Financial Analysis and Reporting Lecture Notes

Financial Analysis and Reporting Lecture Notes I. Introduction to Financial Analysis A. Definition of Financial Analysis Financial analysis is the process of evaluating a company's financial performance, health, and stability by examining its financial statements and related data. It involves the interpretation of financial information to make informed decisions. B. Importance of Financial Analysis Decision-Making: Financial analysis helps in making informed decisions about investments, loans, and strategic planning. Risk Assessment: It aids in assessing the financial health and risk associated with an organization. Performance Evaluation: Companies use financial analysis to evaluate their own performance and compare it with industry benchmarks. C. Tools of Financial Analysis Financial Statements: Income Statement Balance Sheet Cash Flow Statement Ratios: Liquidity Ratios Profitability Ratios Solvency Ratios Efficiency Ratios II. Financial Statements A. Income Statement 1. Purpose Shows the company's profitability over a specific period. Includes revenues, expenses, and net income. 2. Components Revenue: Sales, interest, dividends, etc. Expenses: Cost of goods sold, operating expenses, interest, taxes. Net Income: Revenue - Expenses. 3. Analysis Evaluate the company's revenue growth and cost management. Assess profit margins and trends over time. B. Balance Sheet 1. Purpose Provides a snapshot of a company's financial position at a specific point in time. Assets, liabilities, and equity are listed. 2. Components Assets: Current and non-current (e.g., cash, inventory, property). Liabilities: Current and non-current (e.g., loans, accounts payable). Equity: Owner's investment in the company. 3. Analysis Assess liquidity, solvency, and financial leverage. Calculate the debt-to-equity ratio and working capital. C. Cash Flow Statement 1. Purpose Shows the cash inflows and outflows during a specified period. Operating, investing, and financing activities are categorized. 2. Components Operating Activities: Cash from core business operations. Investing Activities: Cash from buying/selling assets. Financing Activities: Cash from issuing debt/equity or paying dividends. 3. Analysis Determine the company's ability to generate cash. Identify the sources and uses of cash. III. Financial Ratios A. Liquidity Ratios 1. Current Ratio Current Assets / Current Liabilities Measures short-term liquidity. Ideal ratio > 1. 2. Quick Ratio (Acid-Test Ratio) (Current Assets - Inventory) / Current Liabilities A stricter measure of liquidity. B. Profitability Ratios 1. Gross Profit Margin (Gross Profit / Revenue) * 100 Measures profitability before operating expenses. 2. Net Profit Margin (Net Income / Revenue) * 100 Indicates the percentage of revenue that becomes profit. C. Solvency Ratios 1. Debt-to-Equity Ratio Total Debt / Total Equity Evaluates the proportion of debt financing. 2. Interest Coverage Ratio Earnings Before Interest and Taxes (EBIT) / Interest Expense Measures the company's ability to cover interest payments. D. Efficiency Ratios 1. Inventory Turnover Cost of Goods Sold / Average Inventory Measures how quickly inventory is sold. 2. Accounts Receivable Turnover Net Sales / Average Accounts Receivable Measures how quickly receivables are collected. IV. Conclusion Financial analysis is a critical skill for investors, creditors, and company management. Understanding financial statements and using ratios allows for informed decision-making and better financial performance evaluation.