:

The the

financial
the
financial the role
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of a company analysis. analysis
4.1. THE FINANCIAL STATEMENTS

4.2. COMPARISION ANALYSIS

4.3. FINANCIAL RATIOS

4.4. AWARENESS USING FINANCIAL STATEMENTS

AND FINANCIAL RATIOS
4.1. Financial Statements

Financial Statements

5.4
 4.1. Financial Statements

4.1.1. The balance sheet

The balance sheet is of the firm.

The balance sheet has two sides

Assets Liabilities
and the
owners'
equity 5.5
 4.1. Financial Statements

Asset Capital

Short
Liabilities
term
asset

Long Equity
term
asset
5.6
Assets = Liabilities + Shareholders’ equity
 4.1. Financial Statements

4.1.1. The balance sheet

4.1.1.1. Asset

▪ Assets are classified as current and fixed.

▪ A fixed asset is one that has a relatively long life.
Fixed assets can be either tangible, such as a truck
or a computer, or intangible, such as a trademark or
patent.
▪ A current asset has a life of less than one year. This
means that the asset will convert to cash within 12
months.

5.7
 4.1. Financial Statements

4.1.1. The balance sheet

4.1.1.2. Liabilities and the owner’s equity

Liabilities:
▪ These are classified as either current or long-term.
▪ Current liabilities, like current assets, have a life of less than
one year (meaning they must be paid within the year)
▪ A debt that is not due in the coming year is classified as a
long-term liability.
Equity consists of Owner's equity & Other sources and
funds 5.8
 4.1. Financial Statements

4.1.1. The balance sheet BALANCE SHEET

As at 31 December Year N
Ending
ASSETS balance Beginning balance

A- CURRENT ASSETS 1000 800

I. Cash and cash equivalents 50 100
II. Short-term financial investments 0 0
III.I. Short-term receivables 550 200
IV. Inventories 400 500
V. Other current assets 0 0

B- NON-CURRENT ASSETS 2000 1200

I. Non-current receivables 0 0

II. Fixed assets 2000 1200

III. Investment property 0 0
IV. Long-term investments 0 0
V. Other long-term assets 0 0
5.9
TOTAL ASSETS 3000 2000
 4.1. Financial Statements

4.1.1. The balance sheet

Beginning
LIABILITIES AND OWNER'S EQUITY Ending balance balance
A- LIABILITIES 2200 1300
I. Current liabilities 1000 500
II. Non-Current liabilities 1200 800
B- OWNERS’ EQUITY 800 700
I. Owners’ equity 800 700
II. Other sources and funds 0 0
TOTAL LIABILITIES AND OWNER'S
EQUITY 3000 2000

5.10
 4.1. Financial Statements

4.1.1. The balance sheet

4.1.1.3. Market value versus Book value

▪ The values shown on the balance sheet for the firm’s assets are
book values and generally are not what the assets are actually
worth.
▪ Market value and book value might be somewhat similar because
current assets are bought and converted into cash over a
relatively short span of time. In other circumstances, the two
values might differ quite a bit.
▪ Whenever we speak of the value of an asset or the value of the
firm, we will normally mean its market value.
5.11
 4.1. Financial Statements

4.1.2. The income statement

The Income Statement measures performance over

some period of time, usually a quarter or a year.
The income statement equation is:

Net
income
Balance sheet as a snapshot, then
Expenses
you can think of the income statement
as a video recording covering the
Income tax period between before and after
pictures.

5.12
 4.1. Financial Statements

4.1.2. The income statement

The X company’s income statement for the year N

ITEMS Current year/period Previous year/period

1. Net sales 10,000 8,000
2. Cost of goods sold 7,000 5,500
3. Gross profit 3,000 2,500
4. Financial income 300 500
5. Financial expense 200 150
In which: Loan interest expense 150 100
6. Sales expenses 1,000 1,150
7. Administrative expenses 1,500 1,200
8. Profit from operations 600 500
9. Other income 100 50
10. Other expense 50 30
11. Other profit 50 20
12. The total profit before tax 650 520
13. Income tax 162.5 130
14. Net profit 487.5 390
5.13
 4.1. Financial Statements

4.1.2. The income statement

4.1.2.1. Revenue
▪ Revenue is the value that a company actually receives
during a specific period, including discounts and
deductions for returned merchandise.

▪ Revenue is also known as ………………………………..

▪ Revenue = Q.P

5.14
 4.1. Financial Statements

4.1.2. The income statement

4.1.2.2. Expense
▪ Expense is the economic cost that a business incurs
through its operations to earn revenue.

▪ There are possibly an infinite number of expenses

depending on the nature and size of the business. They
can be: Cost of goods sold, operating expense, interest
expense…

5.15
 4.1. Financial Statements

4.1.2. The income statement

4.1.2.2. Expense
Expense Classification
▪ Classification According to Functions: manufacturing
cost, administration cost, selling and distribution cost and
research and development cost.

▪ Classification According to Variability and Behaviour:

fixed costs, variable costs

▪ Others Classification: Text book

5.16
 4.1. Financial Statements

4.1.2. The income statement

4.1.2.3. Income
▪ EBIT

▪ EBT

▪ NI

5.17
 4.1. Financial Statements

4.1.3. Cash flow statement

in out

5.18
 4.1. Financial Statements

4.1.3. Cash flow statement

4.1.3.1. Sources and uses of cash

Sources of cash: …………………………………..

Uses of cash: …………………………………………….

What we need to do is to trace the changes in the firm’s

balance sheet to see how the firm obtained and spent its
cash during some period.
 4.1. Financial Statements

4.1.3. Cash flow statement

4.1.3.1. Sources and uses of cash
The XYZ Balance Sheet
Lialbilities and
Assets 2016 2017 Owners'Equity 2016 2017
Current assets 642 708 Current liabilities 1074 997
Cash 84 98 Accounts payable 312 344
Account
receivable 165 188 Notes payable 231 196
Inventory 393 422 Long-term debt 531 457
Fixed assets 2731 2880 Owners'equity 2299 2591
Net plant and
equipment 2731 2880 Common stock 500 550
Total assets 3373 3588 Retained earnings 1799 2041
Total lialbilities and
Owners'Equity 3373 3588
 4.1. Financial Statements

4.1.3. Cash flow statement

4.1.3.1. Sources and uses of cash

The XYZ Sources and uses of cash

Amount Amount of
Sources of cash % Uses of cash %
of money money
Increase in Increase in
accounts payable accounts receivable
Increase in Increase in
common stock inventory
Increase in Decrease in notes
retained earnings payable
Decrease in long-
Total sources
term det
Net fixed asset
acquisitions
Net addition to cash
Total uses
 4.1. Financial Statements

4.1.3. Cash flow statement

4.1.3.2. The cash flows statement

Statement of cash flow

1. Cash flows from operating

activities

2. Cash flows from investing

activities

3. Cash flows from financing

activities
Ex: Text book p116-119
 4.1. Financial Statements

4.1.4. Notes to financial statements

Notes to financial statements

I. Nature of operations
1. Company's ownership
2. Operating field
3. Main operations
II. Applied accounting period, accounting currency
1. Accounting period
2. Standard currency unit used in accounting
III. Applied accounting system
1. Applied accounting system
2. Applied accounting form
IV. Statement on the compliance with the Vietnamese accounting system
and standards
V. Applied accounting policies
VI. Additional information on the items of Balance sheet, Income statement,
Cash flow statement
VII. Other information
 4.2. Comparison Analysis

4.2.1. Common-size statements:

Common-size statements express each item on the balance

sheet as a percentage of assets (Common-Size Balance
Sheets) and to express each item on the income statement as
a percentage of sales (Common-Size Income Statements), or
each item can be expressed as a percentage of total sources
(or total uses) (Common-Size Statements of Cash Flows).

Ex: Table 4.7 Text Book p121

 4.2. Comparison Analysis

Table 4.7 Common-Size Balance Sheets XYZ Corporation Year N-1 and Year N

Assets N-1 N Change

Current assets
Cash 2.5% 2.7% 0.2%
Account receivable 4.9% 5.2% 0.3%
Inventory 11.7% 11.8% 0.1%
Fixed assets
Net plant and equipment 81.0% 80.3% -0.7%
Total assets 100% 100% 0.0%
Liabilities and Owner Equity N-1 N Change
Current liabilities
Accounts payable 9.2% 9.6% 0.3%
Notes payable 6.8% 5.5% -1.4%
Long-term debt 15.7% 12.7% -3.0%
Owner equity
Common stock 14.8% 15.3% 0.5%
Retained earnings 53.3% 56.9% 3.5%
Total liabilities and Owner Equity 100.0% 100.0% 0.0%
 4.2. Comparison Analysis

4.2.2. Common-base-year financial statements:

Common-base-year financial statements: choose a base

year and then express each item relative to the base
amount to find the trend.

Ex: Table 4.8 Text Book p122

 4.2. Comparison Analysis

Table 4.8 : Common-Base Year Balance Sheets ABC Corporation

Year N-1 and Year N

Assets N-1 (VND million) N (VND million) Common-Base Year

Current assets 642 708 10.28%
Cash 84 98 16.67%
Account receivable 165 188 13.94%
Inventory 393 422 7.38%
Fixed assets 2,731 2,880 5.46%
Net plant and equipment 2,731 2,880 5.46%
Total assets 3,373 3,588 6.37%
Liabilities and Owner Equity N-1 N
Current liabilities 1,074 997 -7.17%
Accounts payable 312 344 10.26%
Notes payable 231 196 -15.15%
Long-term debt 531 457 -13.94%
Owner equity 2,299 2,591 12.70%
Common stock 500 550 10.00%
Retained earnings 1,799 2,041 13.45%
Total liabilities and Owner Equity 3,373 3,588 6.37%
 4.2. Comparison Analysis

4.2.3. Cross –sectional Analysis:

Cross-sectional analysis is a type of analysis where an

investor, analyst or portfolio manager compares a
particular company to its industry peers. Cross-sectional
analysis may focus on a single company for head-to-
head analysis with its biggest competitors or it may
approach it from an industry-wide lens to identify
companies with a particular strength.
 4.3. Financial Ratios

*4.3.1. Liquidity measures

+ Current Ratio:
Current assets
Current ratio =
Current liabilities

+ Quick (or Acid-Test) Ratio:

Current assets – Inventory
Quick ratio =
Current liabilities

5.29
 4.3. Financial Ratios

+ Cash Ratio:
Cash and marketable securities
Cash ratio =
Current liabilities

+ Times Interest Earned Ratio:

5.30
 4.3. Financial Ratios

*4.3.2. Assets Management

Inventory Turnover = Cost of Goods Sold/Average
Inventories

Days’ sales in inventory (DSI) = 360 days / Inventory

Turnover
 4.3. Financial Ratios

*4.3.2. Assets Management

+ Receivables Turnover and Days’ Sales Outstanding (DSO)
Sales
Receivables turnover =
Average Accounts receivables

360 days
Days Sales Outstanding (DSO) =
Receivables turnover

Average Accounts receivables

=
Average sales per day
5.32
 4.3. Financial Ratios

*4.3.2. Assets Management

+ Payables turnover and days payables outstanding (DPO):

5.33
 4.3. Financial Ratios

*4.3.2. Assets Management

+ Cash Conversion Cycle:

Cash conversion cycle measures how many days the firm

needs to complete a cycle of cash. It is calculated by taking the
Days Sales Outstanding plus Days Sales Inventory minus Days
Payables Outstanding:
CCC = DSO +DSI – DPO

5.34
 4.3. Financial Ratios

*4.3.2. Assets Management

+ Working Capital Turnover:

+ Total Asset Turnover:

5.35
 4.3. Financial Ratios

* 4.3.3. Asset and Capital Structure Ratios

+ Asset structure: + Capital structure:

Current assets Total debts

Current asset ratio = Debt ratio =
Total assets
Total assets
Equity ratio = 1 – Debt ratio
Non-current asset ratio = 1 – Current
asset ratio Debt – Equity Ratio = Total Debt/Total Equity

5.36
 4.3. Financial Ratios

*4.3.4. Profitability measures:

+ Profit Margin or Return on Sales (ROS):
Net profit
Profit Margin (ROS) =
Sales (or Net sales)

+ Basic Earning Power (BEP):

EBIT
BEP =
Average Total assets

5.37
 4.3. Financial Ratios

+ Return on Assets (ROA):

Net Profit
Return on assets =
Average Total Assets

+ Return on Equity (ROE):

Net Profit
Return on equity =
Average Total equity

5.38
 4.3. Financial Ratios

*4.3.4. Market value measures:

+ Earnings per share (EPS):

EPS = (Net Income - Dividends on Preferred Stock) / Total Outstanding

Shares
+ Book value per share (BVPS):
BVPS = (Total Shareholder Equity - Preferred Equity) / Total Outstanding
Shares

5.39
 4.3. Financial Ratios

*4.3.4. Market value measures:

+ Price-Earnings Ratio:

+ Market-to-Book Ratio:

5.40
 4.3. Financial Ratios

* 4.3.6. The Du Pont Identity:

ROA = Profit margin x Total assets turnover
Net profit Net sales
= x
Net sales Total Assets

Net profit Net profit Total Assets

ROE = = x
Equity Total assets Equity

Net Profit Sales Total assets

= x x
Sales Total assets Equity
= Profit margin x Total assets turnover x Equity multiplier
5.41
 4.3. Financial Ratios

Return on equity

Return on Assets Multiplied Assets/Equity

by

Profit margin Multiplied Total assets

by turnover

Profit after Net sales Net sales Divided Total assets

Divided
tax by
by
Sales Subtracted
Cost of goods Current Non-current
from Added
sold assets assets
to
Interest

Corporate tax 5.42

 4.3. Financial Ratios

+ The Sustainable growth rate:

g = Retention rate x ROE0
= (1 – Dividend payout ratio) x ROE0
= ROS x Total asset turnover x Equity multiplier x Retention rate

depends explicity on factors

5.43
4.3. Awareness using financial statements and financial ratios

Awareness using financial

statements and financial ratios
✓ Historical
✓ Historical versus current cost
✓ Inflation
✓ Aggregation
✓ Operational changes
✓ Accounting policies
✓ Business conditions
✓ Interpretation
✓ Company strategy
✓ Point in time
5.44