ال‬ratios‫ بتاعت الشركة ب‬ratios‫اما هنا بقارن ال‬
cross sectional analysis‫ في السوق ويعتبر جزء من ال‬competitor ‫ … يعني بقارن بأقوى‬advantage
 Comparison to industry averages is also popular.
industry average‫بقارن نتائجي مع ال‬
 Time-series analysis
is the evaluation of the firm’s financial performance over time using financial ratio
analysis. Comparison of current to past performance, using ratios, enables analysts
to assess the firm’s progress.

‫ الشركة‬progress ‫ بتاع الشركة علي مدار السنين عشان اقدر اقيس‬performance ‫بقيم ال‬
The most informative approach to ratio analysis combines cross-sectional and time-series
analyses.

- Cautions about Using Ratio Analysis

 Ratios that reveal large deviations from the norm merely indicate the possibility of a
problem.

‫ الن فيه مشكله وان الزم ادور علي سببها‬indicator ‫ اللي نتايجها بتبان غير طبيعة ده بيبقي‬ratios ‫ال‬
 A single ratio does not generally provide sufficient information from which to judge
the overall performance of the firm.

‫ الشركه الزم‬performance ‫ واحد مش كفاية او ملهوش معنى لوحده انه يحكملي علي‬ratio ‫اني احسب‬
‫احسب اكتر من واحد‬
 The ratios being compared should be calculated using financial statements dated at
the same point in time during the year.

‫ الزم اتاكد انها محسوبه في نفس السنه عشان يبقى حكمي سليم‬ratios ‫لما اجي اقارن بين ال‬
 It is preferable to use audited financial statements.

information‫ عشان اتأكد ان ماحصلش تالعب في ال‬audited financial statements ‫االفضل اني استخدم‬
 The financial data being compared should have been developed in the same way.

‫ ومعمولين بنفس الطريقه‬principles ‫ اللي بقارنهم يبقوا ماشيين علي نفس ال‬statements ‫الزم ال‬

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 Results can be distorted by inflation.

‫ ممكن جدا يأثر في نتائج الشركه فالزم اخد بالي الن لما االسعار بتزيد الكمية اللي الناس هتشتريها‬inflation‫ال‬
‫ نتائجها هتبقى قليلة‬ratios‫هتقل وبالتالي ال‬

- Ratios can be categorized as follows:

‫ انواع‬3 ‫ بتتقسم ل‬ratios‫ال‬
Ratios for Return and Profitability
- measure the earning ability of a company

profit ‫بتقيس قدره الشركه انها تجيب فلوس و تعمل‬

Ratios for Financial Stability
- measure the extent of a company’s total debt burden by examining the adequacy
of funds, the business solvency, and the ability to meet short-term and long-term
debts.

long term or short term ‫ بتاع الشركه وهل هتقدر تسدد اللي عليها سواء‬debt ‫بتحدد قد ايه ال‬
Ratios for Working Capital Management
- measure a company’s ability to meet its current obligations. They also include
ratios that measure the efficiency of the use of current assets and current
liabilities.
efficiency‫بتهتم بانها تعرف هل الشركه هتقدر تدفع االلتزامات اللي عليها دلوقتي وطبعا بتحسب ال‬

- Challenges that face financial statement analyses

Comparing income statement and balance sheet numbers can create challenges.
This can be attributed to the fact they have different timing. Income statement covers
the entire fiscal period; while, balance sheet applies to a single point in time, the end
of the period.

income ‫ صعب الن االتنين بيتعملوا لمده مختلفه ال‬balance sheet ‫ ب‬income statement ‫اني اقارن‬
‫ بتبقى الخر يوم في السنه بس‬balance sheet ‫ اللي بيحصل علي مدار السنه كلها لكن ال‬cover‫ بت‬statement
Therefore, to compare an income statement number such as cost of goods sold to a
balance sheet number such as inventory, we need to determine the average
inventories for the year that the cost of goods sold number covers.

inventory ‫ زي ال‬balance sheet item ‫ ب‬COGS ‫ زي‬income statement item ‫عشان كدا لو جيت اقارن‬
inventory ‫الزم اخد متوسط ال‬

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However, these numbers are not available to the external users. Instead, we can use
an average of the beginning and ending balance sheet numbers. This helps to
smooths out changes from beginning to end. However, it does not eliminate problems
due to seasonal and cyclical changes. Also, it does not reflect changes that occur
unevenly throughout the year.

‫ بس ده طبعا مش بيمنع كل‬average ‫ عشان كدا بستخدم ال‬external users‫وطبعا المعلومات دي مش بتبقي متاحة لل‬
‫المشاكل زي مثال انه مش بيبين التغيرات اللي بتحصل خالل السنه بشكل مفصل‬

Ratios for Return and Profitability

- Measure the income or operating success of a
company for a given period of time.
‫ واللي علي أساسه بحدد مدي نجاح ال‬income ‫بتقيس ال‬
‫ في وقت معين‬operations
Income affects the company’s ability to obtain
debt and equity financing, their liquidity
position, and their ability to grow.
‫ بيأثر علي قدره الشركه في انها تاخد‬income ‫وطبعا ال‬
liquidity ‫قروض او توزع اسهم وبيأثر علي ال‬
Margins and return ratios provide information
on the profitability of a company and the
efficiency of the company.
‫من خالل العائد اللي بيجيلي بقدر احدد علي الشركة دي حققت ال‬
‫ وال ال وهل الشركة بتكسب وال ال‬efficiency
A margin is a portion of revenues that is a
profit.

COGS ‫ ال‬revenues‫ بحسبه باني بطرح من ال‬margin‫ال‬

A return is a comparison of a profit with the investment necessary to generate the profit.

‫لما بقارن العائد بتاعي باللي بكسبه من االستثمارات بقدر احدد هل انا بكسب وال ال‬
The ratios include:
 Profit Margin or Return on Sales (%)
 Return on Assets (%)
 Return on Common Stockholders’ Equity (%)

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 Profit Margin
It measures the percentage of each dollar of
sales that results in net income
Profit margin = net income / net sales
2012 = 208,500 / 1,837,000
= 11.4%
‫ بتاعتي وكل لما‬sales ‫ من ال‬income ‫بحسب قد ايه نسبه ال‬
‫ اكتر‬profitable ‫النسبه تبقى اعلي كل لما الشركه تبقى‬

 Return on Assets
An overall measure of profitability.
ROA = net income / average total assets
2013 = 263,800 / ((1,835,000+1,595,000)/2))

= 15.4%
‫ وكل ما يبقى اعلي كل لما يدل عن ان ال‬income ‫ قد ايه‬generate‫ بي‬assets ‫ من ال‬$0 ‫بحسب هنا ال‬
.‫ عندي عالية‬efficiency

 Return on Common Stockholders′ Equity

Shows how many dollars of net income the company earned for each dollar invested
by the owners.
ROE = net income / average common stockholders′ equity
2013 = 263,800/ ((1,003,000 + 795,000)/2)
= 29.3%
‫ بيديني قد‬common stock equity‫ من ال‬$0 ‫بيعرفني ال‬
income ‫ايه‬
 Gross profit margin
The gross profit margin shows the percentage of
revenue or sales after subtracting the cost of
goods sold. This ratio indicates whether the
company that achieved higher gross profit margin
than its competitors and the industry average is
doing a good job pricing its product and
controlling its cost of goods (or cost of goods
manufactured).

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It is calculated as follows:
The gross profit margin = Gross profit ÷ Net sales

competitors ‫ وبقارن النسبة بتاعت الشركه بنسبة ال‬COGS ‫ بعد ما طرحت منه ال‬revenues ‫بحدد بيه نسبه ال‬
‫ بتاعي‬product ‫ وعلي اساسه بقدر احط سعر لل‬industry average ‫او ال‬

 Operating profit margin

The operating profit margin shows the percentage of revenue or sales left after
subtracting cost of goods sold and operating expenses. A company that has a higher
operating profit margin than its competitors and the industry average is doing a good
job controlling operating costs and/or maintaining a solid gross profit margin. It is
calculated as follows:
Operating Profit Margin = Profit from Operations ÷ Net Sales

operating ‫ الشركه اللي ب‬... operating expenses‫ و ال‬COGS ‫ بعد ما طرحت ال‬revenues ‫بيوريني نسبة ال‬
‫ بتاعتها‬operating expenses ‫ عالي ده معناه انها متحكمه كويس في ال‬profit margin
it is called EBIT which means Earnings before Interest and Tax expenses.
 Net profit margin
Sometimes the net profit margin calculation in the numerator by adding back tax and
interest expenses; a low-tax country is a competitive advantage as the company has
higher profits per unit of sales available if tax payments are low.
EBITDA margin = EBITDA ÷ Net sales

‫ عشان بيبقى‬interest expense ‫ و‬taxes ‫ بيتحسب بعد لما برجع اضيف ال‬net profit margin ‫ساعات ال‬
‫ بتاعها هتبقى عالية‬net profit ‫ فيها قليلة جدا و بالتالي نسبة ال‬taxes ‫فيه دول ال‬

End of Week 4, Good Luck

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