UNIVERSITY OF ECONOMICS HO CHI MINH CITY

OVERVIEW ON
FINANCIAL ANALYSIS

Objective and Content

Objective:
- To understand

what financial analysis is

- To understand importance of financial analysis
- To understand process of financial analysis
Content:
What

is financial analysis?
Framework of financial analysis
Tools and techniques used in financial analysis

What is financial analysis?

Financial

statement analysis is the process of applying

analytical tools to a companys financial statements to
understand the companys financial health and to make
decisions.

It

requires financial information, standard comparison,

analysis tools.

Potential Financial Statement Users

Managers

Directors

Government

Creditors

What types of questions

do each of these users
seek answers to?

Investors

Users of Statement Analysis

Internal
Internal Uses
Uses

External
External Uses
Uses
Trade

Creditors: Focus on
the liquidity of the firm.
Focus on the
long-term cash flow of the
firm.

Plan:

Focus on assessing the current

financial position and evaluating
potential firm opportunities.

Bondholders:

Control:

Shareholders:

Understand:

Focus on
the profitability and longterm health of the firm.

Focus on return on
investment for various assets and
asset efficiency.
Focus on
understanding how suppliers of funds
analyze the firm.

Common Six Step Analysis Approach

Identifying Objectives
(what for?)
1

Revising,
Updating

Collecting Data
(formal/informal)
2

Choosing
tools/techniques
6

Calculating/Analyzing

Making Decisions
5

Step 1: Identifying Objectives

I had
better
sell
that
stock
ASAP!

What
The companys
return on equity
has dipped
considerably over
the last period

Financial

is analysis objective?
What questions do analyst
need to answer?

Step 2: Collecting and Evaluating Information/Data

Formal Information
(Audited/Consolidated) Financial statements (and notes)
Auditors report
Annual Reports
MD&A
Supplementary schedules
Computerized data bases
o Investment funds
o Articles in popular/business press
o Info on industry norms/ratios
o Info on particular companies/industries
Websites

Informal Information

Step 2: Collecting and Evaluating Information/Data

Evaluating quality of Information/data is a process to
evaluate and adjust financial information/data collected
to better reflex the economic reality.
Comparability problems across firms and across time
Manager estimation error
Distortion problems

Earnings management
Distortion of business

Accounting
Risk

Step 3: Choosing tools/techniques for analysis

Horizontal/
Trend
Analysis
Vertical/
Structural
Analysis

Ratio
Analysis

comparison of a
companys financial
results across time.
comparison of
financial balances to
a base account from
the same company.
comparison of
different balances
from the financial
statements

Year to Year Approach

Base-Year-To-Date
Approach Index
analysis)

Common size financial

statements

Liquidity
Activity/Efficiency
Leverage/Solvency
Profitability
Market Valuation

The Example Co.s Balance Sheets Year-to year analysis

The Example Co.s Balance Sheets Year-to year analysis

The Example Co.s Income statement Year-to year analysis

The Example Co.s Indexed Balance Sheets

The Example Co.s Indexed Balance Sheets

The Example Co.s Indexed Income Statement

The Example Co.s Common Size Balance Sheets

The Example Co.s Common Size Balance Sheets

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The Example Co.s Common Size Income Statement)

Step 3: Choosing tools/techniques for analysis

COMPARISION ANALYSIS

Intra-Industry
Analysis

Financial Position

Trend Analysis

Trend

Intra-Industry Comparision
_Same industry
_Same size
_Same time
_ Position in the
Industry/market
_Financial strength

_Same business model.

_Same financial reporting
principles.

Step 3: Choosing tools for analysis

Nm 2007

HBC

SC5

DCC

Tng ti sn (t ng)

940.07

916.52

361.11

Doanh thu (t ng)

455.35

772.35

375.44

Doanh thu K.doanh a c

Tng trng doanh thu (%)

132.24
121.5%

61.04% 30.12%

Li nhun gp bin (%)

13.3%

9.46%

7.52%

Li nhun rng (t ng)

24.83

61.503

19.504

n by ti chnh

2.77

5.52

1.7

ROA

3.0%

8.51%

6.66%

ROE

8.3%

EPS (ng) cui k

59.07% 14.82%

3,689

5,960

1,970

P/E (x)

5.18

5.07

6.7

P/B (x)

0.49

1.88

0.61

Step 4: Calculating and Analyzing financial data

Applying tools/techniques to calculate or/and analyze

financial data

Difference between calculation and analysis

A good analysis is not simply to combine information, to
calculate ratios or to draw charts UNCOLLECTEDLY,
but to make them a COMPLETE AND INTENTIONAL
picture

Analysis is not to only to answer the question WHAT

HAPPEN, but also WHY and DOES IT FIT THE
COMPANYS STRATEGY?

Difference between calculation and analysis

Nokia (EUR mil.)

Motorola ($ mil.)
2005

2004

2003

DTT

36.843

31.323

23.155

LN H

4.696

3.132

1.273

DTT

2005

2004

2003

34.191

29.371

29.533

LN H

4.639

4.326

4.960

16%

-0.5%

NA

-12,8%

NA

% gDTT

18%

35%

NA

% gDTT

%g LNH

50%

146%

NA

%g LNH

10%

Step 5: Making decisions (answer the analysis questions)

Invest or not?
give loan or not?
what trouble is the firm facing?
realize M&A?
..

Step 6: Analysis Updating and Revision

Update information
Revise analysis
Change decision if any

Business
Environment and
Strategy Analysis

Industry
Analysis

Strategy
analysis

Financial
Analysis

Accounting
analysis

Profitability
analysis

Analysis of Sources and

Use of Funds

Prospective
analysis
Risk Analysis

Estimate Cost of capital

Intrinsic value

Financial Statement
Analysis

Financial Analysis
Framework

Top-Down Analysis Process

1.

Identify the industrys economic characteristics

2.

Identify company strategy

3.

Assess financial statement qualityadjust if necessary

4.

Analyze risk and profitability

5.

Prepare forecasted financial statements

6.

Value the firm

STEP 1: Industrys Economic Characteristics

Industrys Economic Characteristics

Can

use:

Porters

Five Forces
Economic Attributes Framework
..

Porters Five Forces

Buyer

power - relative bargaining power

LOW
Supplier

power

LOW
Rivalry

among existing firms

MODERATE

Threat

of new entrants

LOW
Threat

LOW

of substitutes

Implies
profitability is
HIGH

Economic Attributes Framework

Demand
Supply
Manufacturing
Marketing
Investing

& Financing

Economic Attributes Framework

(applied to soft drink/beverage industry)
Demand
Relatively insensitive to price
Low growth in U.S. but high growth
elsewhere
Not cyclical
Higher in warmer weather

Economic Attributes Framework

(applied to soft drink/beverage industry)
Supply
Two principal suppliers
High brand recognition
Domination of distribution channels
High barriers to entry

Economic Attributes Framework

applied to soft drink/beverage industry

Manufacturing
Manufacture of concentrate/syrup not capital
intensive
Bottling/distribution IS capital intensive
Simple process

Economic Attributes Framework

applied to soft drink/beverage industry
Marketing

Brand

recognition, established demand;

advertising can stimulate

Investing/Financing

Bottling/distribution

require long-term

financing
Profitability high, growth slow (in U.S.) leads
to excess cash flow
Other countries growth requires financing

STEP 2: Company Strategy

Nature

of product or service
niche market? Unique product?

Integration

within value chain

Geographical
Industry

diversification

diversification

STEP 3: Financial Statement Quality

Income

Statement

Balance

Sheet

Statement

of Cash Flows

Statement

of Shareholders Equity

First three required; most companies include all four.

STEP 4: Profitability and Risk Analysis

TOOLS:

Common-size

financial statements
Percentage change statements
Financial Statement Ratios
Profitability:

EPS, ROCE
Risk: CR, Debt to Equity

STEP 5: Forecast Financial Statements

Earnings

forecasts

Operating

Other

cash flow forecasts

key metrics

STEP 6: Value the Firm

Valuation based on:
Dividends
Earnings
Cash

flows

All three methods will give same value?

Q&A