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Chapter01-Overview of Financial Statement Analysis
Chapter01-Overview of Financial Statement Analysis
K R Subramanyam
John J Wild
Evaluate
EvaluateProspects
Prospects Evaluate
EvaluateRisks
Risks
Liquidity
Liquidity Solvency
Solvency
Ability
Abilitytotomeet
meetshort-term
short-term Ability
Abilityto
tomeet
meetlong-term
long-term
obligations
obligations obligations
obligations
Focus:
Focus: Focus:
Focus:
••Current
Currentcash
cashflows ••Long-term
flows Long-termprofitability
profitability
••Make
Makeup upofofcurrent ••Capital
current Capitalstructure
structure
assets
assetsand
andliabilities
liabilities
••Liquidity
Liquidityofofassets
assets
Kode & Mata Kuliah 7 Revisi 1.0
Equity Analysis
Assessment
Assessmentof
ofdownside
downsiderisk
riskand
andupside
upsidepotential
potential
Technical
Technicalanalysis
analysis//Charting
Charting Fundamental
FundamentalAnalysis
Analysis
••Patterns
Patternsininprice
priceor
orvolume Determine
history
volume DetermineIntrinsic
Intrinsicvalue
value
historyofofaastock
stock without
withoutreference
referencetotoprice
price
••Predict
Predictfuture
futureprice
price ••Analyze
Analyzeand
andinterpret
interpretkey
key
movements
movements factors
factors
–– Economy
Economy
–– Industry
Industry
–– Company
Company
Accounting
Risk
Business
BusinessEnvironment
Environment
&&Strategy
StrategyAnalysis
Analysis
Accounting
AccountingAnalysis
Analysis
Financial
FinancialAnalysis
Analysis
Intrinsic
IntrinsicValue
Value
Kode & Mata Kuliah 12 Revisi 1.0
Dynamics of Business Activities
Business
BusinessActivities
Activities Time
Time
Financing
Financingactivities
activities
••Owner (equity)
Owner (equity)
••Nonowner (liabilities)
Nonowner (liabilities)
Investing
Investingactivities
activities
• •Buying
Buyingresources
resources
• •Selling
Sellingresources
resources
Investing
Investing==Financing
Financing
Kode & Mata Kuliah 16 Revisi 1.0
Business Activities
Operating
OperatingActivities
Activities
Revenues
Revenuesand
andexpenses
expensesfrom
fromproviding
providing
goods
goodsand
andservices
services
Kode & Mata Kuliah 17 Revisi 1.0
Financial Statements Reflect Business Activities
20 Revisi 1.0
Balance Sheet
Colgate’s Profitability
(in $billions)
24
Statement of Cash Flows
26 Revisi 1.0
Additional Information
(Beyond Financial Statements)
Comparative Analysis
Analysis Preview
Common-Size Analysis
Purpose : Evaluation of internal makeup
of financial statements
Evaluation of financial statement
accounts across companies
Output: Proportionate size of
assets, liabilities, equity,
revenues, & expenses
Kode & Mata Kuliah 30 Revisi 1.0
Analysis Preview
Ratio Analysis
Purpose : Evaluate relation between two or more
economically important items (one
starting point for further analysis)
Output: Mathematical expression of
relation between two or more items
Cautions: Prior Accounting analysis is important
Interpretation is key - long vs short
term & benchmarking
Valuation
Valuation - an important goal of many types
of business analysis
Equity Valuation
FCFt+n
t+n
is the free cash flow in the period t + n [often
defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E refers to an expectation
Rit+n
t+n
is the residual income in period t + n [defined as
net income, NI, minus a charge on beginning
book value, BV, or RItt = NItt - (k x BVt-1
t-1
)]
k is the cost of capital
E refers to an expectation
Kode & Mata Kuliah 38 Revisi 1.0
Analysis in an Efficient Market