LECTURE 1: OVERVIEW OF FINANCIAL

STATEMENT ANALYSIS

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Overview of financial analysis

Industry analysis
Strategy analysis
Principal financial statements
Analysis tools

Comparative analysis
Common size analysis
Ratio analysis

Valuation

Business
Environment &
Strategy Analysis
Industry
Analysis

Strategy
Analysis

Financial
Analysis

Accounting
Analysis

Cash
Risk
flow
Profitability
Analysis Analysis
Analysis

Cost of Capital Estimate

Prospective
Analysis

Intrinsic Value

Process to generate performance

expectations through industry analysis and
competitive strategy analysis

Process to evaluate accounting quality by

assessing accounting policies and estimates

Process to evaluate performance using

ratios and cash flow analysis

Process to make forecasts and value

business

Value chain analysis

Porters Five Forces

Buyer power
Supplier power
Rivalry among firms
Threat of new entrants
Threat of substitutes

Economic attributes framework

Demand
Supply
Manufacturing

- Marketing
- Financing

Nature of product or service

Degree of integration within value chain
Degree of geographical diversification
Degree of industry diversification

Cost leadership: supply same product or

service at a lower cost
Differentiation: supply a unique product or
service at a cost lower than the price premium
customer will pay

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Balance sheet
Income statement
Cash flow statement
Notes to financial statements

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A snapshot of the resources of a firm and

the claims on those resources at a specific
time.
Assets = Liabilities + Owners equity
Assessing the quality of the Balance Sheet

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Information about the operating

profitability of a firm for a particular
time period
Net income = Revenues + Gains
- Expenses Losses
Based on accrual basis
Assessing the quality of earnings

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Reports for a period of time the net cash

flows from the three principal business
activities: operating, investing and
financing

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Comparative analysis
Common size analysis
Ratio analysis

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An important goal of many business

analysis
To estimate the intrinsic value of a company

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Problem 1.9
Problem 1.12
Problem 1.14

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