Chapter 8: financial statement analysis

Question 1

what is financial statement analysis

Answer 1

transform raw financial numbers in meaningful insights for decision-making

Question 2

give the discriptive tools

Answer 2

summary statistics

financial ratio’s

vertical analysis

horizontal analysis

Question 3

give the diagnostic tools

Answer 3

benchmark comparison

drill-down analysis

regression & correlation analysis

Question 4

give the predictive tools

Answer 4

forecasting future performance:
- time series analysis
- leverage extern/predictions

Question 5

give the prescriptive tools

Answer 5

optimize decisions
- cash flow and valuation analysis
- sensitivty analysis

Question 6

Title: Ratio Analysis – 4 Types

Front: What are the 4 main types of financial ratios and what do they show?

Answer 6

Liquidity → Can company pay short-term obligations?

Solvency → Is it stable long-term (e.g. debt)?

Activity → How efficient are assets used?

Profitability → Can it generate profit?

Question 7

dupont formula

what does the dupont analysis do?

Answer 7

It breaks down ROE into:

Profit Margin × Asset Turnover × Equity Multiplier
→ Shows what drives company performance

RATIO THAT SHOWS HOW MUCH PROFIT COMPANY MAKES FOR EVERY DOLLAR OF SHAREHOLDERS

Question 8

vertical analysis

what is vertical analysis used for

Answer 8

Shows each line item as a % of a base total

Income Statement → % of sales

Balance Sheet → % of total assets
→ Useful for comparing differently sized firms

Question 9

horizontal (trend analysis)

what is horizontal analysis and what is indexing

Answer 9

Compares same item over time

Indexing formula: (Current / Base) × 100
→ Base year = 100
→ Reveals growth or decline

Question 10

Title: Combination of Techniques
Front: Why use a combination of methods?
Back:

Answer 10

Vertical = what is big

Horizontal = how it changed

Ratios = how it performs

Benchmarks = how it compares
→ Together = full picture

Question 11

:Data Visualizations

What tools help visualize financial data?
Back:

Answer 11

Data Visualizations
Front: What tools help visualize financial data?
Back:
Sparklines → Tiny trends next to rows

Heat Maps → Use color to show size

Sunburst Charts → Show breakdowns by layer (e.g. cost types)

Question 12

sentiment analysis

what is sentiment analysis and why use it?

Answer 12

Analyzes TONE of reports

Classifies words: Positive, Negative, Uncertain, etc.

More negative tone = often lower stock returns

Question 13

XBRL Tags

What is the difference between standard and custom XBRL tags?

Answer 13

Standard taxonomy: official, consistent → easy to compare

Custom tags: company-defined → harder to compare, risk of hiding info

Question 14

drill down analysis

Answer 14

You start with a total or high-level number, and then zoom in step-by-step to find where the difference or problem comes from.

You see that travel costs increased by €10,000 this year.
With drill-down, you:
Look at which department spent more
Then which employee
Then which type of travel (e.g. flights, hotels)

Question 15

thing with XBRL

standard taxonomy

Answer 15

standard taxonomy: standardised list of tags used bij all companies in XBRL reports –> simple and comparable

BUT: if standard tag for unique items not enough –> CUSTOM TAG

problem:
inconsistent tagging= poor data quality
widespread use of custom tags reduces comparability
–> leads to frustrations