Financial Statements Analysis. Annual Reports and Financial Statements as the basic sources of financial analysis

Contents the procedure of financial statements analysis (FSA); Information needed for FSA; the annual report and its main sections; financial statements: the contents and significance for financial analysis; the interpretation of financial statements; the main techniques of FSA.

The procedure of financial statements analysis Collecting the information Analysis of information Interpretation The use of the information for decision making purposes

Collecting the information Prospects for the sector. Key question: What are the drivers the sector profits? General economic and stock market factors – how do they affect the sector? Key risks ( interest rate, foreign exchange risk, market risk, taxation and so on).

Collecting the information The companys business and strategies Strategy; Key operational and geographical segments; Performance; Risks ( operational, credit, liquidity, market, reputational and so on).

The main techniques of financial statements analysis Horizontal analysis is a line–by-line comparison of financial information over a series of reporting periods; Vertical analysis - the proportional analysis of a financial statement, where each line item on a financial statement is considered as a percentage of the total amount; Trend analysis - analysis of changes of every items of financial statements over a series of reporting periods; Ratio analysis- analysis of the financial ratios system

Horizontal analysis Current assets 1000,01100,01150,0 Fixed assets2000,02500,02800,0 Total assets3000,03600,03950,0

Vertical analysis Current assets 33,3%30,55%29,1% Fixed assets66,7%69,46%70,9 Total assets100,0%

Vertical analysis ( example) AAA Company Income Statement s for the Year Ended December 31, 2012 Amount Percent Sales $ 18, % Cost of Goods Sold 7, % Gross Profit $ 11, % Selling Expenses Advertising $ % Commissions % Delivery Fees 1, % Salaries 5, % Total Selling Expenses $ 7, % General & Administrative Expenses Insurance $ % Rent 1, % Depreciation % Utilities % Total General & Administrative Expenses $ 2, % Operational Profit $ %

Trend analysis Current assets 100,0110,0%115,0% Fixed asset100,0125,0%140,0 Total assets100,0%120,0%131,6%

Ratio analysis Liquidity ratios; Profitability ratios; Capital Structure ratios; Efficiency Ratios; Investment Valuation Ratios

Sources of Data Annual reports – company websites Published collections of data – e.g., Dun and Bradstreet Investment sites on the web

The Annual Report The annual report is a comprehensive report on a company`s activities throughout the preceding year. Annual reports are intended to give all interested users information about the company's activities and financial performance.

The main sections of annual report Financial statements Other reports: Shareholder information Financial summary Chairman`s statement Corporate governance Other information

Financial Statements Balance Sheet (Statement of Financial Position) Income Statement (Statement of Comprehensive Income) Statement of Cash Flows Statement of Shareholder`s Equity Notes

Statement of Financial Position (Balance Sheet) A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. Balance Sheet helps to answer: What we have? What we owe? What we`re worth?

Balance Sheet Basics Fundamental equations of Balance Sheet Assets = Liabilities + Shareholders' Equity Shareholders' Equity = Net Assets Net Assets = Assets - Liabilities

Assets What we have Current assets are assets which can either be converted to cash or used to pay current liabilities within 12 months. Typical current assets include: cash, short-term investments, accounts receivable, inventory. Long term assets - the value of a company`s property, equipment and other capital assets expected to be useable for more than one year, minus depreciation. Typical long term assets include: Long-term Investments Property, Plant and Equipment Intangible assets, such as goodwill, patents and copyrights.

LIABILITIES What we owe LIABILITIES Current Liabilities- are those obligations of the business which are expected to be paid off within a year. Short-term loans Accounts Payable Current Portion of Long-term Debt Long-term Liabilities are those obligations of the business which are expected to continue for more than one year. These include loans payable and mortgages payable.

Net assets What we`re worth Stockholders Equity (Net Assets) = Assets – Liabilities Stockholders Equity Common stocks Additional Paid-in Capital Retained Earnings

Statement of Financial Position Balance Sheet ASSETS Current Assets Cash Accounts Receivable Inventory Fixed Assets Property and Equipmentnet of depreciation Total LIABILITIES Current Liabilities Short-term loans Accounts Payable Current Portion of Long-term Debt Long-term Liabilities Long-term debt Stockholders Equity Common stock Additional Paid-in Capital Retained Earnings Total

The Income Statement The income statement presents the results of a business for a stated period of time. The primary purpose of the income statement is to report a company's earnings to investors over a specific period of time.

The Income Statement Revenue Cost of sales Gross profit Administrative expenses Distribution expenses Research and development expenses Other expenses Profit before tax Income tax expense Profit (Loss) for the year

Statement of Cash Flows The statement of cash flows describes the cash flows into and out of the business. Its particular focus is on the types of activities that create and use cash. Cash flows in the statement are divided into the following three areas: Operating activities. These constitute the revenue- generating activities of a business. Investing activities. These constitute payments made to acquire long-term assets, as well as cash received from their sale. Financing activities. These constitute activities that will alter the equity or borrowings of a business.

Statement of Cash Flows Cash flows from operating activities Cash receipts from customers Cash paid to suppliers Cash paid to employees Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Purchase of property, plant, and equipment Proceeds from sale of equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issuance of common stock Proceeds from issuance of long-term and short term debt Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

The basic steps of financial statements analysis Step 1. Acquire the companys financial statements for several years. Step 2. Quickly scan all of the statements to look for large or significant movements in specific items from one year to the next. Step 3. Review the notes accompanying the financial statements for additional information that may be significant to your analysis. Step 4. Examine the balance sheet. Look for large changes in the overall components of the company's assets, liabilities or equity. Step 5. Examine the income statement. Look for trends over time. Calculate and graph the growth of the following entries over the past several years. Step 6. Examine the cash flow statement, which gives information about the cash inflows and outflows from operations, financing, and investing. Step 7. Calculate financial ratios in each of the following categories, for each year. Step 8. Obtain data for the companys key competitors, and data about the industry. Step 9. Review the market data you have about the companys stock price. Step 10. Review the dividend payout. Step 11. Review all of the data that you have generated. Prepare a short conclusion.