Financial Statements Analysis

1. Introduction

2. Accounting change

3. Profitability analysis

4. Risk analysis

5. Forecasting

6. Valuation

1. Introduction Back to Top

Capacity (facility) constraint: Large capacity creates higher entry barrier, and keep higher margin.

Competitive constraint: Severe competition lowers margin.

Operation leverage constraint: Higher operation leverage (higher fixed cost) leads to greater variability in ROA.

Cyclical economy constraint: Sensitivity to cyclical economy affects variability of ROA

Product life cycle constraint: Product life cycle affects ROA (At introduction of a product, ROA becomes lower)

2. Accounting change Back to Top

Accounting change often hide the true profitability and risk of a company.

3. Profitability analysis Back to Top

ROA = Profit margin x Assets turnover

4. Risk analysis Back to Top

5. Forecasting Back to Top

6. Valuation Back to Top


Intrinsic value approach:

Discounted Cash Flow or Discounted Dividends shows the value of a company.

  1. Forecasting future cash flows
  2. Deciding a discount ratio (WACC)

  • Interest tax shield effect
  • Equity cost should be substituted by ROCE.

  • Dividends growth model
  • Security Market Line Model

Relative value approach:

Competitive companies' market values can be adjusted based on a relative P/E ratio and a relative P/BV ratio.