Corporate Finance

Financial Statement Analysis

Presented By:
Syed Nabeel
Fahad Ghani
Ali Raza
Hasnain Raza
Aslam Ali
Tanzeel Ghazdar

BB-2500
BM-1284
BME-1940
BME-1574
BME-35168
BME-1646

Learning Objectives
Perform a horizontal analysis of
comparative financial statements
Perform a vertical analysis of financial
statements
Prepare and use common-size financial
statements
Use the statement of cash flows for
decisions

Types of Analysis
Horizontal Analysis
Study of percentage changes in comparative
financial statements
Considers changes over time.

Compute the Rupees amount of the

change from the base period to the later
period
Divide the rupees amount of the change
by the base period amount

Horizontal Analysis

Compute the rupees amount of change from 2002 to 2003

8,380 - 7,757 = 623
Divide the rupees amount of the change by the base period
amount to get the percentage change.
623 / 7,757 = 8.0%

Horizontal Analysis

Trend Percentages
Horizontal analysis over a period of several
years.
Indicates the direction a business is taking.

Vertical Analysis
Shows the relationship of a financial statement
item to its base.
Income Statement base is usually Total
Revenue
Balance Sheet base is usually Total Assets

Each income statement item

Vertical analysis %
Total revenue

Vertical Analysis

Other Financial Analysis Tools

Benchmarking
comparison of a company to a standard set
by others
allows one to compare companies of different
sizes

Financial Highlights - YoY

Breakup of Non Interest Income - YoY

Financial Highlights - QoQ

Breakup of Non Interest Income - QoQ

Ratio Analysis
A ratio expresses the relationship of one
number to another
Common types of ratios
Ability to pay current liabilities
Ability to sell inventory and collect receivables
Ability to pay long-term debt
Profitability
Analyze stock as an investment

Ability to Pay Current Liabilities

Working Capital = Current assets Current liabilities

Current Ratio = Current assets / Current liabilities

Cash + Short-term investments

+ Net current receivables
Acid-Test Ratio =

Current liabilities

Ability to Sell Inventory and

Collect Receivables
Inventory Turnover =
Accounts Receivable
=
Turnover

Cost of Goods Sold

Average Inventory
Net Sales
Average net
accounts receivable

One days sales = Net sales / 365

Days sales in average
=
accounts receivable

Average net
accounts receivable
One days sales

Ability to Pay Long-Term Debt

Debt Ratio

Total Liabilities
Total Assets

Times Interest
Earned

Operating Income
Interest Expense

Measure Profitability
Return on Sales

Net Income
Net Sales

Rate of Return
Net Income + Interest Expense
=
on Total Assets
Average total assets

Rate of Return
on Common
=
Stockholders Equity

Net
Preferred
Income
Dividends
Average Common
Stockholders Equity

Measure Profitability
Earnings per
share of
common stock

Net
Preferred
Income
Dividends
=

Number of shares of
common stock
outstanding

Analyzing Stock Investments

Market price per
share of common stock
Price/Earnings Ratio =

Dividend yield on
common stock

Earnings per Share

Dividend per share
of common stock

Market price per share

of common stock

Analyzing Stock Investments

Book value per

=
share of
common stock

Total
stockholders
equity

Preferred
equity

Number of shares of common

stock outstanding