Financial Statement Analysis. Chapter 6

Financial Statement Analysis Chapter 6 Financial Statement Analysis Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis Introduction • Financial statement analysis is a process • It helps to understand the situation and activities of the company. • It uses the financial statements and other complementary information, evaluating the liquidity, solvency and profitability of the company, and it also considers the investor´s perspective • It implies transformations, graphic representations, ratios and others calculations, that forms an opinion • This opinion usually takes the form of an analysis report, reducing the uncertainty of the interested parties, Introduction The analysis of the accounts is structured in three principal areas: • Liquidity: to determine the capacity of the company to meet its short-term debts. • Solvency: to check whether the company can meet its debts in the long-term. • Profitability: to measure both the yield from the assets of the company and from the financing provided by the shareholders. Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis The role of the analyst The analyst is the specialized professional who • faces the complexity of the company information • takes into account the different interest of the information users • forecasts • Permits that good decisions can be made by non specialists Definitively, is who offers a funded opinion Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis The process of analysis • • • • • • • • • Object identification Interest identification Data collection Evaluation of reliability and validity of data Data cleaning Company and industry presentation report Partial analysis (liquidity, solvency…) Complementary searching Conclusion: analysis report Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis Documents presenting the analysis • Company overview: describe the company and its context, the principal products and services offered, the main inputs and resources involved, interest groups, and the legal environment • Intermediate documentation: additional information, that has been considered relevant in the forming of the opinion. • These documents, as well as the report of presentation, should not be supplied finally to the client if this has not been previously agreed. Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis The techniques of analysis Different approaches: • Temporal series vs • Cross-sectional analysis Pool analysis • Detection of syndromes-patterns The techniques of analysis Different approaches: • Structural analysis – Horizontal and vertical analysis vs • Ratio analysis – Liquidity, solvency, profitability and investor´s view Limitations of both approaches • Relative magnitudes, as ratios and percentages, are not always directly comparable and they sometimes presents a low predictive capacity Index • • • • • • Introduction The role of the analyst The process of analysis Documents presenting the analysis The techniques of analysis Structural analysis Structural analysis It can be defined as the study of a company´s accounts in two or more consecutive accounting periods, considering • the variations presented by each significant item from one accounting period to another (horizontal percentages), • and the relative importance of each item with respect of the total balance sheet (vertical percentages). Example of structural analysis 37% 63% Non-current assets Current assets 37% 31% Equity Non-current liabilities Current liabilities 32% No ncu rr e 5000 0 10000 15000 20000 25000 Cu rre n ta ss et s ts se As ts se nt as No ncu rr e nt l ia t li rre n b il ab L ia Cu i ti e il it bi Pr of Eq u it s ie s liti e s it ( y lo s Re s) be fo re ve ta nu xe e s n n-1 n-2