Course Teacher Md.

Azizur Rahman Lecturer in Finance IIUC - DC

1/27/2014

aziz_fin_2004@yahoo.com

Defining Financial Analysis

Financial analysis is the process of evaluating financial and other information for decisionmaking. According to Business Dictionary, Financial Analysis is use and transformation of financial data into a form that can be used to monitor and evaluate the firm's financial position, to plan future financing, and to designate the size of the firm and its rate of growth. Financial analysis includes the use of financial statement analysis and funds-flow-adequacy ratio.

Assessment of the effectiveness with which funds (investment and debt) are employed in a firm, efficiency and profitability of its operations, and value and safety of debtors' claims against the firms assets.

1/27/2014

aziz_fin_2004@yahoo.com

Significance of Financial Analysis

i.

ii.

iii.

To make comparison of a firms performance within the firm or with that of other firms in the same line of business. To reveal its current strengths and weakness. To show whether the firms performance is either improved or deteriorated.

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aziz_fin_2004@yahoo.com

iv.

To suggest actions that the firm might enact to take advantage of the strengths and correct the weakness in the future.

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aziz_fin_2004@yahoo.com

Types of Financial Analysis

i.

ii.
iii. iv.

Fundamentals: This type deals with the forecast of any company, commodity, currency. Technical: This type uses charts and past behavior. Cycle: This type looks at the stage of the investment, is it in its growth stage or in its top. Inter Market: This type looks at the effect if one thing on other investments.

1/27/2014

aziz_fin_2004@yahoo.com

Objectives of Financial Analysis

From the view points of Shareholders, i) To judge the financial stability of an enterprise. ii) To measure the enterprise's short-term and long-term solvency. iii) To measure the enterprise's operating efficiency and profitability. iv) To compare intra-firm position, inter-firm position and pattern position within industry. v) To assess the future prospects of the enterprise.

Objectives cont.
From the view point of Lender, i) To assess managerial Performance ii) To assess the cash flow pattern iii) To assess the economic performance From the view point of Government, i) To assess the contribution to society ii) To ascertain business and products backgrounds iii) T evaluate the inflation effects

Six-step Process

Identify purpose of financial analysis Corporate overview Financial analysis techniques Detailed accounting analysis Comprehensive analysis Decision or recommendation

Tools & Techniques of Financial Analysis

i. ii. iii. iv. v. vi.

BEP or C-V-P analysis Capital budgeting technique Cash flow analysis Ratio analysis Variance analysis Leverage analysis

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vii.

vii. viii. ix.

Risk analysis & control technique. Earned value analysis. Sensitivity analysis. Simulation analysis.

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Limitations of Analysis of F.S.:

I.

II.

Limitations of Financial Statements: Financial Statements are the basis f financial analysis. Hence, the limitations of financial statements, such as influence of accounting concepts and conventions, personal judger disclosure of only monetary events, etc., are also the limitations of analysis and financial statements. Ignores the Price-Level, Changes: Financial analysis fails to disclose current worth of the enterprise, since it is based on .financial statements, which are merely a record of historical cost.

Continuing
Not. Free from Bias: In many situations, the accountant has to make a choice out of various alternatives available, e.g., choice in the method of depreciation choice in the method of inventory valuation. Since, the subjectivity is interest in personal judgment, the financial statements are therefore not free from bias. As a result, financial analysis also cannot be said to be free from bias. Window Dressing: The term window dressing means presentation of account that conceals vital facts and showing better position than what it actually is. On account of such a situation, financial analysis may not be a definite indicator of good or bad management

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