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Financial Statement Analysis
Essentials of
Financial Statement Analysis
Time-Series vs. Cross-Sectional
What is time-series analysis?
One company over multiple periods
Identifies trends over time for single company
What is cross-sectional analysis?
Multiple companies in one period
Similarities and differences across companies (benchmarks)
Tools for Financial Statement Analysis
1. Cause of Change Analysis
2. Common Size Statements
3. Trend Statements
4. Financial Ratios
Cause of Change Analysis
Net Income drops from $100 to $50
What caused the change in performance?
Lower revenues?
Higher expenses?
Change in tax rate?
Cause of Change Analysis
How does it work?
Column 1: Statement for FY1
Column 2: Change 1st variable to FY2 level and look at effect
Column 3: Change 2nd variable to FY2 level and look at effect
Continue until all variables are changed to FY2 levels
Cause of Change Analysis
Common Size Statements
Which firm is more profitable?
$1000 in profit for a firm with $2000 in sales
$100 in profit for a firm with $150 in sales
Which firm has more debt?
$1000 in bonds for a firm with $2000 in assets
$100 in bonds for a firm with $150 in assets
Common Size Statements
Income Statement
Scale everything by Sales
Balance Sheet
Scale everything by Total Assets
Time-Series or Cross-Sectional?
Time-Series = Differences in same firm over multiple periods
Cross-Sectional = Differences in multiple firms in same period
Common Size Income Statement
Common Size Balance Sheet
Trend Statements
Income Statement and Balance Sheet
Scale everything by baseline
What is baseline?
Depends on Time-Series vs. Cross-Sectional
Time-Series: Baseline is first fiscal period
Cross-Sectional: Baseline is single firm
Trends Income Statement
Trends Balance Sheet
Financial Ratios
Should be relevant relationship
Does Debt / Assets provide information?
What about Debt / Sales?
No single "correct" way to compute many financial ratios
ROA Version 1: EBI / Total Assets
ROA Version 2: Net Income / Total Assets
KEY: Is it the economics of business, or is it the accounting?
Financial Ratios
A closer look at Return on Assets:
Changes in ROA Changes in Net Profit Margin and Asset Turnover