Financial Statement Analysis: Methods Overview Financial Statement Analysis: Methods Overview

I. Business Strategy Analysis II. Accounting Analysis III. Financial Analysis IV. Prospective Analysis accrual accounting and economic reality evaluation of historical performance forward looking view of performance qualitative assessment of profit potential

I. Business Strategy Analysis II. Accounting Analysis III. Financial Analysis IV. Prospective Analysis accrual accounting and economic reality evaluation of historical performance forward looking view of performance qualitative assessment of profit potential

a) Industry analysis b) Competitive strategy analysis a) Industry analysis b) Competitive strategy analysis I. Business Strategy Analysis: a qualitative assessment of profit potential

Industry Analysis example: Porter’s 5 Forces n rivalry with existing firms n threat of new entry n new Products n bargaining power of suppliers n bargaining power of buyers

a) Industry analysis b) Competitive strategy analysis a) Industry analysis b) Competitive strategy analysis I. Business Strategy Analysis: a qualitative assessment of profit potential

Competitive Strategy Analysis n product differentiation strategy n cost leadership strategy n niche strategy

I. Business Strategy Analysis II. Accounting Analysis III. Financial Analysis IV. Prospective Analysis accrual accounting and economic reality evaluation of historical performance forward looking view of performance qualitative assessment of profit potential a) industry analysis b) firm strategy analysis

a) evaluate accounting quality b) understand managerial reporting discretion consequences of accrual accounting II. Accounting Analysis

Accounting Analysis: evaluating accounting quality Do the financial statements reflect economic reality? what are the constraints? what are the sources of distortion? n GAAP n regulation n legal n capital market n auditors

a) evaluate accounting quality b) understand managerial reporting discretion consequences of accrual accounting Accounting Analysis

Accounting Analysis: evaluating accounting quality Do the financial statements reflect economic reality? n when do managers have incentives to reveal truth? n when do managers have incentive to obscure truth?

I. Business Strategy Analysis II. Accounting Analysis III. Financial Analysis IV. Prospective Analysis a) accounting quality b) managerial discretion evaluation of historical performance forward looking view of performance qualitative assessment of profit potential a) industry analysis b) firm strategy analysis

a) Ratio analysis b) Cash flow analysis a) Ratio analysis b) Cash flow analysis III. Financial Analysis evaluation of historical performance

Financial Analysis: evaluation of historical performance Ratio Analysis profitability: ROA, ROE liquidity: working capital turnover: asset turns leverage: debt to equity

a) Ratio analysis b) Cash flow analysis a) Ratio analysis b) Cash flow analysis Financial Analysis evaluation of historical performance

Cash flow analysis: is there sufficient cash to carry out plans? does the firm generate cash flow internally? borrowing profile: long and short matching?

I. Business Strategy Analysis II. Accounting Analysis III. Financial Analysis IV. Prospective Analysis a) accounting quality b) managerial discretion evaluation of historical performance forward looking view of performance qualitative assessment of profit potential a) industry analysis b) firm strategy analysis a) ratio analysis b) cash flow analysis

a) Forecasting b) Valuation a) Forecasting b) Valuation Prospective Analysis forward looking view of performance

Prospective Analysis: forward looking view of performance benchmarks: behavior of inputs, aggregate data starting point: models, analysts, line by line comprehensive forecasts: I/S, B/S, CF Forecasting

a) Forecasting b) Valuation a) Forecasting b) Valuation Prospective Analysis forward looking view of performance

Prospective Analysis: forward looking view of performance DCF comparables, Multiples accounting based valuation Valuation

I. Business Strategy Analysis II. Accounting Analysis III. Financial Analysis IV. Prospective Analysis a) accounting quality b) managerial discretion evaluation of historical performance forward looking view of performance qualitative assessment of profit potential a) industry analysis b) firm strategy analysis a) ratio analysis b) cash flow analysis a) forecasting b) valuation