The Objectives of the Financial Analysis

Process
1. The Financial Analysis Process
Distinguishing between Computations and
Analysis

There are many relationships between

financial accounts and between expected
relationships from one point in time to another

The Universe of Ratios

microeconomic relationships within a

company that help analysts project earnings
and free cash flow

a company’s financial flexibility

management’s ability
Ratios provide
changes in the company and/or industry over
time;
2.1 Ratios
comparability with peer companies or the
Value, Purposes, and Limitations of Ratio relevant industry(ies)
Analysis
The heterogeneity or homogeneity of a
company’s operating activities

The need to determine whether the results of

the ratio analysis are consistent
limitations to ratio analysis
The need to use judgment

The use of alternative accounting methods.

Sources of Ratios

Common-Size Analysis of the Balance Sheet

Common-Size Analysis of the Income

2.2 Common-size Analysis
Statement
2. Analytical Tools and Techniques
Cross-Sectional Analysis

Sensitivity analysis 7. MODEL BUILDING AND

Scenario analysis
FORECASTING
2.3 The Use of Graphs as an Analytical Tool
Simulation

Segment Reporting Requirements

6. Business and Geographic Segments
Segment Ratios
2.4 Regression Analysis

Credit risk is the risk of loss caused by a

counterparty’s or debtor’s failure to make a
promised payment.

Research on Ratios in Credit Analysis (E.g Z-

5. Credit Analysis Reading 26: Financial
score) Analysis Techniques

The valuation process has several

steps, including:
1. understanding the business and the
existing financial profile
2. forecasting company performance
3. selecting the appropriate valuation model
4. converting forecasts to a valuation
5. making the investment decision

4.2 Industry-Specific Ratios

4. Equity Analysis

4.3 Research on Ratios in Equity Analysis Company goals and strategy

3.1 Interpretation and Context Industry norms (cross-sectional analysis)

Economic conditions.

3.2 Calculation of Activity ratios

3.3 Liquidity Ratios

3. Common Ratios Used in Financial

Analysis

3.4 Solvency Ratios

3.5 Profitability Ratios

4.6 Dupont analysis