Financial statement analysis Flashcards
Who are the two main information users?
- Shareholders
- Lenders
Why do shareholders and lenders need financial statement analysis?
They contribute capital
What type of information is most relevant to shareholders?
Net profit
What type of information is most relevant to lenders?
Risk level and short-term liabilities
What are the categories of financial statement analysis?
- Profitability
- Efficiency
- Liquidity
- Gearing
Why are financial ratios useful?
- They make analysis quicker & simpler
- They enable comparisons between firms at different scales
Who sets the accounting standard for financial ratios?
Nobody - there is no standard
What are the types of comparative financial statement analysis?
- Time-series analysis
- Cross-sectional analysis
What are potential issues with time-series analysis?
Changes in capital structure, economic conditions etc.
What are potential issues with cross-sectional analysis?
- Only useful for peers doing similar business
- Accounting policies & financing methods vary
What type of analysis relates to cost structure?
Profitability analysis
What ratio can be used to analyse both profitability & efficiency? Why?
ROCE, as it relates to both operating profit margin and net asset turnover
What are the limitations of ratio analysis?
- Conservatism & historical cost
- Basis for comparison
- Timing of measurement
- Lack of context
What is one result of conservatism on ratio analysis?
Companies with high intangible assets report higher ROA & ROE
What is one remedy to the ‘timing of measurement’ problem?
Take the average of several points throughout the year
