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Financial Statement Analysis F F M
1. FINANCE FOR MANAGERS
COURSE LECTURER
Shumaila Paracha
Assistant Professor
Course Code: 0387
MBA Program
Academic Year
Fall 2010
2. Financial Statement Analysis
โข A thorough financial statement analysis
include:
โข Ratio Analysis
โข Trend Analysis
โ Common Size Analysis
โ Percent Change Analysis
โข Du Pont Analysis
3. TREND ANALYSIS
โข Trend analysis is about plotting ratio over
time.
โข Trends give clues as to whether a firms
financial condition is likely to improve or to
deteriorate.
4. TREND ANALYSIS
โข This graph shows that
MicroDriveโs ROE has
been declining since
1998, even though the
industry average has
been relatively stable.
โข All the other ratios can
be analyzed similarly.
ROE
(%)
Rate of Return on Equity 1997-2001
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1997 1998 1999 2000 2001
Industry
MicroDrive
5. Common Size Analysis
โข Common Size analysis is used to identify trends in
financial statements.
โข Common size is also useful in comparative analysis.
โข In common size analysis all income statement items
are divided by sales ( common size income statement
shows each item as % of sales) and all balance sheet
items are divided by total assets (common size
balance shows each item as a % of total assets).
6. Common Size Analysis
โข The advantage of common size analysis is :
โ It facilitates comparisons of balance sheets and
income statements over time and across
companies.
7. Percent Change Analysis
โข Percent Change analysis is also used to
identify trends in financial statements.
โข In this type of analysis, growth rates are
calculated for all income statement items and
balance sheet accounts.
8. Du Pont Analysis
โข The profit margin times the total asset
turnover is called Du Pont equation and it
gives rate of return on assets.
โข ROA= Profit margin X Total asset turnover
= (Net income/Sales) X (Sales/Total assets)
If the company is financed only with common
equity, the ROA and ROE would be same because
total assets equal total equity.
9. Du Pont Analysis
โข However if a company use debt than ROE
must be greater than ROA. Specifically the
ROA can be multiplied by the equity multiplier.
โข Equity Multiplier (EM) = total assets / equity
โข Firms that use large amounts of debt financing
(more leverage) will have a high EM-the more
the debt the less the equity, hence the higher
the EM.
10. Du Pont Analysis
โข ROE depends on its ROA and its use of
leverage
โข ROE = ROA x EM
โข ROE = (net income/total assets) x (total
assets/equity)
โข So the extended Du Pont Equation is:
โข ROE = (Profit Margin)(Total Assets t/o)(EM)
11. Comparative ratios and
Benchmarking
โข Ratio analysis involves comparisons โ a
companyโs ratios are compared with those of
other firms in the same industry, that is to
industry average figures.
โข However some firms go a step further โ they also
compare their ratios with those of a smaller set
of leading companies in that industry. This
technique is called Benchmarking.
โข The bench marking setup makes it easier for
companyโs to see exactly where the company
stands relative to its competition.
12. Follow up Task!
โข Read chapter โ 3 โAnalysis of financial Statementsโ
from Book : Fundamentals of Financial Management
(Brigham)Ed-10 or Ch-4 in Ed 11.
โข Read lecture slides.
โข Hear audio recording of lecture.
โข Solve the relevant questions at the end of chapter.
โ You can access lecture slides and audio recording from file
server.
โ Written quiz from lec-1 till end of this lecture in the
following class