Financial Statement Analysis,

Balance Sheet, Income

Statement,
Retained Earnings Statement
The annual report and other reports given to stockholders to inform
them of the companys financial standing and developments or
discusses the profits and losses of the company.
Also called shareholders report.
Shareholders
Report
STOCKHOLDERS REPORT
 What goes into a stockholders report?
CEO's Letter
The chief executive officer of the company greets the stockholders in
an introductory letter setting the tone of the report.
Financial Well-Being
The annual report contains the consolidated financial statements regarding
the company's income, cash flow performance, short- and long-term debt and
financial position.
Products and Marketing
The marketing strategy for new and existing products demonstrates the
corporation's capacity to discover potential customers, identify growth markets and
begin to offer the company's products in those new markets.

Research and Development

A company demonstrates financial viability by informing shareholders about
the many new ideas and products currently being developed and researched.
1. Balance sheet provides a snapshot of a firms financial position at one
point in time.
2. Income statement summarizes a firms revenues and expenses over a given
period of time.
3. Statement of retained earnings shows how much of the firms earnings
were retained, rather than paid out as dividends.
4. Statement of cash flows reports the impact of a firms activities on cash
flows over a given period of time.
 Provide narrative description or disaggregation of items presented in the financial
statements and information about items that do not qualify for recognition.
Contain information in addition to that presented in the financial statements.
In other words, notes to financial statements are used to report information that does not
fit in the financial statements in order to enhance the understandability of the financial
statements.
The purpose of the notes to financial statements is to provide the necessary disclosures
required by Philippine Financial Reporting Standards.
The balance sheet and income statement are both basic
statements common to most businesses. Another group of
statements are based on the concept of how funds flow through a
business. Two such statements are the statement of retained
earnings and the statement of cash flows.
 Major sections to
consider
1. Company Overview
These factors can prove invaluable in helping to explain why a company
might be a profitable investment or not.
2. Investment Thesis
Contains research on the firms financial statements, such as sales and profit
growth trends, cash flow generation strength, debt levels and overall liquidity,
and how this compares to the competition.
3. Valuation
There are three primary valuation techniques: The first, and
arguably most fundamental, technique is to estimate a companys future
cash flows and discount them back to the future at an estimated discount
rate. This is generally referred to as a discounted cash flow analysis.
4. Key Risks

The loss of patent protection for a blockbuster drug for a

pharmaceutical company is a great example of a factor that can weigh
heavily on the valuation for its underlying stock. Other considerations
include the industry in which the firm operates.
 5. Other Considerations
Sections covering corporate governance, the political environment
or nearer-term news flow, might be worthy of a fuller analysis. Basically,
anything important that can impact the future value of a stock should
exist somewhere within the report.
6. The Bottom Line
Performance of the underlying company is most certainly to
drive the performance of its stock or bond in the future. Other
derivative securities, such as futures and options, will also depend on
an underlying investment, be it a commodity or a company.
 The primary reason for comparative analysis is the explanatory interest of
gaining a better understanding of the causal processes involved in the
production of an event, feature or relationship. Typically it achieves this by
introducing (or increasing) variation in the explanatory variable or variables.
The strength of comparative analysis as a research design is its ability to
introduce additional explanatory variables (or to allow variation in variables
which take a fixed value in the initial case of interest), and to show that relations
are more or less general than had been initially thought.
 These financial analysis tools are highly helpful in evaluating the market
and investing in a way so as to maximize the profit from the investments
made. These financial analysis tools are useful for deciphering both internal
and external information related to a specific business organization. The
economic conditions in the present day market are analyzed by
management professionals with assistance from SWOT analysis. Moreover,
financial analysis tools are really important for any investor for the
companys performance shows direct impact on the price of a companys
stock.
 Application of analysis tools
Mainly, the financial analysis tools can be used for SWOT analysis. The term
SWOT is short for:

S Strength Internal
Factors
W Weaknesses
O Opportunities External
Factors
T Threats
 Types of financial analysis tools

Balanced Scorecard is one tool which can be of good assistance

to gauge the financial position of a company (can be easily
performed using Ready Ratios software). This financial analysis
tool is helpful in subjective as well as objective measurement of
special processes. Moreover, this financial tool is also helpful in
evaluation of a companys overall return, the operating income,
and the capital financing processes.
 Benchmarking is used for assessing the intrinsic
strengths and weaknesses of a business organization.
Besides, this also sways the stock price of the company.
Also, there are some professional agencies which use this
type of financial analysis tools to generate advices for
their clients.
Let's assume you compare the returns of your stock portfolio, which is a broadly diversified
collection of small-cap stocks and is managed by Company XYZ, with the Russell 2000
index, which you feel is an accurate universe of feasible alternative investments. If Company
XYZ's portfolio returns 5.5% in a year but the Russell 2000 (the benchmark) returns 5.0%,
then we would say that your portfolio beat its benchmark. Benchmarks help an investor
communicate his or her wishes to a portfolio manager. By assigning the manager a
benchmark with which to compare the portfolio's performance, the portfolio manager will
make investment decisions with the eci's performance in mind. The most commonly used
benchmarks are market indexes such as the Dow Jones Industrial Average, the S&P 500, or
the Russell 2000. However, there are dozens of other market indexes out there that focus
on specific industry sectors, security classes, or other market segments. Investors also use
other portfolios, mutual funds, or even pooled accounts to construct benchmarks. LIBOR is
one of the most widely used benchmarks for short-term interest rates, and the Fed controls
another common interest benchmark known as the Fed Funds rate. A good benchmark
should appropriately reflect the portfolio's investment style and strategy as well as the
investor's return expectations.
For example, the Russell 2000 may be an appropriate benchmark for a portfolio
investing exclusively in small-cap domestic stocks, but it may be inappropriate for a
portfolio investing in bonds and international REITs. Comparing a portfolio to an
inappropriate benchmark could yield misleading information. The portfolio may
look fantastic compared to one benchmark but lag considerably behind another. It
is difficult to benchmark some portfolios effectively, especially real estate
portfolios, where each asset is unique. Further, it is important to compare a
portfolio with its benchmark over a long period of time. Portfolio managers vary in
their benchmark strategies. For example, passive managers seek to replicate their
benchmarks. This is the strategy behind index mutual funds, which replicate broad
market indexes or indexes of securities with special characteristics. Actively
managed portfolios on the other hand, seek to beat benchmark returns but
generally require added risk and expertise to do so. Venture capitals frequently
receive incentive fees if their portfolios exceed the benchmark return. However, it
is important to structure these incentives in a manner that does not motivate a
manager to unduly increase the portfolio's risk.
 Analysis of the financial statements can be done comparatively to show
performance and financial condition in prior years as compared to the
current year.
It reveals if the profitability and the financial condition of the firm are
improving or not.
This comparison usually reveals trend; the reason why it is sometimes
referred to as trend analysis.
Also regarded as dynamic analysis.
It is an important tool of horizontal analysis.
Under this analysis, ratios of different items of the financial
statements for various periods are calculated and the comparison is
made accordingly.
The analysis over the prior years indicates the trend or direction.
Trend analysis is a useful tool to know whether the financial health of
a business entity is improving in the course of time or it is
deteriorating.
It is an important method of analysis which is used to
make comparison between two financial statements.
Being a technique of horizontal analysis and applicable
to both financial statements, income statement and
balance sheet, it provides meaningful information when
compared to the similar data of prior periods.
 The comparative statement of income statements enables
to review the operational performance and to draw
conclusions, whereas the balance sheets, presenting a
change in the financial position during the period, show
the effects of operations on the assets and liabilities.
Thus, the absolute change from one period to another
may be determined.
Illustration #1
2009 Revenue, $108,000 / 2008 Revenue,
$100,000 = 108%
2010 Revenue, $120,000 / 2008 Revenue,
$100,000 = 120%
Illustration #2
 2009:
= Revenue Increase $108,000 $100,000 / 2008
(previous year) $100,000
= $8,000 / $100,000 = 8.0%
2010:
= Revenue Increase $120,000 ?$108,000 / 2009 (previous
year) $108,000
= $20,000 / $108,000 = 11.1%
Refers to the type of analysis where one number is compared to
another to identify significant relationships.
It is performed when financial ratios are to be calculated for one
year only.
There are two types of vertical analysis : common-size
statement or percentage analysis & ratio analysis.
Also called as static analysis.
The most popular way to analyze the financial statements is computing
ratios. It is an important and widely used tool of analysis of financial
statements.
It highlights the key performance indicators, such as, liquidity, solvency
and profitability of a business entity.
The tool of ratio analysis performs in a way that it makes the process of
comprehension of financial statements simpler, at the same time, it reveals a
lot about the changes in the financial condition of a business entity.
 The figures of financial statements are converted to
percentages.
It is performed by taking the total balance sheet as 100. The
balance sheet items are expressed as the ratio of each asset to
total assets and the ratio of each liability to total liabilities.
Thus, it shows the relation of each component to the whole -
hence, the name common size.
Illustration #3
 BALANCE SHEET
Snapshot of a firms position and a report that summarizes all
of an entity's assets, liabilities, and equity at a specific point in
time.
Typically used by lenders, investors, and creditors to estimate the
liquidity of a business.
also known as the statement of financial position.
 GENERAL
CATEGORIES
Assets: Cash, marketable securities,
accounts receivable, inventory, and fixed
assets
Liabilities: Accounts payable, accrued
liabilities, taxes payable, short-term debt,
and long-term debt (ex. Pension fund
liability, Deferred tax liability)
Shareholders' equity: Stock, retained
earnings, and treasury stock
Several additional points about balance
sheet should be noted:
Cash versus other assets
Working Capital
Other sources of funds
Depreciation
Market Values versus book values
Time dimension
 INCOME STATEMENT
A report summarizing a firms revenue, expenses, and
profits during a reporting period, generally a quarter or a
year.
The income statement is sometimes referred to as the
profit and loss statement (P&L), statement of operations,
or statement of income.
 Elements:
A. Revenues and Gains
Revenues from primary activities
Revenues from secondary activities
Gains
B. Expenses and Losses
Expenses involved in primary activities
Expenses involved in secondary activities
Losses
Revenues from primary activities

Operating income earnings from

operations before interest and taxes
(EBIT)
Earnings per share (EPS) the bottom line. It is the portion of a company's
profit allocated to each outstanding share of common stock.
Earnings per share (EPS) = Net Income
Common Shares Outstanding
Dividend per share (DPS) the total dividends paid out over an entire year
(including interim dividends but not including special dividends) divided by the
number of outstanding ordinary shares issued.
Dividends per share (DPS) = Dividends paid to common stockholders
Common Shares Outstanding
Book value per share (BVPS) - it is used to calculate the per share value of a
company based on its equity available to common shareholders.
Book value per share (BVPS) = Total Common Equity
Common Shares Outstanding
 OTHER COMPONENTS:
Depreciation The charge to reflect the cost
of assets used up in the production process.
Amortization A noncash charge similar to
depreciation except that it is used write off
the costs of intangible assets.
EBITDA Earning before interest, taxes,
depreciation, and amortization.
 Retained Earnings Statement

Stockholders Equity represents the amount that stockholders

paid the company when shares were
purchased and the amount of the
company has retained since its
origination.
Stockholders Equity =
Paid-in Capital +
Retained Earnings
 Retained Earnings
It represents the corporation's cumulative earnings that have not been distributed to its
stockholders. A negative amount of retained earnings is reported as deficit or accumulated
deficit. (Accounting Coach)
Retained earnings refer to the percentage of net earnings not paid out as dividends, but
retained by the company to be reinvested in its core business, or to pay debt. It is
recorded under shareholders equity on the balancesheet. (Investopedia)
They represent the cumulative total of all earnings kept by the company during its life.
Recorded in the corporations Balance Sheet under Stockholder Equity section.
Retained Earnings Account details:
Beginning Retained Earnings
Profit/Loss of the Corporation
Dividends Declared
Appropriated Retained Earnings
Unappropriated or Free Retained Earnings
 Appropriated retained earnings is a separate account
from the standard retained earnings account that is used
for special projects to inform shareholders of the funding
issues with these projects. In other words, amount of
retained earnings that are reserved for a special purpose.
Unappropriated retained earnings are profits that are
not set aside for a specific purpose. (Accounting Tools)
The formula for ending retained earnings is: Beginning
retained earnings + Profits/losses - Dividends = Ending
retained earnings
 When evaluating the amount of retained earnings
that a company has on its balance sheet, consider the
following points:
Age of the company. An older company will have had more
time in which to compile more retained earnings.
Dividend policy. A company that routinely issues dividends will
have fewer retained earnings.
Profitability. A high profit percentage eventually yields a large
amount of retained earnings, subject to the two preceding points.
End of Presentation