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Corporate Financial Statement Analysis

The document discusses corporate financial statement analysis. It describes the process of using relationships among a company's financial statements to gain insight into its operations. It outlines common methods of analysis including common-size statements and financial ratios. It also describes the key components of a DuPont analysis framework for analyzing return on equity.

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Ali ELAABAR
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37 views4 pages

Corporate Financial Statement Analysis

The document discusses corporate financial statement analysis. It describes the process of using relationships among a company's financial statements to gain insight into its operations. It outlines common methods of analysis including common-size statements and financial ratios. It also describes the key components of a DuPont analysis framework for analyzing return on equity.

Uploaded by

Ali ELAABAR
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Corporate Financial Statement Analysis

Financial statement analysis:

Process of using the relationships among a company’s financial statement numbers to gain
insight into its operations.

Methods of financial analysis:

- Common-size financial statement:

Convert a company’s raw financial statement numbers into percentage of total sales or
𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐵𝑜𝑡𝑡𝑜𝑚 𝑙𝑖𝑛𝑒
percentage of total assets. Example: 𝑃𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 = → e.g. .
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑇𝑜𝑝 𝑙𝑖𝑛𝑒

N.B: The raw data is considered as the data that has not been processed for use (Top-line
data is considered as raw data).

- Financial ratio analysis:

Examining the relationship between specific financial statement numbers.

Financial analysis process:

1. DuPont framework;
2. Common-size financial statement;
3. Additional ratios;
4. Follow-up with specific staff.
I. A review of the financial statements
1. The accounting equation

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒚 + 𝑬𝒒𝒖𝒊𝒕𝒚

Cash Accounts payable Capital


Inventory Loans Retained earnings
Equipment

𝑨𝒄𝒕𝒊𝒇 = 𝑫𝒆𝒕𝒕𝒆𝒔 + 𝑪𝒂𝒑𝒊𝒕𝒂𝒖𝒙 𝒑𝒓𝒐𝒑𝒓𝒆𝒔

Liabilities: are obligations to repay money or to provide a service in the future.

Owner’s equity: money provided to the company by the owners. We distinguish:

 Paid-In capital (les apports en capital): money (capital) that the owners put in a
business.
 Retained earnings (les réserves): profits that are reinvested in the company.

The fundamental financial statements:

 Balance sheet;
 Income statement;
 Statement of cash flows.

These financial statements are derived from the accounting equation.

2. Balance sheet

List of an organization’s assets and liabilities.

3. Income statement

𝑹𝒆𝒗𝒆𝒏𝒖𝒆𝒔 − 𝑬𝒙𝒑𝒆𝒏𝒔𝒆𝒔 = 𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆

Revenues: Assets generated in doing business → Cash from selling inventory, services.

Expenses: Assets consumed in doing business → Buying inventory, wages, rent, etc.

Net income: Net amount of assets generated by business through its operations.
4. Statement of cash flows

Cash in and Cash out.

Cash flows are separated into 3 categories:

- Operating activities: Cash collection from customers; Cash paid for inventory; Cash
paid for wages, rent, advertising.
- Investing activities: Investing in the business productive capacity; buying new
buildings; land or machines.
- Financing activities: Borrowing money; Repaying loans; Cash from investors; Paying
dividends.

N.B: Cash cows are the companies that generate massive cash from there operating
activities.

II. The DuPont Framework


1. Return on equity (ROE)

Return on equity (ROE) is a measure of financial performance calculated by dividing net


income by shareholders' equity. Because shareholders' equity is equal to a company’s assets
minus its debt, ROE is considered the return on net assets. ROE is considered a gauge of a
corporation's profitability and how efficient it is in generating profits. In simple words, ROE
measures the amount of the profit earned per dollar of investment.

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝑅é𝑠𝑢𝑙𝑡𝑎𝑡 𝑛𝑒𝑡


→
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑢𝑥 𝑝𝑟𝑜𝑝𝑟𝑒𝑠

N.B :
2. The DuPont framework

The DuPont analysis (also known as the DuPont identity or DuPont model) is a framework for
analyzing fundamental performance popularized by the DuPont Corporation. DuPont
analysis is a useful technique used to decompose the different drivers of return on equity
(ROE). The decomposition of ROE allows investors to focus on the key metrics of financial
performance individually to identify strengths and weaknesses.

2.1. The components of DuPont analysis

Leverage ratio: Financial leverage, or the equity multiplier, is an indirect analysis of a


𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔
company's use of debt to finance its assets.
𝑺𝒕𝒐𝒄𝒌𝒉𝒐𝒍𝒅𝒆𝒓 𝒆𝒒𝒖𝒊𝒕𝒚

Efficiency ratio: The asset turnover ratio measures how efficiently a company uses its assets
𝑻𝒐𝒕𝒂𝒍 𝒔𝒂𝒍𝒆𝒔/𝒓𝒆𝒗𝒆𝒏𝒖𝒆
to generate revenue.
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔

Profitability ratio: The net profit margin is the ratio of bottom line profits compared to total
revenue or total sales. This is one of the most basic measures of profitability. The profit
margin can be improved if costs for the owner were reduced or if prices were raised, which
𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆
can have a large impact on ROE.
𝑺𝒂𝒍𝒆𝒔/𝒓𝒆𝒗𝒆𝒏𝒖𝒆

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