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ADMN1107 Distance Education

ADMN1107 Distance Education Chapter 12 – Financial Statement Analysis Financial Statement Analysis - Keys Auditors’ Report Why have it and its limitations Reading the financial statements This includes the notes to the financial statements Why read the notes to the financial statements?

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ADMN1107 Distance Education

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  1. ADMN1107 Distance Education Chapter 12 – Financial Statement Analysis

  2. Financial Statement Analysis - Keys • Auditors’ Report • Why have it and its limitations • Reading the financial statements • This includes the notes to the financial statements • Why read the notes to the financial statements? • Using the past to predict the future

  3. Financial Statement Analysis • Time-series analysis • Year to year analysis with the same company • Over a period of 2 or more years • Sales • Receivables • Expenses

  4. Financial Statement Analysis • Cross-Sectional Analysis • From one company to another • Examples?

  5. Financial Data • There are three general types of types of data • Raw Financial Data [F/S Data] • Common Size Ratio [Interrelationships] • Ratio Data

  6. Performance Ratios • Return on Assets (ROA) • Type of return that is earned on the investment in assets • Cross industry analysis must be done carefully • Return on Equity (ROE) • The return the shareholders are earning on their investment in the company

  7. Performance Ratios • Leverage • How much is financed by debt holders • If a large portion is financed from debt holders then it’s said to be ‘highly leveraged’

  8. Turnover Ratios • Accounts Receivable • Inventory Turnover • Accounts Payable Turnover

  9. Short-Term Liquidity Ratios • Current Ratio • Quick Ratio • Includes Cash, Accounts Receivable and Marketable Securities

  10. Long-term Liquidity Ratios • Debt/Equity Ratios • Measure of how much debt a company has in relation to equity

  11. Earnings Per Share • Mandatory disclosure for public companies • Often quoted and will fluctuate based on certain factors • Revenue Projections • Quarterly earnings • Basic calculates what we know [remove preferred dividends]

  12. Earnings Per Share • Diluted EPS takes a ‘what if’ approach • It can get very complicated as it includes things such as: • Convertible Bonds • Stock Options

  13. So Ratio Analysis is Fool Proof Right?

  14. Pitfalls of Ratio Analysis • “Rules of thumb” may not work for all industries • Comparison between companies may not be valid [size, market share, etc.] • A ratio on its own is just a number

  15. End

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