Financial Statement and Company Risk Analysis: (See Chapter 3 Hitchner)

Financial Statement and Company
Risk Analysis
(see chapter 3 Hitchner)
A Presentation By
Ion ANGHEL,Ph.D.
Academy of Economic Studies - Bucharest
Agenda
Introduction
I. Historical Financial Statement Analysis
II. The role of financial reporting and financial analysis in
the market
III. Ratio analysis (quantitative analysis)
IV. Industry Structure Analysis – The Porter Model/
PESTEL Model/ Du Pont Model
V. SWOT Analysis
Prof.univ.dr.Ion ANGHEL
Introduction
 During 1990 the Internet enhanced our ability
to obtain and disseminate information
 A well reasoned valuation includes critical
elements:
 An estimation of the future economic benefits
(normalization and projection of the future CF)
 An assessment of the probability or risk that
the projected future economic benefits will be
realised
Introduction
 Process of financial statement analysis:
 Spreading historical fin. statement in columnar format
 Normalizing financial statement
 Common-sizing normalized historical fin.statement
 Performing ratio analysis on the normalized historical
fin. Statement
 Subjecting normalized historical financial statement to
industry comparison
1.Historical Financ.Statement Analysis
 Provide the most reliable information for estimating
future performance and risk assesment
 Audited information are preferred
 Length of financial history to be used: 5 years
 Spreading Financial Statement in columnar format
 (see pages 61-62 in the handbook – Hitchner)
 Adjustment to Financial Statement
 To develop historical earnings from which to predict future
earnings
 To present financial information on a normalized basis
 Facilitate comparison (in time, sector capital structure etc.)
Historical Financ.Statement Analysis
 Adjustments to reflect the economic realities of
“normal”
 To present financial statements on a basis more
comparable with other companies in that industry
 Categories
 Unusual items: events or transactions with a high degree of
abnormality
 Nonrecurring items: events or transactions that are not
reasonably expected to recur in the future
 Extraordinary items
 Non operating items: excess cash, marketable securities, excess
real estate, private planes, private collections etc
 Changes in accounting principles
 Degree of ownership interest
 Adjustments (examples)
 Strikes and other types of work stoppages
 Litigation expenses or recoveries
 Uninsured losses due to disasters (fire or flood)
 One time realization of revenues or expenses due to
nonrecurring contracts
 Gain or loss on the sale of a business unit or business
assets
 Discontinuation of operations
 Control Adjustments (examples)
 Removal of transactions with family or insiders (salary,
benefits, non market transactions)
 Eliminating of discretionary expenses and operating
inefficiencies
 Smoothing of excess or deficient compensation
 See examples: Tables 3.4.; 3.4A and 3.5
2.The role of financial reporting and
financial analysis in the market
Lemon problem
Economii
Intermediarii Intermediarii de
financiari informatii
Idei de afaceri
Figura 1. Piata de capital - Prezentare sintetica
Market participants
 Financial intermediary (Intermediarii financiari)
 Pension funds, insurance funds etc
  Information intermediary (Intermediarii de
informatii)
 Auditors, financial analysts, rating agencies etc
Situatiile Financiare Contextul analizei
- managementul are cea mai - analiza pentru creditare;
completa informatie; - analiza realizata de
- posibile erori de estimare; consultantul de plasament;
- distorsiuni datorita optiunilor - analiza pentru achizitii si
contabile fuziuni;
Alte informatii publice - analiza (ratingul) datoriilor.
- situatia sectorului ;
- informatii non-financiare.
Instrumentele analistului
financiar
Analiza strategiei intreprinderii.

Asteptari generale privind
performantele viitoare
Analiza informatiei contabile Analiza financiara. Analiza prospective.

- evaluarea calitatii informatiei - evalueaza performantele - previziuni si evaluare.
contabile prin analiza folosind metoda ratelor,
politicilor contabile si analiza cash-flow ului etc.
estimarilor managementului
Figura 1.2. Analiza intreprinderii
3.Ratio analysis (quantitative analysis)
 The most commonly used tool in financial analysis;
 Allow the analyst to asses the strength an
weaknesses of a given company with regard to such
measure as:
 Liquidity
 Performance
 Profitability
 Leverage
 Growth
Ratio analysis (quantitative analysis)
 Two common types of ratio analyses
 Time series (trend analysis): compares the company’s
ratios over a time period and identifies trends that
might indicate financial performance
 Cross sectional analysis: compares a specified

company’s ratios to other companies or to industry
norms
 See table 3.10A pag.81
 Liquidity Ratios
 Current Ratio = Current Assets/ Current Liabilities
 Quick Ratio = (Current Assets – Inventories)/ Current

Liabilities
 Activity Ratios
 Accounts Recievable Turnover = Annual Sales/

Average Accounts Receivable
 Days outstanding in accounts receivable =365 days/
ART
 Inventory Turnover = Cost of Good Sold/ Average
Inventory
 Total Assets Turnover = Sales/ Average Total Assets
 Leverage Ratios
 Debt to Total Assets = Total Debt/ Total Assets
 Equity to Total Assets =Total Equity/ Total Assets
 Long Term Debt to Equity = Long Term Debt/ Equity
 Total Debt to Equity = Total Debt/ Equity
 Profitability Ratios
 Gross Profit Margin = Gross Profit / Net Sales
 Operating Profit Margin =Operating Profit/ Net Sales
 EBITDA Margin = EBITDA / Net Sales
 ROE = Net Income/ Equity

 ROI Return on Investment = Net income + Interest exp
(1-t)/ (Average equity and Long Term Debt)
 ROTA Return on Total Assets = Net income + Interest
exp (1-t)/ (Average total assets)
 Growth Potential Ratios
 Average Annual Sales Growth
 Compund Annual Sales Growth
 Growth Potential = (1-div)x ROE
 Risk Analysis
 Operational Risk
 Financial Risk
 Bankruptcy Risk
21
Operational Risk
Firma "Zero Ch.fixe" S.A. "Ch.fixe" S.A.

Indicator/ Scenariu I II III I II III
1 Ve 100 200 300 100 200 300
2 Ch.v. 80 160 240 40 80 120
3 Rata Ch.v. 80.0% 80.0% 80.0% 40.0% 40.0% 40.0%
4 Contribuţia (Ve - Ch.v.) 20 40 60 60 120 180
5 Ch.f. 0 0 0 80 80 80
6 Re 20 40 60 -20 40 100
7 Marja Re 20.0% 20.0% 20.0% -20.0% 20.0% 33.3%
8 Pârghia operaţională 1.0 1.0 1.0 3.0 3.0 1.8
9 Variaţia Re ( Re) 20 20 60 60
10 Variaţia Ve ( Ve) 100 100 100 100
11 Indice ( Re/ Ve) 20% 20% 60% 60%
Ion ANGHEL
22
Financial Risk
Capital propriu 200 u.m., Datorii = 200 u.m., rata dobânzii 5%

Firma "Zero Ch.fixe" S.A. "Ch.fixe" S.A.
Indicator/ Scenariu I II
III I II III
1 Re 20 40 60 -20 40 100
2 Marja Re 20.0% 20.0% 20.0% -20.0% 20.0% 33.3%
3 Ch.cu dobânda 10 10 10 10 10 10
4 Rezultat net 10 30 50 -30 30 90
5 Rentabilitate active 5.0% 10.0% 15.0% -5.0% 10.0% 25.0%
6 Rentabilitate financiară 5.0% 15.0% 25.0% -15.0% 15.0% 45.0%
Ion ANGHEL
23
Bankruptcy Risk
A = 5,676 + 6,3718 X + 5,3932 X – 5,1427 X – 0,0105 X

1 2 3 4
În care:
rata rentabilităţii veniturilor (X )
1
rata de acoperire a datoriilor cu cash-flow (X )

2
rata de îndatorare a activului (X )

3
perioada de achitare a obligaţiilor (X .)

4
Ion ANGHEL
4. Industry Structure Analysis – The
Porter Model
 Michael Porter of Harvard Business School
developed an analytical approach known as Porter
Model by which to analyse company risk associated
with industry structure
 5 forces
 Rivalry between current competitors
 Threat oh new entrants
 Bargaining power of customer
 Bargaining power of suppliers
 The treat of substitute products/services
Industry Analysis – The PESTEL Model
 To form a view of the main influences on the
present & future of the organization.
 The PESTEL environmental variables:
 The resources availability

 The aspiration & expectations (shareholders,
managers, owners, unions etc.)
Du Pont Model
 The major advantage of the Model synthesis
 ROE = Net Income/ Sales x Sales/ Average Total Assets

x Average Total Assets/ Equity
5.SWOT Analysis
 Strengths
 Weaknesses
 Opportunities
 Threats
 Thank you for your
attention

Financial Statement and Company Risk Analysis: (See Chapter 3 Hitchner)

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Financial Statement and Company

 See examples: Tables 3.4.; 3.4A and 3.5

Figura 1. Piata de capital - Prezentare sintetica

Analiza strategiei intreprinderii.

Analiza informatiei contabile Analiza financiara. Analiza prospective.

Figura 1.2. Analiza intreprinderii

 Cross sectional analysis: compares a specified

 See table 3.10A pag.81

 Current Ratio = Current Assets/ Current Liabilities

 Quick Ratio = (Current Assets – Inventories)/ Current

 Accounts Recievable Turnover = Annual Sales/

 Debt to Total Assets = Total Debt/ Total Assets

 Equity to Total Assets =Total Equity/ Total Assets

 Long Term Debt to Equity = Long Term Debt/ Equity

 Total Debt to Equity = Total Debt/ Equity

 ROE = Net Income/ Equity

 Average Annual Sales Growth

 Compund Annual Sales Growth

 Growth Potential = (1-div)x ROE

Firma "Zero Ch.fixe" S.A. "Ch.fixe" S.A.

Capital propriu 200 u.m., Datorii = 200 u.m., rata dobânzii 5%

A = 5,676 + 6,3718 X + 5,3932 X – 5,1427 X – 0,0105 X

rata de acoperire a datoriilor cu cash-flow (X )

rata de îndatorare a activului (X )

perioada de achitare a obligaţiilor (X .)

 The resources availability

 ROE = Net Income/ Sales x Sales/ Average Total Assets

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