Case «Analysis of financial statements of an international company»

The student must perform an analysis of financial statements according

to the companies listed on the site of the Wall Street Journal [1]. According to
the data of financial statements the student has to fill in tables 1 – 2 and
determine, which indicators have grown, draw conclusions.
 Table 1
Analysis of assets

Regular
Persentage, % Changes in the given period
(in thousands $)
Assets Percentage of
Growth (in Rate of
Jan 1, 21 Jan 1, 22 Jan 1, 21 Jan 1, 22 Growth, % the increase in
thousands $) increase, %
assets
8  (6 / 2)  9 = 6 / Σ6 (total
1 2 3 4 5 632 754
100 % assets) ×100

1. Current assets (total)

2. Fixed assets (total)

Total assets (total sum)

1+2
 Table 2
Analysis of liabilities and shareholders’ equity

Regular
Persentage, % Changes in the given period
(in thousands $)
Liabilities and shareholders’
Growth (in
equity Growth, Rate of Percentage of the
Jan 1, 20 Jan 1, 21 Jan 1, 20 Jan 1, 21 thousands
% increase, % increase in assets
$)
1 2 3 4 5 632 754 8  (6 / 2)  9 = 6 / Σ6 ×100
100 %

Current liabilities
Long-term debt
Other Liabilities
1 Total liabilities (current +
LT+other)
Deferred Taxes?

Total equity

Total liabilities and

equity
Financial analysis, though varying according to the particular interests of the analyst,
always involves the use of various financial statements – primarily the balance sheet
and income statement.

- The balance sheet summarizes the assets, liabilities, and owners’ equity of a business
at a point in time, and the income statement summarizes revenues and expenses of a
firm over a particular period of time.

- International and national accounting standard setters, are working toward

“convergence” in accounting standards around the world. “Convergence” aims to
narrow or remove accounting differences so that investors can better understand
financial statements prepared under different accounting frameworks.

- A conceptual framework for financial analysis provides the analyst with an

interlocking means for structuring the analysis. For example, in the analysis of external
financing, one is concerned with the firm’s funds needs, its financial condition and
performance, and its business risk. Upon analysis of these factors, one is able to
determine the firm’s financing needs and to negotiate with outside suppliers of capital.

- Financial ratios are the tools used to analyze financial condition and performance. We
calculate ratios because in this way we get a comparison that may prove more useful
than the raw numbers by themselves.

- Financial ratios can be divided into five basic types: liquidity, leverage (debt),
coverage, activity, and profitability. No one ratio is itself sufficient for realistic
assessment of the financial condition and performance of a firm. With a group of ratios,
however, reasonable judgments can be made. The number of key ratios needed for this
purpose is not particularly large – about a dozen or so.

- The usefulness of ratios depends on the ingenuity and experience of the financial
analyst who employs them. By themselves, financial ratios are fairly meaningless; they
must be analyzed on a comparative basis. Comparing one company with similar
companies and industry standards over time is crucial. Such a comparison uncovers
leading clues in evaluating changes and trends in the firm’s financial condition and pro-
fitability. This comparison may be historical, but it may also include an analysis of the
future based on projected financial statements.

- Additional insights can be gained by common-size and index analysis. In the former,
we express the various balance sheet items as a percentage of total assets and the
income statement items as a percentage of net sales. In the latter, balance sheet and
income statement items are expressed as an index relative to an initial base year.
 To make rational decisions in keeping with the objectives of the firm, the
financial manager must have analytical tools.

The firm itself and outside providers of capital – creditors and investors – all
undertake financial statement analysis.

The type of analysis varies according to the specific interests of the party
involved. Trade creditors (suppliers owed money for goods and services) are primarily
interested in the liquidity of a firm. Their claims are short term, and the ability of the
firm to pay these claims quickly is best judged by an analysis of the firm’s liquidity.
The claims of bondholders, on the other hand, are long term. Accordingly, bondholders
are more interested in the cash-flow ability of the firm to service debt over a long period
of time. They may evaluate this ability by analyzing the capital structure of the firm, the
major sources and uses of funds, the firm’s profitability over time, and projections of
future profitability. Investors in a company’s common stock are principally concerned
with present and expected future earnings as well as with the stability of these earnings
about a trend line. As a result, investors usually focus on analyzing profitability. They
would also be concerned with the firm’s financial condition insofar as it affects the
ability of the firm to pay dividends and avoid bankruptcy.

Internally, management also employs financial analysis for the purpose of

internal control and to better provide what capital suppliers seek in financial condition
and performance from the firm.

From an internal control standpoint, management needs to undertake financial

analysis in order to plan and control effectively. To plan for the future, the financial
manager must assess the firm’s present financial position and evaluate opportunities in
relation to this current position. With respect to internal control, the financial manager is
particularly concerned with the return on investment provided by the various assets of
the company, and with the efficiency of asset management. Finally, to bargain
effectively for outside funds, the financial manager needs to be attuned to all aspects of
financial analysis that outside suppliers of capital use in evaluating the firm. We see,
then, that the type of financial analysis undertaken varies according to the particular
interests of the analyst.