Custom Search

FINANCIAL STATEMENT ANALYSIS

Divide and conquer ­ is the only practical strategy for presenting a complex topic like financial management. That is why we have broken down the financial manager`s job into separate areas: capital budgeting, dividend policy, equity financing, and debt policy. Ultimately the financial manager has to consider the combined effects of decisions in each of these areas on the firm as a whole. Therefore, we devote all of Part Six to financial planning. We begin by looking at the analysis of financial statements.

Why do companies provide accounting information? Public companies have a variety of stakeholders: shareholders, bondholders, bankers, suppliers, employees, and management, for example. These stakeholders all need to monitor how well their interests are being served. They rely on the company`s periodic financial statements to provide basic information on the profitability of the firm.

In this material we look at how you can use financial statements to analyze a firm`s overall performance and assess its current financial standing. You may wish to understand the policies of a competitor or the financial health of a customer. Or you may need to check your own firm`s inancial performance in meeting standard criteria and determine where there is room for improvement.

We will look at how analysts summarize the large volume of accounting information by calculating some key financial ratios. We will then describe these ratios and look at some interesting relationships among them. Next we will show how the ratios are used and note the limitations of the accounting data on which most ratios are based. Finally, we will look at some measures of firm performance. Some of these are expressed in ratio form; some measure how much value the firm`s decisions have added. After studying this material you should be able to

_ Calculate and interpret measures of a firm`s leverage, liquidity, efficiency, and profitability. _ Use the Du Pont formula to understand the determinants of the firm`s return on its assets and equity. _ Evaluate the potential pitfalls of ratios based on accounting data. _ Understand some key measures of firm performance such as market value added and economic value added.