Financial Statement

Analysis
Sibat Al-Nistas
LECTURER

D E P T. O F A I S , B U P
 Reformulation &
Viewing business Analysis of
Investor & the
Course Introduction through the lens of Statement of
Analyst
financial statements Changes in Owners
Equity

Reformulation of
Reformulation of Statement of Profit &
Analysis of SFP &
Statement of Loss, and Other
SPLOCI
Financial Position Comprehensive
Income

Contents
Analysis of SFP & SPLOCI
Analysis Techniques
> Summary Figures/ Non-IFRS Measures/ KPI

> Trend (Horizontal) Analysis

> Common Size (Vertical) Analysis

> Ratio Analysis

◦ Cross-sectional Analysis
◦ Time Series Analysis

These techniques are not mutually exclusive. The list is

also not exhaustive.
Caution on Analysis
> Analysis is meaningless without comparison &
explanation.
> A discrepancy from expectation typically
reveals that further investigation is necessary.
Analysis may not be conclusive.
> Make multidimensional comparison.
> Compare against benchmarks, standards &
expectations.
 Return provided by best
alternate investment available
Required
Rate of
Return Opportunity
Cost
Proxy Indicators Cost of Equity
CAPM
 Residual Earnings
> Return in-excess of required return
◦ If shareholder expects 10% return, and firm generates 15% return; then 5% is residual
return.

> Represents valued added to firm (value remaining after meeting all costs)

> 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬 = 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝒕𝒕 − (𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝒐𝒐𝒐𝒐 𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬𝑬 ×

𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝒕𝒕−𝟏𝟏 )

> 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 = 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 − (𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑜𝑜𝑜𝑜 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 ×

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑜𝑜𝑜𝑜 𝑁𝑁𝑁𝑁𝑁𝑁 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴)
 Residual Income From Operations
> Value added from operations (from utilizing operating assets &
operating liabilities)

> 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝒕𝒕 = 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝑰𝒕𝒕 −

(𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹 × 𝑵𝑵𝑵𝑵𝑵𝑵 𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶 𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝑨𝒕𝒕−𝟏𝟏 )

> 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝒕𝒕 = 𝑶𝑶𝑶𝑶𝒕𝒕 − (𝒓𝒓 × 𝑵𝑵𝑵𝑵𝑵𝑵𝒕𝒕−𝟏𝟏 )

Common Size Analysis
> Standardization of line-items to eliminate the effect of size.

> Reveals per-dollar effect of each line item on operation.

> If done on reformulated statements, can reveal contribution of

different line items on business activities.

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
> 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = × 100
𝐾𝐾𝐾𝐾𝐾𝐾 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
 Common Size – Income Statement
> Reveals how firms to business differently, and how their revenue &
expenses are structured.

> Reveals the drivers of profit & how it can get affected by economic
factors.
𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
> 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = × 100
𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
 Common Size – Balance Sheet
> Reveals composition of assets & liabilities.

> Can assist in forming strategy.

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
> 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = × 100
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

> 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = × 100
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴

𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

> 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 = × 100
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿
 Trend Analysis
> Compares financial statement line items to base year

> Helps identify change & growth

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼
> 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 = × 100
𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼

> Trend Analysis & Common Size Analysis can be combined to show
progression of multiple firms over time (best done through plotting
multiple year common-size analysis in a chart)
> YTD - Year to date (YTD) refers to the duration starting on the first day of the
current fiscal or calendar year and ending on the current day. Compares year
starting values with current values at today.
◦ Provides a running total, shows progress.

> YoY or YtY – Year Over Year or Year-to-Year - compares a company's financial
performance for one period to the same time period in the previous year.
◦ Provides a point of comparison, and growth from last period (year).

> Base Year – Compares performance against base year (specific year).
◦ Provides a point of comparison, and visualizes sustained progress.
Ratio Analysis
TYPES OF RATIO ANALYSIS PROCESS OF RATIO ANALYSIS

> Liquidity > Cross Sectional

> Activity > Time Series
> Debt > Combined
> Profitability Ratio is simply comparison of two numbers. A quantitative
method to gain insights into changes in different financial
> Etc. statement line items
Cross-Sectional & Time Series
Analysis
> Cross-Sectional Analysis
◦ Comparison of different firms’ financial ratios at the same time.
◦ Allows for industry-wide comparison & benchmarking

> Time Series Analysis

◦ Evaluation of the firm’s financial performance over time using financial ratio analysis.

> Combined Analysis

◦ Evaluates multiple firms' financial ratios over time by combining time series & cross-
sectional analysis.
 Financial Ratios for Select Firms and Their Industry Average Values
Average Times
collection interest
Total Net Return Return on
Current Quick Inventory period asset Debt Debt- earned profit on total common
ratio ratio turnover (days) turnover ratio to-equity ratio margin assets equity
Apple 1.6 1.4 36.5 52.0 0.7 0.7 2.8 20.5 21.5% 15.1% 55.5%
Cisco Systems 1.8 1.6 12.2 64.0 0.5 0.6 1.5 20.4 21.4% 10.7% 29.0%
IBM 1.0 0.9 24.3 129.0 0.6 0.9 6.3 8.6 12.2% 7.3% 49.7%
Computers 2.0 1.1 14.6 17.0 2.9 0.6 1.0 3.4 3.1% 5.8% 7.2%
Chipotle 1.6 1.5 182.5 6.0 1.5 0.7 2.0 - 6.3% 9.5% 22.4%
Texas Roadhouse 0.6 0.5 91.3 13.0 1.6 0.5 1.1 - 6.3% 10.1% 18.4%
Wendy’s 1.6 1.2 365.0 27.0 0.4 0.9 8.7 2.4 8.0% 3.2% 23.5%
Eating and drinking 0.6 0.4 121.7 3.0 3.6 0.8 1.3 3.4 2.6% 7.9% -12.3%
Dillard’s 2.0 0.4 2.8 3.0 1.9 0.5 1.0 3.9 1.8% 3.4% 6.7%
Nordstrom 0.9 0.3 - 4.0 1.8 0.8 8.0 3.8 3.2% 5.8% 53.6%
Target 0.9 0.3 6.1 2.1 1.8 0.7 2.6 9.8 4.2% 7.7% 27.7%
Walmart 0.8 0.2 8.9 4.0 2.3 0.7 1.9 9.9 2.8% 6.4% 18.5%
Merchandise stores 1.3 0.2 16.6 1.0 6.1 0.6 2.0 6.5 2.4% 15.1% 40.4%
All Industries 1.6 1.0 17.4 13.0 1.7 0.6 1.0 1.9 3.3% 2.4% 3.2%
Source: Ready Ratios https://www.readyratios.com
Cautions about using ratios
> Large deviations in ratio merely indicate possibility of a problem

> Single ratio does not provide sufficient information

> Time period sensitivity: Effects of seasonality

> Different accounting treatments can distort values

> Different business strategies will affect ratios.

> Ratio values are industry dependent

Thank you!