FINANCIAL ANALYSIS

1 Defining Financial Analysis 2 A five-step approach is suggested for systematic financial analysis

1. Identify purpose of financial analysis

2. Corporate Overview

(a) Industry Analysis a. What is the industry? b. Relative size and significance c. Largest companies d. Geographic presence e. Business cycle effects f. Future potential

(b) Business Strategy Analysis a. Historical perspective b. Primary focus of operations c. Most important strategy d. Major operating segments e. Corporate outlook forecast

3 Financial Analysis Techniques

1. Qualitative Analysis
a. Industry e.g. High Tech b. Competitors c. Name of Products d. Growth Rate: High, Low e. Barriers to entry f. Economic Slow Down

g. Direct or Indirect Selling h. Made-to-order manufacturing or process

2. Quantitative Analysis
a. Comparative Financial Statements (Horizontal Analysis) i. Comparative Balance Sheet ii. Comparative Income Statement b. Common Size (Vertical Analysis) i. Common Size Balance Sheet ii. Common Size Income Statement c. Trend Analysis d. Financial Ratios i. Sales 1. Sales Growth ii. Profitability 1. Return on Assets 2. Return on Equity 3. Gross Profit Margin 4. Net Profit Margin 5. Operating Return on Total Assets iii. Asset Management

1. Asset Turnover 2. Fixed Asset Turnover 3. Current Asset Turnover 4. Days Receivable 5. Days of Inventory 6. Inventory Turnover 7. Turn and Earn iv. Financial Structure 1. Financial Leverage Multiplier 2. Debt to Equity and Debt to Assets 3. Current Debt to Equity 4. Long term Debt to Equity 5. Equity Turnover 6. Times Interest Earned v. Liquidity Management 1. Current Ratio 2. Quick Ratio 3. Working Capital 4. Days Payable vi. Expense Ratios 1. Cost of Goods Sold Ratio 2. Operating Expenses Ratio 3. Administrative Expenses Ratio 4. Selling Expenses Ratio 5. Financial Expenses Ratio e. Z-Score Model f. DuPonts Model Analysis

g. CAMEL Analysis (Banking Only Analysis) i. Capital Adequacy 1. Capital to risk weighted assets ratio 2. Capital to Liability ratio ii. Asset Quality

1. Non-Performing Loans to Total Loans 2. Earning Assets to Total Assets Ratio iii. Management 1. Total Expenditure to Income Ratio 2. Operating Expenditure to Total Expenditures 3. Earning per Employee Indicator 4. Interest Rate Spread 5. Operating Expense per Employee iv. Earnings and Profitability 1. Net Profit to Asset ratio 2. Net Profit to Equity Ratio 3. Net Interest Margin 4. Interest Expense to Total Assets 5. Non-Interest Expense to Total Assets 6. Interest Expense to Total Expenses v. Liquidity 1. Liquidity Assets to Total Assets Ratio vi. Other Indicator 1. Advances to Total Assets ratio 2. Investment to Total Assets ratio 3. Load to Deposit ratio h. Break-even Analysis i. Cash flow Analysis

4 Detailed Accounting Analysis

1. Does accounting information capture the underlying business reality? 2. Indentify areas of accounting flexibility

5 Financial Analysis Decision

Conclusion and Recommendations