GA20403/GB20003

International Financial Statement Analysis

Name: Nurjeehan Binti Ayub

Phone: 087-466525

Email: nurjeehana@ums.edu.my

Room No: 1022, Level 10 KAL Tower

Reference Book: Subramanyam, K.R. (2014). Financial Statement

Analysis, Eleventh edition. New York: McGraw-Hill Education.
Price: RM80.00
Assessment

Elements Weightage (%)

Quizes 10

Case Study (Group) 30

Midterm Exam 20

Final Exam 40

Total 100
LU1
OVERVIEW OF INTERNATIONAL
FINANCIAL STATEMENT ANALYSIS
Learning objectives:
1. Understand business analysis and its relation to financial statement.
2. Describe the purpose of each financial statement and linkages
between them.
3. Apply several basic financial statement analysis techniques.
4. Define and formulate some basic valuation models.
Overview
Financial Statement
Business Analysis Analysis -- Tools

Comparative analysis
Types of business Components of
analysis business analysis

Business environment Common-size analysis

Credit analysis
& strategy analysis

Ratio analysis
Equity analysis Accounting analysis

Cash flow analysis

Others Financial analysis

Valuation
Prospective analysis

Valuation
Business Analysis
• Process of evaluating a company’s economic prospects and risks.
• The analysis includes:
1. Company’s business environment
2. Strategies
3. Financial position and performance
Process of Business Analysis
Input Process Output

Information Evaluate risk & prospects Business decisions

 Business environment  Equity/debt valuation

 Credit risk assessment

 Company strategy
Non-financial
issues/factors  Earnings predictions
 Company’s financial
performance & position  Audit testing
Financial accounting
information  Compensation negotiation

7
Types of Business Analysis
Credit Analysis Equity Analysis
 Ability to meet obligations;  Equity investors;

Trade creditors
 Downside risks & upside
 Creditors potential;
Debt holders

 Downside risk Technical analysis Fundamental analysis

 Charting  Determine intrinsic

value
Liquidity Solvency
 Patten in the price/  Analysis & interpret:
 Current assets  LT profitability volume history  economy
 Current liabilities  Capital (financing)
 industry
 Predict future price  company
structure
 Cash flows movement
Uses of Business Analysis
1. Managers
 Provide clues to strategic change in operating, investing and financing
activities.
 Evaluate competitor’s profitability and risk.

2. Mergers, acquisition and divestitures

 Identify potential targets and determine their values

 Determine whether and how much capital value is created

3. Financial Management
 Assess the impact of financing decisions on both future profitability and
risk
Uses of Business Analysis
4. Directors
 Help in fulfilling their oversight responsibilities

5. Regulators
 Audit tax returns and check the reasonableness of reported amounts.

6. Labor Unions
 Collective bargaining negotiations

7. Customers
 Determine the profitability
Component Process of Business Analysis
Business
Environment &
Strategy Analysis

Industry Strategy
Analysis Analysis

Financial
Statement
Financial Analysis
Accounting Analysis Prospective
Analysis Analysis
Analysis
of Sources
Profitability &Uses of Risk
Analysis Funds Analysis

Cost of Capital Estimate Intrinsic Value

11
Business Activities
Elements of Financial Statements

Income Sharehol Cash

Balanc Statemen ders’
e Sheet t Equity Flow
●
Summary of Inflows and
●

Informatio
●
revenues and
The value
●
outflows of
n about the expenses of the cash
financial incurred entity to equivalents
●
Indicates from business
position profit or loss the owner activity.
Analysis Tools
1. Comparative Analysis
I. Year-to-year change analysis
II. Index-number trend

2. Common-size financial statement analysis

3. Ratio analysis
4. Cash flow analysis
5. Valuation
End of LU1
Accounting Analysis
Financial Analysis
Prospective Analysis
Fundamental Analysis: Intrinsic Value

Investment Strategy
The intrinsic value of the shares is determined based upon
these three analyses:
Intrinsic value > Market value Buy

Intrinsic value < Market value Sell

Intrinsic value = Market value Hold

Balance Sheet
Balance Sheet

Total Investing = Total Financing

= Creditor Financing + Owner Financing

Colgate Financing
(in $billions)
$12.724 = $10.183 + $2.541
Income Statement
Income Statement

Revenues – Cost of goods sold = Gross Profit

Gross profit – Operating expenses = Operating Profit

Colgate’s Profitability
(in $billions)

$16.734 - $7.144 = $9.590 Gross Profit

$9.590 - $5.749= $3.841 Operating profit
Shareholder’s Equity
Cash Flow
Comparative Analysis
Year-to-year change analysis

$16,734-$15,564
$1,170 ÷ $15,564
Index-Number Trend Analysis

Calculating the revenues

𝐶𝑢𝑟𝑟𝑒𝑛𝑡
  𝑦𝑒𝑎𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 $ 16,734
𝑋 100= =108
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑏𝑎𝑙𝑎𝑛𝑐𝑒 $ 15,564
Common-Size Income Statement
$7,144 ÷ $16,734
Ratio Analysis
Ratio Analysis
Credit (risk) Analysis:
I. Liquidity- evaluate the ability to meet short-term obligations
II. Capital Structure and Solvency- to assets the ability to meet long-term obligations
Profitability Analysis:
III. Return on Investment- assess financial rewards to the supplier of equity and debt
financing
IV. Operating Performance- evaluate profit margins from operating activities
V. Asset Utilizations- assess effectiveness and intensity of assets in generating sales
(turnover)
Cash Flow Analysis
Valuation
Valuation
Market Measures
 Measurereturns to stockholders and the value the marketplace puts on
a company’s stock
 Reporting of these numbers has a significant impact on stock price
changes in the marketplace.
 Thorough analysis of a company, its environment, and its financial
information offers a much better gauge of future prospects of the
company than looking exclusively at these ratios.
Valuation Models

Debt (Bond) Valuation

Btt is the value of the bond at time t

Itt +n
+n
is the interest payment in period t+n
F is the principal payment (usually the debt’s face value)
r is the investor’s required interest rate (yield to maturity)
Valuation Models
Equity Valuation - Residual Income Model

BV is the book value at the end of period t

tt

Rit+n
t+n
is the residual income in period t + n [defined as
net income, NI, minus a charge on beginning book
value, BV, or RItt = NItt - (k x BVt-1
t-1
)]
k is the cost of capital
E refers to an expectation