ANALYSIS ON FINANCIAL

STATEMENT
(Fiscal Management)
 ◦ Financial statement analysis is the process of
analyzing a company's financial statements
 for decision-making purposes. External
stakeholders use it to understand the overall
What Is Financial health of an organization as well as to
Statement Analysis? evaluate financial performance and business
value. Internal constituents use it as a
monitoring tool for managing the finances.

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 Analyzing Financial Statements

The financial statements of a company record important financial data on

every aspect of a business’s activities. As such they can be evaluated on
the basis of past, current, and projected performance.

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 In general, financial statements are centered around 
generally accepted accounting principles (GAAP) in the U.S. These
principles require a company to create and maintain three main financial
statements: the balance sheet, the income statement, and the cash flow
statement. Public companies have stricter standards for financial
statement reporting. Public companies must follow GAAP standards which
requires accrual accounting.1 Private companies have greater flexibility in
their financial statement preparation and also have the option to use either
accrual or cash accounting.
 “
Several techniques are commonly used as part of financial statement
analysis. Three of the most important techniques include 
horizontal analysis, vertical analysis, and ratio analysis. Horizontal
analysis compares data horizontally, by analyzing values of line items
across two or more years. Vertical analysis looks at the vertical
affects line items have on other parts of the business and also the
business’s proportions. Ratio analysis uses important ratio metrics to
calculate statistical relationships.

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 ◦ As mentioned, there are three main financial
statements that every company creates and
monitors: the balance sheet, income
statement, and cash flow statement.
Companies use these financial statements to
Financial Statements manage the operations of their business and
also to provide reporting transparency to
their stakeholders. All three statements are
interconnected and create different views of
a company’s activities and performance.

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 Balance Sheet
The balance sheet is a report of a company's financial worth in terms of book value. It is broken into three parts
to include a company’s assets, liabilities, and shareholders' equity. Short-term assets such as cash and
accounts receivable can tell a lot about a company’s operational efficiency. Liabilities include its expense
arrangements and the debt capital it is paying off. Shareholder’s equity includes details on equity capital
investments and retained earnings from periodic net income. The balance sheet must balance with assets minus
liabilities equaling shareholder’s equity. The resulting shareholder’s equity is considered a company’s book
value. This value is an important performance metric that increases or decreases with the financial activities of a
company.

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 ◦ The income statement breaks down the revenue a company
earns against the expenses involved in its business to provide a
bottom line, net income profit or loss. The income statement is
broken into three parts which help to analyze business efficiency
at three different points. It begins with revenue and the direct
costs associated with revenue to identify gross profit. It then
moves to operating profit which subtracts indirect expenses such
as marketing costs, general costs, and depreciation. Finally it
Income Statement ends with net profit which deducts interest and taxes.

◦ Basic analysis of the income statement usually involves the

calculation of gross profit margin, operating profit margin, and net
profit margin which each divide profit by revenue. Profit margin
helps to show where company costs are low or high at different
points of the operations.

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 The cash flow statement provides an overview of the
company's cash flows from operating activities, investing
activities, and financing activities. Net income is carried
over to the cash flow statement where it is included as the
Cash Flow
top line item for operating activities. Like its title, investing
Statement
activities include cash flows involved with firmwide
investments. The financing activities section includes
cash flow from both debt and equity financing. The bottom
line shows how much cash a company has available.

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Free Cash Flow and Other
Valuation Statements

Companies and analysts also use free

cash flow statements and other valuation
statements to analyze the value of a
company. Free cash flow statements
arrive at a net present value by
discounting the free cash flow a
company is estimated to generate over
time. Private companies may keep a
valuation statement as they progress
toward potentially going public.

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KEY TAKEAWAYS

 Financial statement analysis is used by internal and external

stakeholders to evaluate business performance and value.
 Financial accounting calls for all companies to create a
balance sheet, income statement, and cash flow statement
which form the basis for financial statement analysis.
 Horizontal, vertical, and ratio analysis are three techniques
analysts use when analyzing financial statements.
 

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 Frequently Asked Questions

What is financial statement analysis?

Financial statement
our office
analysis is the process of
evaluating a company’s performance or value through
a company’s balance sheet, income statement, or
statement of cash flows. By using a number of
techniques such as horizontal, vertical, or ratio
analysis, investors may develop a more nuanced
picture of a company’s financial profile.

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What are the different types of financial statement analysis?
Most often, analysts will use three main techniques for analyzing a
company's financial statements. First, horizontal analysis involves comparing
historical data. Usually, the purpose of horizontal analysis is to detect growth
trends across different time periods. Second, vertical analysis compares
items on a financial statement in relation to each other. For instance, an
expense item could be expressed as a percentage of company sales. Finally,
ratio analysis, a central part of fundamental equity analysis, compares line-
item data. P/E ratios, earnings per share, or dividend yield are examples of
ratio analysis.

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 An analyst may first look at a number of ratios on a
company’s income statement to determine how
efficiently it generates profits and shareholder
value. For instance, gross profit margin will show
What is an example the difference between revenues and the cost of
of financial goods sold. If the company has a higher gross
statement analysis? profit margin than its competitors, this may indicate
a positive sign for the company. At the same time,
the analyst may observe that the gross profit
margin has been increasing over nine fiscal
periods, applying a horizontal analysis to the
company operating trends.

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◦ is the process of
evaluating businesses,
projects, budgets, and
other finance-related
transactions to determine
their performance and
suitability.
Financial
Typically, financial analysis 
analysis is used to
analyze whether an entity
is stable, solvent, liquid,
or profitable enough to
warrant a monetary
investment.

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Many business owners
and company managers
have found that insight
gained from their
examination of
company financial Why is financial
statements can be analysis important?
invaluable. Such insight
can help businesses
improve their
profitability, cash flow,
and value

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 ◦ There are generally six steps to
developing an
effective analysis of financial state
ments.

1. Identify the industry economic

characteristics. ...

2. Identify company strategies. ...

3. Assess the quality of the How do you do a financial

firm's financial statements. ... analysis?
4. Analyze current profitability and risk. ...

5. Prepare
forecasted financial statements. ...

6. Value the firm.

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 The primary objective of financial statement
analysis is to understand and diagnose the
What are the information contained in financial statement with
objectives of a view to judge the profitability
financial analysis? and financial soundness of the firm, and to make
forecast about future prospects of the firm.

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 ◦ Tools or Techniques of Financial Statement
Analysis

 Comparative Statement or
Comparative Financial and
Operating Statements.
 Common Size Statements.
What are the tools  Trend Ratios or Trend Analysis.
of financial
 Average Analysis.
analysis?
 Statement of Changes in Working Capital.
 Fund Flow Analysis.
 Cash Flow Analysis.
 Ratio Analysis.

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 ◦ Financial statements are written records
that convey the business activities and the
financial performance of a company.
Financial statements are often audited by
government agencies, accountants, firms,
What Are Financial etc. to ensure accuracy and for tax,
Statements? financing, or investing purposes. Financial
statements include:

 Balance sheet

 Income statement

 Cash flow statement.

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  Financial statements are written records that
convey the business activities and the financial
performance of a company.

 The balance sheet provides an overview of

assets, liabilities, and stockholders' equity as a
snapshot in time.
KEY TAKEAWAYS  The income statement primarily focuses on a
company’s revenues and expenses during a
particular period. Once expenses are subtracted
from revenues, the statement produces a
company's profit figure called net income.

 The cash flow statement (CFS) measures how

well a company generates cash to pay its debt
obligations, fund its operating expenses, and fund
investments.
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 ◦ But in accounting, there are
some differences between financial
reporting and financial
What is the statements. Reporting is used to provide
difference between information for decision
financial reports making. Statements are the products
and financial
of financial reporting and are more
statements?
formal. Often, you use statements to
communicate your financial health to
outside entities.

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 ◦ Ratio analysis is a quantitative method of
gaining insight into a company's liquidity,
operational efficiency, and profitability by
What Is Ratio studying its financial statements such as
Analysis? the balance sheet and income statement.
Ratio analysis is a cornerstone of 
fundamental equity analysis.

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  Ratio analysis compares line-item data from a
company's financial statements to reveal
insights regarding profitability, liquidity,
operational efficiency, and solvency.

 Ratio analysis can mark how a company is

performing over time, while comparing a
KEY TAKEAWAYS company to another within the same industry
or sector.

 While ratios offer useful insight into a

company, they should be paired with other
metrics, to obtain a broader picture of a
company's financial health.

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 ◦ Investors and analysts employ ratio
analysis to evaluate the financial health of
companies by scrutinizing past and current
financial statements. Comparative data can
demonstrate how a company is performing
What Does Ratio over time and can be used to estimate
Analysis Tell You?
likely future performance. This data can
also compare a company's financial
standing with industry averages while
measuring how a company stacks up
against others within the same sector.

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 Investors can use ratio analysis easily, and every figure needed to calculate the
ratios is found on a company's financial statements.

Ratios are comparison points for companies. They evaluate stocks within an
industry. Likewise, they measure a company today against its historical numbers.
In most cases, it is also important to understand the variables driving ratios as
management has the flexibility to, at times, alter its strategy to make its stock and
company ratios more attractive. Generally, ratios are typically not used in isolation
but rather in combination with other ratios. Having a good idea of the ratios in each
of the four previously mentioned categories will give you a comprehensive view of
the company from different angles and help you spot potential red flags.
Examples of Ratio Analysis
Categories
The various kinds of
financial ratios available
may be broadly grouped
into the following six silos,
based on the sets of data
they provide:
◦ 1. Liquidity Ratios
◦ Liquidity ratios measure a company's
ability to pay off its short-term debts as
they become due, using the company's
current or quick assets. Liquidity ratios
include the current ratio, quick ratio, and
working capital ratio.
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 1. Liquidity Ratios
Liquidity ratios measure a company's
ability to pay off its short-term debts as they
become due, using the company's current or
quick assets. Liquidity ratios include the
current ratio, quick ratio, and working capital
ratio.
 3. Profitability Ratios
These ratios convey how well a company
can generate profits from its operations.
Profit margin, return on assets, return on
equity, return on capital employed, and gross
margin ratios are all examples of 
profitability ratios.
 4. Efficiency Ratios
Also called activity ratios, efficiency ratios
 evaluate how efficiently a company uses its
assets and liabilities to generate sales and
maximize profits. Key efficiency ratios include:
turnover ratio, inventory turnover, and days' sales
in inventory.
 5. Coverage Ratios
Coverage ratios measure a company's ability to
make the interest payments and other obligations
associated with its debts. Examples include the 
times interest earned ratio and the 
debt-service coverage ratio.
 6. Market Prospect Ratios
These are the most commonly used ratios in
fundamental analysis. They include dividend yield, 
P/E ratio, earnings per share (EPS), and 
dividend payout ratio. Investors use these metrics
to predict earnings and future performance.
 ◦ Common size analysis, also referred as
vertical analysis, is a tool that financial
managers use to analyze 
financial statements. It evaluates financial
What is Common statements by expressing each line item as a
Size Analysis? percentage of the base amount for that
period. The analysis helps to understand the
impact of each item in the financial
statement and its contribution to the
resulting figure.

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 YEAR 2022-2023 2023-2024 2024-2025

GROSS PROFIT 274144.17 420494.17 476596.67 before tax

DEPRECIATION 35455.83 35455.83 35068.33
NET PROFIT 191900.92 294345.92 333617.67 after tax
REVENUE /SALES 510000 561000 617100
*note: no liability noted

SOLVENCY RATIO=net profit after tax+depreciation

short term liability+long term liability

RESULT 227346.75 329801.75 368686

OPERATING MARGIN=operating profit x100

sales

RESULT 53.75375882 74.9543975 77.23167558

NET PROFIT MARGIN=net income x100

sales

RESULT 37.62763137 52.46807843 54.06217307

GROSS PROFIT MARGIN=gross profit X100

sales

RESULT 53.75375882 74.9543975 77.23167558 40

Formula for
Common Size
Analysis

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 ◦ Common size analysis can be ◦
conducted in two ways, i.e.,
vertical analysis and
horizontal analysis. Vertical
analysis refers to the analysis
Types of of specific line items in
Common Size relation to a base item within
the same financial period. For
Analysis
example, in the balance
sheet, we can assess the
proportion of inventory by
dividing the inventory line
using total assets as the base
item.
On the other hand,
horizontal analysis refers to
the analysis of specific line
items and comparing them
to a similar line item in the
previous or subsequent
financial period. Although
common size analysis is
not as detailed as 
trend analysis using ratios,
it does provide a simple
way for financial managers
to analyze financial
statements
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 ◦ The balance sheet
 common size analysis
mostly uses the total
assets value as the base
value. On the balance ◦ For example, if the value of
sheet, the total assets long-term debts in relation to
value equals the value of the total assets value is too
Balance total liabilities and  high, it shows that the
Sheet shareholders’ equity. A company’s debt levels are too
Common financial manager or high. Similarly, looking at the
Size investor uses the retained earnings in relation
Analysis common size analysis to to the total assets as the base
see how a firm’s capital value can reveal how much
structure compares to of the annual profits are
rivals. They can make retained on the balance
important observations sheet.
by analyzing specific line
items in relation to the
total assets.
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Balance Sheet

Balance Sheet
Amount of Individual Item Amount of Base Item Percentage
868483.50 538681.75 100 161

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 ◦ The base item in the income statement is
usually the total sales or total revenues.
Common size analysis is used to calculate net
profit margin, as well as gross and operating
Income margins. The ratios tell investors and finance
Statement managers how the company is doing in terms
Common Size of revenues, and they can make predictions
Analysis of future revenues. Companies can also use
this tool to analyze competitors to know the
proportion of revenues that goes to
advertising, research and development, and
other essential expenses.

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Income Statement

Income Statement
Amount of Individual Item Amount of Base Item Percentage
294345.92 191900.92 100 153

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 ◦ One of the benefits of using common size analysis is that it allows investors
to identify drastic changes in a company’s financial statement. This mainly
applies when the financials are compared over a period of two or three
years. Any significant movements in the financials across several years can
help investors decide whether to invest in the company. For example, large
drops in the company’s profits in two or more consecutive years may
indicate that the company is going through financial distress. Similarly,
Importance of considerable increases in the value of assets may mean that the company is
implementing an expansion or acquisition strategy, making the company
Common Size attractive to investors.
Analysis ◦ Common size analysis is also an excellent tool to compare companies of
different sizes but in the same industry. Looking at their financial data can
reveal their strategy and their largest expenses that give them a competitive
edge over other comparable companies. For example, some companies
may sacrifice margins to gain a large market share, which increases
revenues at the expense of profit margins. Such a strategy allows the
company to grow faster than comparable companies because they are
more preferred by investors.

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 ◦ Percentage change analysis
examines the change in
financial statement accounts
over two years. For the income
statement it can reveal if costs
Percent Change are remaining in line with sales
Analysis revenue; for the balance sheet
this type of analysis can
uncover if (and how) individual
asset and liability accounts have
changed relative to the previous
year. The basic calculation is

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 ◦ Market value (also known as OMV, or "open market
valuation") is the price an asset would fetch in the
marketplace, or the value that the investment community
gives to a particular equity or business. Market value is also
commonly used to refer to the market capitalization of a
publicly traded company, and is calculated by multiplying the
number of its outstanding shares by the current share price.
What Is Market Market value is easiest to determine for exchange-traded
Value? instruments such as stocks and futures, since their market
prices are widely disseminated and easily available, but is a
little more challenging to ascertain for over-the-counter
instruments like fixed income securities. However, the
greatest difficulty in determining market value lies in
estimating the value of illiquid assets like real estate and
businesses, which may necessitate the use of real estate
appraisers and business valuation experts respectively.

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 ◦ To determine the percentage, we
have to divide the value by the
total value and then multiply the
Formula resultant to 100. Percentage
Percent formula = (Value/Total value)×100.
Change Example: 2/5 × 100 = 0.4 × 100 =
40 per cent.

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 Percent Change

Percent Change
Value 2024 less Value 2023 Divided Value 2024 Multiply by 100 Percentage Change
1206246.84 911900.92 911900.92 100 1206146.84

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 ◦ A company’s market value is a good indication of
investors’ perceptions about its business
prospects. The range of market values in the
marketplace is enormous, ranging from less than
$1 million for the smallest companies to hundreds
of billions for the world’s biggest and most
Understanding successful companies.
Market Value
◦ Market value is determined by the valuations or 
multiples accorded by investors to companies,
such as price-to-sales, price-to-earnings, enterprise
value-to-EBITDA, and so on. The higher the
valuations, the greater the market value.

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  Market value is the price an asset fetches in
the market and is commonly used to refer to
market capitalization.

 Market values are dynamic in nature

because they depend on an assortment of
factors, from physical operating conditions
KEY TAKEAWAYS to economic climate to the dynamics of
demand and supply.
◦ How is fair market value calculated?
◦ Remember, fair market value is determined by what
the buyer and seller both agree to pay. For example, if
you had a homeowner who needed to sell the home
quickly to take a job in another state, maybe the buyer
paid less than the home's actual value at that time.

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 ◦ Market value can fluctuate a great deal
over periods of time and is substantially
The Dynamic influenced by the business cycle. Market
Nature of Market values plunge during the bear markets that
Values accompany recessions and rise during the
bull markets that happen during economic
expansions.

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 Market value is also dependent on numerous
other factors, such as the sector in which the
company operates, its profitability, debt load,
and the broad market environment. For
example, Company X and Company B may both
have $100 million in annual sales, but if X is a
fast-growing technology firm while B is a stodgy
retailer, X’s market value will generally be
significantly higher than that of Company B.
 In the example above, Company X may be
trading at a sales multiple of 5, which would give
it a market value of $500 million, while Company
B may be trading at a sales multiple of 2, which
would give it a market value of $200 million.
Market value for a firm may diverge significantly
from book value or shareholders’ equity. A stock
would generally be considered undervalued if 
its market value is well below book value, which
means the stock is trading at a deep discount to
book value per share. This does not imply that a
stock is overvalued if it is trading at a premium to
book value, as this again depends on the sector
and the extent of the premium in relation to the
stock’s peers.
 The book value is also known as the explicit
value, and it can heavily influence a company's
implicit value (i.e., the personal perceptions and
research of investors and analysts), which in turn
affects whether a company's stock price rises or 
drops.
 THANKS!
MACJIM A. PARALEJAS
Reporter

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 Thank You!
Mr. MacJim A. Paralejas
Reporter