so the things that we gonna learn are :
1. Financial Statements
2. A Possible Framework For Analysis
3. Balance Sheet Ratios
4. Income Statements
5. Income / Balance Sheet Ratios
6. Trend analysis
financial statements (or financial report) is a formal record of the financial activities and position of a business, person, or other entity. That is the definition of the financial statement !
So this financial statements are needed by two things . first needed by External and second needed by Internal.
Lets discuss first about the External !
1. Trade Creditors (The people / entity that give debt or credit to the company)
They use the financial statement to see the liquidity of the firm.
2. Bondholders (The people who put their money in the firm like shareholders but in long term the company must pay their money back)
They use the financial statement to see the long-term cash flow of the firm
3. Shareholders (The people who put their money in the firm and then get the stock , these people can't take their stock but they can sell it)
They use the financial statement to see the profitability and long-term health of the firm.
And second about the Internal !
1. Plan : Compare current financial position and evaluating potential firm opportunities
2. Control : Focus on return on investment for various assets and asset efficiency.
3. Understand : Focus on understanding how suppliers of funds analyze the firm.
Type Of Financial Statements
1. Income statement that is summary of a firm's revenues and expenses over a specified period .
For the example :
For the example :
Framework For Financial Analysis
So this is the step we need to do the financial analysis !
First , you need to analysis of the funds needs of the firm. How to do that ? we can do that through these :
1. Trend / Seasonal Component .
Here you need to think about how much funding that you needed or required in the future and also is there seasonal component or not .
2. Analytical Tools Used.
Sources and uses statement. Statement of cash flows cash budget
Second , you need to do Analysis of the financial condition and profitability of the firm. You can do this through these things :
1. Find out the health of the firms
2. Financial Ratios
3. Individually
4. Over time
5. In combination
6. In comparison
Third , you need to do Analysis of the business risk of the firms. Business risk is related to the risk inherent in the operations of the firms. The example are : Volatility in sales, volatility in costs, & proximity to break-even point.
After do all of that things , the manager must determine the financing needs of the firms and then negotiations with suppliers of capital .
Use Of financial Ratios
A financial Ratio is an index that relates two accounting numbers and is obtained by dividing one number by the other numbers. There are Liquidity Trend Ratios, Financial Leverage Ratios, Coverage Ratios, Activity Ratios, Inventory Turnover Ratio, & Profitabillities Ratios.
Liquidity Ratios
there are 2 kind of liquidity ratios. First is Current & second is Acid-test.
Current , Show the firm's ability to cover its current liabilities with its current assets.
The formula is :
The more high the value of current , that mean the more good that company.
Acid-Test (Quick) , Show the firm's ability to meet current liabilities with its most liquid assets.
The formula is : (Inv = Inventory)
The more high the value of Acid-Test
So in liquidity ratios ,Strong current and weak acid-test indicates potential problems in the inventories account.
Financial Leverage Ratios
there are 3 kind of leverage ratios. First is Debt-to-equity , Debt-to-total-assets & Capitalization.
Debt-to-equity , Shows the extent to which the firm is financed by debt.
The formula is :
Debt-to-total-assets , Shows the percentage of the firm's assets that are supported by debt financing
The formula is :
Capitalization , Shows the relative importance of debt to the long-term financing of the firm.
The formula is :
TC = LT-Debt+Equity
Coverage Ratios
there is only one in coverage ratios that is Interest Coverage this show or indicate a firm's ability to cover interest changes.This is the formula :
there are six kind of activity ratios that we will talk about it !
Receivable Turnover (Assume all sales are credit sales.) , Indicates quality of receivables and how successful the firm is in its collections.
The formula is :
The formula is :
The formula is :
PT in days , Average numbers of days that payables are outstanding .
The formula is :
Inventory Turnover , Indicates the effectiveness of the inventory management pratices of the firms.
The formula is :
The formula is :
Profitability Ratio
There are 4 kind of ratio that you will find here .
Gross Profit Margin , Indicates the efficiency of operation and firm pricing policies.
The formula is :
Net Profit Margin , Indicates the firm's profitability after taking account of all expenses and income taxes .
The formula is :
Return On Investment , Indicates the profitability on the assets of the firm (after all expenses and taxes) .
The formula is :
Return On Equity . Indicates the profitability to the shareholders of the firm (after all expenses and taxes) .
The formula is :
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