FINANCIAL STATEMENTS ANALYSIS
(chap 2)
Analysis of Financial Statements
Financial statements analysis is the principal tool of the lending banker in assessing the financial performance and condition of any business
3 broad types of analysis techniques
time series techniques
a combination of the two
cross-sectional techniques
profitability ratios
efficiency ratios
Liquidity ratios
leverage ratios
the current ratio
the quick ratio
the inventory turnover ratio
the average collection period
the gross profit-sales ratio
the net profit-sales ratio
The debt-equity ratio
The interest coverage ratio
The fixed charges coverage ratio
The trend of financial ratios
Variability measures
Trend statements
Market perceptions via share price
Changes in key management
Changes in market share
Impact of macroeconomic changes
Project risk analysis
Break-even analysis
Sensitivity analysis
Simulation
Steps Approach to Financial Statements Analysis
Step 4: Collect data about industry and general economic trends
Step 5: Comparison with Industry Averages
Step 3: Undertake preliminary scrutiny of financial statements
Step 6: Do Supplementary Analysis
Step 2: Check for consistency
Step 7: Summarise Main Features
Step 1: Obtain relevant financial statements