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To analyze the financial statements of a firm, one would go through the following steps: 1) Collect the company's financial statements from the past 3-5 years including the balance sheet, cash flow statement, income statement, and notes. 2) Analyze these statements by looking for large changes between years and reviewing the notes. 3) Calculate financial ratios to identify trends and compare the company's performance to competitors.

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47 views2 pages

Answer

To analyze the financial statements of a firm, one would go through the following steps: 1) Collect the company's financial statements from the past 3-5 years including the balance sheet, cash flow statement, income statement, and notes. 2) Analyze these statements by looking for large changes between years and reviewing the notes. 3) Calculate financial ratios to identify trends and compare the company's performance to competitors.

Uploaded by

Aimen Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. How would you analyze the financial statements of a firm? Explain each step thoroughly.

Answer:

Analyzing the financial statements of a firm is important for financial professional. This requires an
understanding of three key areas:

 The structure of the financial statements

 The economic characteristics of the industry in which the firm operates and

 The strategies the firm pursues to differentiate itself from its competitors.

However, for our purposes we will discuss the basic steps for you to start dabbling in the art of financial
analysis.

Step 1. Collect the company’s financial statements

From the last, three to five years including:

1. Balance Sheets

2. Cash Flow Statements

3. Income Statements

4. Shareholders equity statement

5. Other Comprehensive Income

Step 2. Analyze these financial statements

Moreover, scan them in order to look for large movements in specific items from one year to the next.

For instance; we will look into the numbers of fixed asset, or capital or stock trade either they grow or
fall or at what percentage they changed? What will be the impact of this changing on net profit of the
firm or in the operation of the company? Did the company sell some of its operation? Did the company
announced their new share during financial year? Compare it with previous year

Step 3. Make sure to review the financial statement’s notes.

We did in Best-way cement Annual report; Notes is explain the each step, which has taken during the
financial year with its detail and in-depth answer of taking any specific step. These notes may have
information that could be important in your analysis of the business.

Like significant accounting policies is important to know at the time of analysis.

Corporation and general information, Statement of compliance, approved accounting standard.

Step 4. Analyze the Balance:

Compare balance sheet with last year and examine if any things happens that may goes against the firms
operations. Moreover, to see if there are large changes in the company’s assets, liabilities, or equity.
Step 5. Examine the Income Statement to identify trends over time.

Compare Statement with last year and examine if any things happens that may goes against the firms
operations. Like is expense increases? What impact has the increased expense on revenue? Did the firm
cost of goods sold decrease? What did the firm taken into measurers that decreases the COGS

Step 6.Business is Shareholder’s Equity Statement.

Analysts look at the relationship between equity, liabilities and assets to determine a company's
financial stability. Examine that: if the company issued new shares, or bought some back? Has the
retained earnings account been growing or shrinking?”

Step 7. Analyze the company’s Cash Flow Statement.

The cash flow statement (CFS) measures how well a company manages its cash position, meaning how
well the company generates cash to pay its debt obligations and fund its operating expenses. To
measure that whether a company generates enough cash to meet its operating expenses.

Step 8. Calculate financial ratios.

Financial ratios can provide small business owners and managers with a valuable tool with which to
measure their progress against predetermined internal goals, a certain competitor, or the overall
industry. In addition, tracking various ratios over time is a powerful means of identifying trends in their
early stages.

Step 9. Company key competitor’s data.

An understanding of how your existing and potential customers rate the competition. A mechanism to
develop effective competitive strategies in your target market. An idea of what gives your company an
advantage over its competitors. A good idea of what your customers are in need of. Strategies for how
to expand into a new market.

Step 10.

Review the market data of the business’s stock price, as well as the Price to Earnings (P/E) Ratio.

Step 11. Review the Dividend Payout.

The Dividend Payout Ratio measures the percentage of a company’s net income given to shareholders in
the form of dividends.

Step 12. Value the firm.

While there are many valuation approaches, the most common is a type of discounted cash flow
methodology. These cash flows could be in the form of projected dividends, or more detailed techniques
such as free cash flows either to the equity holders or on enterprise basis. Other approaches may
include using relative valuation or accounting-based measures such as economic value added.

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