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Financial Statement Analysis

Financial Statement Analysis. A. Financial Statement Analysis B. “Watch Out” - Make Sure You Are Comparing Apples to Apples C. How Financial Ratios Can Be Used D. Sources of Performance Data E. Decomposition (DuPont) Analysis F. Trend Analysis G. Common Size Statements

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Financial Statement Analysis

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  1. Financial Statement Analysis A. Financial Statement Analysis B. “Watch Out” - Make Sure You Are Comparing Apples to Apples C. How Financial Ratios Can Be Used D. Sources of Performance Data E. Decomposition (DuPont) Analysis F. Trend Analysis G. Common Size Statements H. Indexed Statements I. Types of Financial Ratios The University of Tennessee

  2. Financial Statement Analysis Financial statements are used, like a barometer, to provide insight into the health (current status) of a company. This data, along with other information, can than be used by creditors, investors, and management to make credit decisions, assess a firm’s future potential, and identify problem areas and strategic opportunities. Ratio analysis is one of the many TOOLS we can use!!! The University of Tennessee

  3. Financial Statement Analysis“Watch Out” “Make Sure You Are Comparing Apples to Apples” - Why compare yourself to the mean? Pick the “right” peer group. Are the company’s objectives the same? - How are the underlying data generated? - Don’t chase numbers at any cost (i.e., don’t create ratios just to “compare numbers”). - Be careful comparing international subsidiaries; how are the accounting numbers generated in each country. Remember Ratio Analysis is Only a Tool Instead of fixating on the scoreboard, what you really need to understand are the fundamental processes that made the game turn out the way it did. Virgil Stephens, CFO Eastman Chemical, CFO Magazine The University of Tennessee

  4. Financial Statement AnalysisHow Financial Ratios Can Be Used A) Peer group or industry comparison “Benchmarking” How does a particular dimension of a firm compare with its industry? B) Decomposition Analysis (DuPont System) Trace the sources of profitability or trouble. C) Trend Analysis Trace changes in the company’s financial profile over time. D) Common Size Statements Express balance sheet items as percentages of total assets, and income statement items as percentages of net sales. Then compare with industry averages or within company across years. E) Index Statements Compare balance sheet and income statement accounts as percentages of same account in some prior year (index year). The University of Tennessee

  5. Financial Statement AnalysisSources of Performance Data Wachowicz’s Web World –Websites for Discerning Finance and Accounting Students http://web.utk.edu/~jwachowi/wacho_world.html Karmen Crowther’s Business Library Guides http://www.lib.utk.edu Follow: E-Resources/Subject Guides/Business & Economics The University of Tennessee

  6. Financial Statement AnalysisDecomposition (DuPont) Analysis • Let’s Calculate ROE for Coke Using the DuPont Method The University of Tennessee

  7. Financial Statement AnalysisTrend Analysis The University of Tennessee

  8. Financial Statement AnalysisTrend Analysis The University of Tennessee

  9. Financial Statement AnalysisCommon Size Statements: Coca-Cola The University of Tennessee

  10. Financial Statement AnalysisIndexed Statements: Coca-Cola The University of Tennessee

  11. Financial Statement AnalysisTypes of Financial Ratios Four Classes of Financial Ratios 1. Liquidity - measures the firm’s ability to meet its maturing short-term obligations as they come due. 2a. Leverage - measures the extent to which the firm has been financed by debt. 2b. Coverage - relates the financial charges of the firm to its ability to service these charges. 3. Activity - measures how effectively the firm is using its assets. 4a. Profitability - measures management’s overall effectiveness as shown by the returns generated on sales and investments. 4b. Investor Returns - measures return to investor’s investment. The University of Tennessee

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