04 Financial Statement Analysis Flashcards
Involves assessment and evaluation of the firm’s past performance, its present condition and future business potential
FS Analysis
Types of information to extract in FS Analysis
- profitability
- ability to meet obligations (liquidity and solvency)
- safety of investment in the business
- effectiveness of management in running the firm (proper utilization of assets)
- overall company marketability (sale of stocks)
Enables investors and analysts to see what has been driving a company’s financial performance over time by identifying trends and growth patterns using two or more periods
Horizontal Analysis (Trend Percentages and Index Analysis)
Process of comparing figures in the financial statements of a single period
Vertical Analysis (Common-size FS)
Common base year in horizontal analysis
Prior year
Common base of SFP and Income Statement in Vertical Analysis
SFP - Assets
Income Statement - Sales
Financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company
SCF
Main components of SCF
Operating
Investing
Financing
Positive operating activities net cash flow means
Company is self-sustaining
Cash left over after a company pays for its Opex and CaPex
Free Cash Flow
Cash flow available for the company to repay creditors or pay dividends and interest to investors
Free Cash Flow
Compute FCF from operating activities
CF from operating activities
+ Interest expense
- Tax shield on interest expense
- CAPEX
= Free Cash Flow
Compute FCF from EBIT
EBIT x (1 - tax rate)
+ Non-cash exp (Dep, Amort, etc.)
- Change in working capital
- CAPEX
= FCF
Compute FCF from Net Income
Net income
+ Interest Expense
- Tax shield on Int Exp
+ Non-cash exp (Dep, Amort, etc.)
- Change in working capital
- CAPEX
= FCF
Increasing FCF means
increased earnings, company too liquid
Shrinking FCF means
unable to sustain earnings growth but not a bad thing if increasing capex
Measures the change in total sales and gross profit brought about changes in selling price
Sales Price Variance or Sales Factor
= Sales this year - Sales this year at last year’s price
- only affects sales
Used to determine reasons why the GP margin chanegs from period to period so that management can take steps to bring GM in line with expeectations
GP Analysis
(change in SP, change in unit cost, change in units sold)
Two primary factors that result to revenue variances
Price
Physical/Quantity Factors
Measures the change in cost of sales and gross profit brought about changes in unit cost
Cost Price Variance or Sales Factor
= Cost of sales this year - Cost of sales this year at last year’s price
- only affects cost of sales
Measures the change in total sales and gross profit brought about by change in units sold
Sales Quantity Variance
= Sales this year at last year’s price - Sales last year
Measures the net effect on gross profit due to change in units sold
Sales Volume Variance or Quantity Factor
= Sales Quantity Variance + Cost Quantity Variance
Measures change in cost of sales and gross profit about by changes in units sold
Cost Quantity Variance
= Cost of sales this year at last year’s price - Cost of sales last year
Quantitative method for gaining insight into a company’s liquidity, operational efficiency and profitability by examining FS such as SFP and SCI
Ratio Analysis
