FINANCIAL ANALYSIS

What is Financial Analysis? The process of evaluating businesses, projects, budgets and other finance- related entities to determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in.

Goals of Financial Analysis 1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations;income statement 2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;cash flow 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators.

Six-step Process Identify purpose of financial analysis Corporate overview Detailed accounting analysis Financial analysis techniques Comprehensive analysis Decision or recommendation

Pre-requisites of Financial Analysis  Cost of the project  Different ways of financing the project  Working capital requirements  Time value of money

Cost of the project  Land and site development  Building and civil works  Plant and machinery  Miscellaneous fixed assets  Preliminary expenses  Capital issue expenses  Technical know-how fees  Marginal money for working capital

Means of Finance  Share capital  Term loans  Debenture  Deferred credit  Miscellaneous sources

Working Capital Requirement and Financing  Working capital requirements I. raw material II. work-in-progress III. operating expenses  Sources of working capital I. long-term funds II. short term funds III. trade credit

Evaluation Of Project Investments Non-discounting techniques I. pay back period II. average rate of return Discounting techniques I. net present value method II. profitability index III. internal rate of return

Risk Analysis

What is “risk”? Can be loosely defined as the “possibility of loss or injury”.  Should be accounted for in social projects (and regulations) and private decisions. Think of there being different “states of nature” that can emerge, and we are uncertain about which we will end up with. We want to develop a way to describe risk quantitatively by evaluating the probability of all possible outcomes.

Risk Analysis of Project Investment Sources of risk I. Project specific risk or stand-alone risk II. Competitive risk III. Industry-specific risk IV. Market risk V. International risk

SENSITIVITY ANALYSIS – This technique is used to find out how sensitive the results of a particular financial model are to changes in input variables. SCENARIO ANALYSIS – This analysis identifies combinations of inputs that lead to change in output values. TECHNIQUES OF RISK ANALYSIS