2. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
3. Financial Statement Analysis: Introduction
Who uses Financial Statements
To Ensure
Government and Regulatory Bodies • Compatibility with Law
Tax department, Accounting • Quality of Disclosures
body, Securities regulator. • Protect interest of Claimholders
Creditors To Analyze
• Liquidity Position
Debt holders & Credit rating Agencies
• Repayment capacity
• Possibility of default
Investors
To Analyze
Retail Investors, Buy-side and sell-side • Profitability
analysts. • Sustainability
• growth
4. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
5. Cash Flow Statement: Introduction
The Cash Flow Statement: Construction
Net Income
Add: Depreciation Cash flow from operations
Add: (Increase) / Decrease in Accounts receivables indicates the cash the business has
Add: (Increase) / Decrease in Inventories generated from its core operations
Add: Increase / (Decrease) in Accounts payable and the amount of funds available for
Add: Increase / (Decrease) in Accrued Liabilities expansion and other activities.
Cash Flow from Operations2 (CFO)
Cash flow from Investing
indicates the cash the business has
Capital Expenditures
spent on expansion and investments
Investments
in other activities like investments in
Cash Flow from Investing (CFI)
marketable securities.
Debt raised
Debt repaid Cash flow from financing
Equity Capital Issued indicates the cash the business has
Share Buyback generated from raising and repayment
Dividends Paid of debt and equity capital.
Cash flow from Financing (CFF)
2 Using indirect method
6. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
7. Cash Flow Statement: Analysis
The Cash Flow Statement: Analysis
Net Income • Has depreciation risen considerably?
Add: Depreciation • Has the firm given more credit to
generate sales?
Add: (Increase) / Decrease in Accounts receivables
• Have inventories piled up due to lack of
Add: (Increase) / Decrease in Inventories demand?
Add: Increase / (Decrease) in Accounts payable • Can the firm get enough credit from
Add: Increase / (Decrease) in Accrued Liabilities suppliers?
Cash Flow from Operations2 (CFO)
• Does the firm have internal accruals for
Capital Expenditures expansion?
Investments • Has it invested sufficiently for future
Cash Flow from Investing (CFI) growth?
Debt raised
• Is the company having a healthy debt
Debt repaid
ratio?
Equity Capital Issued
• Has the it been able to repay its
Share Buyback obligations?
Dividends Paid • Would it be able to raise debt in future if
Cash flow from Financing (CFF) CFO falls short of Capex requirements?
2 Using indirect method
8. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
9. Income Statement: Introduction
Introduction to the Income Statement
Measure of Profitability
The income statement measures the income and expenditures of a company
during a given period and thus it measures profitability. It measures profitability
at 4 levels viz. Gross, Operating, Before tax and after tax.
Accumulated over a period of time
Unlike the balance sheet, the income statement measures the income and
expenditure over a given period of time, usually a quarter or an year.
Is a consequence of most3 Activities undertaken by a business
The income statement is a consequence of most of the activities a business
undertakes ranging from investments in capital, purchase of raw materials, due
to creditors and dues from customers, cash collections, tax payout, asset charges
etc. However, it is an incomplete story teller, which is completed after an
analysis of the other two statements.
3Off-balance sheet items and FCCBs may not be reflected in the Income Statement
10. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
11. Income Statement: Analysis
Analysis of the Income Statement
Sales Includes both cash and credit sales
Cost of Goods Sold
Gross Profit Includes Inventories, Wages, and
Selling, General & Administration expenses expenses related to producing goods
EBITDA Marketing, advertising and salary
Depreciation & Amortization
expenses.
EBIT / Operating Profit
Interest Depreciation of fixed assets and
Profit before tax / Pretax Income amortization of goodwill if any
Taxes
Profit After Tax / Net Profit Interest expense on debt
Includes taxes paid and deferred
Measures the effect of inflation and price competitiveness of the company
Measures the operational efficiency of the company
Measures the overall internal efficiency of the company
12. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
13. Balance Sheet: An introduction
An Introduction to the Balance Sheet
…is what company owes and owns on a
Assets = Liabilities + Stockholder’s Equity particular date.
Unlike the income statement, the Balance Sheet
is a snapshot of a company on a particular date.
Assets
Cash & Cash Equivalents It gives a insight into what was used to
Accounts Receivable
Inventories
generate sales
Fixed Assets The balance sheet gives an insight into the items
Goodwill and other intangibles used to generate sales i.e. Capital used.
Liabilities
Accounts Payable Complements the income and cash flow
Accrued Liabilities statement to form a holistic story
Short-Term debt The Balance sheet along with the cash flow and
Long-term debt income statement gives a clear picture of how
Stockholder’s equity funds are employed and how well are they
utilized.
14. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
15. Balance Sheet: Analysis
Table of Contents
Assets
Cash & Cash Equivalents Is the firm holding too much or too less Cash?
Accounts Receivable Has Accounts receivable increased suddenly?
Inventories Have inventories increased disproportionately to Sales?
Fixed Assets Has the company invested sufficiently in Fixed Assets for future
Goodwill and other intangibles growth? Has it used its Assets efficiently?
Has Accounts receivable increased suddenly?
Liabilities
Accounts Payable Have short-term liabilities fallen or increased drastically vis-à-vis
Accrued Liabilities sales?
Short-Term debt
Long-term debt Does it include contingent liabilities like convertible bonds or
FCCBs? What would be the cost for incremental borrowings for
Stockholder’s equity future Capex?
16. Table of Contents
Financial Statement Analysis: An Introduction
Cash Flow Statement: An Introduction
Cash Flow Statement : Analysis
Income Statement: An Introduction
Income Statement : Analysis
Balance Sheet: An Introduction
Balance Sheet: Analysis
Financial Statement Integration & Forecasting
17. Financial Statement Integration
Sales
Cost of Goods Sold
Net Profit Selling, General & Administration expenses
Add: Depreciation Depreciation & Amortization
Add: (Increase) / Decrease in Accounts receivables Interest
Add: (Increase) / Decrease in Inventories Taxes
Add: Increase / (Decrease) in Accounts payable Profit After Tax / Net Profit
Add: Increase / (Decrease) in Accrued Liabilities
[1] Cash Flow from Operations (CFO)
Assets
Capital Expenditures
Cash & Cash Equivalents
Investments
Accounts Receivable
[2] Cash Flow from Investing (CFI)
Inventories
Fixed Assets
Debt raised
Goodwill and other intangibles
Debt repaid
Equity Capital Issued
Liabilities
Share Buyback
Accounts Payable
Dividends Paid
Accrued Liabilities
[3] Cash flow from Financing (CFF)
Short-Term debt
Long-term debt
Net Cash [1] +[2] +[3]
Stockholder’s equity
18. Financial Statement Forecasting
Guidelines for Financial Forecasting│ First Principles
Top-Down Vs Bottom-up
Top-down approach also known as E-I-C approach Key drivers forecasting
Focuses on demand and its effect on company Key drivers like Sales, Cost of
fundamentals for key drivers. However, other parameters Goods Sold and Capital
are bottom-up, usually as a percentage of sales Expenditure are forecasted using
macro-economic indicators and
industry/company specific
factors like availability of funds
etc.
Bottom-up approach Key drivers forecasting
Focuses on historical growth and company Key drivers like Sales, Cost of
fundamentals alone. This gives a myopic picture of the Goods Sold and Capital
company and misrepresents true value. Expenditure are forecasted using
Historical trends like
CAGR, Moving average, time
series analysis and regression.
19. Reference Books
▬ The Analysis and Use of Financial Statements
Ashwinpaul Sondhi, Gerald White and Dov Fried
▬ International Financial Statement Analysis
Robinson, Greuning, Henry and Broihahn
▬ Financial Theory and corporate Policy
Thomas Copeland, Fred Weston and Kuldeep Shastri
