Financial Statement Analysis

1. Steps to FSA

1.1. Obtain relevant FS

1.2. Check for consistency

1.3. Undertake preliminary scrutiny of FS

1.4. Collect industry data & general economic trends

1.5. Compare with Industry Avg.

1.6. Do supplementary analysis

1.7. Summarise main features

2. Limitations of FSA

2.1. Prob. with benchmark

2.2. Creative accounting/ Window dressing

2.2.1. Valuation of receivable inventory, property, mktable securities & other A.

2.2.2. L includes off-BS items

2.2.3. Changes in accounting methods

2.3. Historical data

2.4. Qualitative aspects

3. Loan assessment ratios

3.1. D/E

3.2. Current ratio

3.3. CF/ LT debt

3.4. Fixed charge cover

3.5. Net IR earned

3.6. Net profit after tax

3.7. Net profit b4 tax

3.8. Financial leverage

3.9. Inv. T/O in days

3.10. AR T/O in days

4. FSA techniques

4.1. Cross-sectional

4.1.1. Ratio analysis

4.1.1.1. Liquidity ratio (quick ratio, current ratio)

4.1.1.2. Efficiency ratio (Inv T/O ratio, Avg collection period)

4.1.1.3. Profitability ratio (Gross profit-sales ratio, Net profit-sales ratio)

4.1.1.4. Leverage ratio (D/E, Int. coverage ratio)

4.1.2. Common-size statements: percentage of other items on total Assets.

4.2. Time series: evaluate ratio by detecting the improvement/deterioration in financial position

4.3. Combination: using FS & non-FS informations

5. Project analysis

5.1. Techniques

5.1.1. Payback period

5.1.2. Accounting Rate of Return

5.1.3. Discounted CFs (NPV, IRR, benefit-cost ratio)

5.2. Risk analysis

5.2.1. Sensitive analysis

5.2.2. Break-even analysis

5.2.3. Margin of safety

5.2.4. Cash break-even point