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Financial Analysis: A User Approach Chapter 1
Financial Analysis is the use of financial and other information to form judgments leading to decisions.
Examples of Decisions:
Continue or discontinue its main operation or part of its business Make or purchase certain materials in the manufacture of its product Acquire or rent/lease certain machineries and equipments in the production of its goods Issue stocks or negotiate for a bank loan to increase its working capital Make decisions regarding investing or lending capital
Our focus:
Credit decisions Equity investments decisions (including M&A)
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Basic Process:
- Identify purpose of analysis
- Understand and document an overview of the company
- Perform quantitative financial analysis
- Perform detailed accounting analysis
- Summarize and document the overview, quantitative, and accounting analysis
- Present a recommendation based on your work
Step 1 – Identify the Purpose of Your Analysis
The purpose will dictate the components and depth of your analysis Financial and other information will be the focus of your work regardless of your purpose Example – Lending Decision
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Example – Seagate Technology (STX) o SIC Code – 3572 Manufacturing (3) Industrial Machinery and Equipment (35) Computers and Office Equipment (357) Computer Storage Devices (3572) o NAICS Code – 334112 Manufacturing (33) Computer and Electronic Product Manufacturing (334) Computer and Peripheral Equipment Manufacturing (3341) Computer and Peripheral Equipment Manufacturing (33411) Computer Storage Device Manufacturing (334112) o Other Industry Companies Western Digital Iomega Quantum Sandisk EMC
Sources of Industry Analysis
Analysts Reports (Investext) Hoovers
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Business Strategy
Factors That Describe Business Strategy
Cost Leadership o Potential economies of scale o Efficient production methods o Low input prices (vertical integration for example) Product Differentiation o Commodity vs. Specialty o Availability of substitute goods Core Competencies o Typically industry specific
Example – Seagate
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Step 5 – Comprehensive Analysis
Summary of the Previous Analysis Red Flags Green Flags Executive Summary
Step 6 – Financial Analysis Decision
Driven by the Purpose
