Financial

Statement
Analysis

K.R. Subramanyam

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 Chapter Objectives
• Explain business analysis & how it relates to financial statement
analysis
• Identify & discuss different types of business analysis
• Describe the component analyses that constitutes business analysis
• Explain business activities & their relation to financial statements
• Describe the purpose of each financial statement and how they are
interlinked
• Identify relevant analysis information beyond financial statements
• Analyze and interpret financial statements as a preview for more
detailed analyses
• Apply several basic financial statement analysis techniques
• Define and formulate some fundamental valuation models
• Explain the purpose of financial statement analysis in an efficient
market
 1-27

Balance Sheets
 1-28

Balance Sheet

Total Investing = Total Financing

= Creditor Financing + Owner Financing

Colgate Financing
(in $billions)
$12.724 = $10.183 + $2.541
 1-29

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
 1-30

Income Statement
 1-32

Statement of Cash Flow

 1-33

Retained Earnings, Comprehensive Income,

and Changes in Capital Accounts
 1-34

Retained Earnings, Comprehensive Income,

and Changes in Capital Accounts
 1-35

In which of the previous financial

statements would an analyst find the
investing, financing and operating
activities reflected?
 1-37

Comparative Income Statements

 1-39

Common Size Balance Sheets

 1-40

Common Size Income Statements

 1-46

Analysis Preview
Debt (Bond) Valuation

Bt is the value of the bond at time t

It +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)
 1-47

Analysis Preview
Equity Valuation

Vt is the value of an equity security at time t

Dt +n is the dividend in period t+n
k is the cost of capital
E refers to expected dividends
 1-48

Analysis Preview
Equity Valuation - Free Cash Flow to Equity
Model

FCFt+n is the free cash flow in the period t + n [often

defined as cash flow from operations less capital
expenditures]
k is the cost of capital
E refers to an expectation
 1-49

Analysis Preview
Equity Valuation - Residual Income Model

BV is the book value at the end of period t

t

Rit+n is the residual income in period t + n [defined as

net income, NI, minus a charge on beginning
book value, BV, or RIt = NIt - (k x BVt-1)]
k is the cost of capital
E refers to an expectation