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

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the inventory turnover ratio

the average collection period

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the gross profit-sales ratio

the net profit-sales ratio

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The debt-equity ratio

The interest coverage ratio

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The fixed charges coverage ratio

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The trend of financial ratios

Variability measures

Trend statements

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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

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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