1. Overview of Financial Statement Analysis
Week 1 – Part 1
FINA321 Course
Fall 2016
Abdullah Al Shukaili

2. Business Analysis
Financial statement analysis is an integral and important part of the broader field of business analysis
Business analysis is the process of evaluating a company’s economic prospects and risks
The analysis of company’s business could be:-
business environment
its strategies
financial position

3. Purposes of Business Analysis
Business analysis is useful in a wide range of business decisions such as:-
whether to invest in equity or in debt securities,
whether to extend credit through short- or long-term loans,
how to value a business in an initial public offering (IPO), and
how to evaluate restructurings including mergers, acquisitions, and divestitures

4. Business Analysis
Business analysis is the evaluation of a company’s prospects and risks for the purpose of making business decisions.
Much information about business analysis can be found in the annual report
Financial Annual reports include information about the company’s:-
Past performance
Its strategies and future plan
Explanatory notes ( assets, debt, equity, etc.)

5. Microsoft Financial Statement
(In millions, except per share data)
Year Ended June 30,
2015
2014 (b)
2013
2012
2011
Revenue
$93,580
$86,833
$77,849
$73,723
$69,943
Gross margin
$60,542
$59,755
$57,464
$56,193
$54,366
Operating income
$18,161 (a)
$27,759
$26,764 (c)
$21,763 (d)
$27,161
Net income
$12,193 (a)
$22,074
$21,863 (c)
$16,978 (d)
$23,150
Diluted earnings per share
$1.48 (a)
$2.63
$2.58 (c)
$2.00 (d)
$2.69
Cash dividends declared per share
$1.24
$1.12
$0.92
$0.80
$0.64
Cash, cash equivalents, and short-term investments
$96,526
$85,709
$77,022
$63,040
$52,772
Total assets
$176,223
$172,384
$142,431
$121,271
$108,704
Long-term obligations
$46,282
$36,975
$26,070
$22,220
$22,847
Stockholders' equity
$80,083
$89,784
$78,944
$66,363
$57,083

6. Types of Business Analysis
The goal of business analysis is to improve business decisions by evaluating available information about
a company’s financial situation,
its management,
its plans and strategies,
and its business environment.
Business analysis is applied in many forms and is an important part of the decisions of:-
security analysts, investment advisors, fund managers, investment bankers, credit raters, corporate bankers, and individual investors.

7. Types of business analysis
1- Credit Analysis
Creditors lend funds in many forms and for a variety of purposes.
Trade (or operating) creditors deliver goods or services to a company and expect payment within a reasonable period, often determined by industry norms.
creditors bear the risk of default.
Credit analysis is the evaluation of the creditworthiness of a company.
Creditworthiness is the ability of a company to honor its credit obligations
Most trade credit is
short term, ranging from 30 to 60 days, with cash discounts often granted for early
payment.

8. 1- Credit Analysis
Credit analysis focuses on downside risk instead of upside potential. This includes analysis of both liquidity and solvency.
Liquidity is a company’s ability to raise cash in the short term to meet its obligations.
Liquidity depends on a company’s cash flows and the makeup of its current assets and current liabilities.
Solvency is a company’s long-run viability and ability to pay long-term obligations. It depends on both a company’s long-term profitability and its capital (financing) structure.

9. 2- Equity Analysis
Equity investors provide funds to a company in return for the risks and rewards of ownership. Equity investors are major providers of company financing
Equity financing, also called equity or share capital
Investor are much looking for the company value in the market ( share value)

10. 3- Other Uses of Business Analysis
Managers
Mergers, acquisitions, and divestitures
Financial management
Directors
Regulators
Labor unions
Customers.

11. Why we need FS?

12. Homework
Visit Muscat Securities Market (MSM) website (
Search for one Omani company and try to understand the components of its Financial Annual Report

13. Reading
Subramaniyam, K. R., & Wild, John,J. (2009). Financial Statement Analysis (10th ed.), chapter 1