CHAPTER 7:
Analysing
Financial Data
© Ediciones Pirámide
BEYOND FIGURES: Introduction to Financial Accounting
CAMACHO-MIÑANO, M.M.; AKPINAR, M.; RIVERO-MENÉNDEZ, M.J.;
URQUIA.GRANDE, E. and ESKOLA, A. (2012).
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Financial accounting 1.Chapter 7, Apuntes de Contabilidad Financiera
Asignatura: Contabilidad Financiera, Profesor: maria del mar camacho, Carrera: Administración y Dirección de Empresas, Universidad: UCM
Tipo: Apuntes
2013/2014
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CHAPTER 7:
Analysing
Financial Data
© Ediciones Pirámide BEYOND FIGURES: Introduction to Financial Accounting
CAMACHO-MIÑANO, M.M.; AKPINAR, M.; RIVERO-MENÉNDEZ, M.J.; URQUIA.GRANDE, E. and ESKOLA, A. (2012).
MOTIVATION OF THE CHAPTER 7
© Ediciones Pirámide BEYOND FIGURES: Introduction to Financial Accounting
NOKIA AND MICROSOFT
Read the article in the manual and try to answer these questions:
- Which company Nokia or Microsoft do you think performs better?
- Do you have a Nokia mobile telephone? Have you ever used one? Do you use an iPhone? Which one is better? Why?
- Currently, do you think Nokia is under control? Take a look in all resources you can.
Let’s read the chapter...
Index
7.1 Financial statement analysis.
7.2. Methods that can be used for analysis purposes.
7.3. Ratios.
7.4. Particular use of ratios: predicting failure firm.
7.5. Strategic accounting: balanced scorecard.
© Ediciones Pirámide BEYOND FIGURES: Introduction to Financial Accounting
7.1. Financial Statement Analysis
Different types of investors expect different types of company analysis.
- A stockholder expects an increase in the stock invested.
- A speculator expects a dividend payment.
- A bank expects to receive the interest on the loan given and the loan amortization payment.
- Fund managers will analyze their own research resources and look at the professional broker’s reports, who work by buying and selling the shares, about the companies.
- Although the types of return expected by the different stakeholders can be diverse, the avoidance of risk is the same for all of them.
- The primary concern of creditors is short term liquidity and long term solvency.
- Equity investors are more concerned with profitability and future security prices. Both creditors and equity investors are interested in the future company’s profitability.
- The question is which indicators are a good representation of the company’s future profitability or can give an idea of the company’s trend in the long term. © Ediciones Pirámide BEYOND FIGURES: Introduction to Financial Accounting
7.3. Ratios
© Ediciones Pirámide
- Liquidity ratios:
- Working capital
- Current ratio
- Acid test
- ..
- Activity ratios:
- Accounts receivable turnover
- Average collection period
- Accounts payable turnover
- Average collection period
- Solvency ratios:
- Debt ratio
- Debt to equity ratio
- Times interest earned/interest coverage ratio
- Profitability ratios:
- Gross profit margin
- Profit margin
- Return on assets
- Return on equity
- EVA
7 .4. Particular use of ratios: Predicting a firm’s failure
The Z-score is one of the most important way to predict bankruptcy.
It combines a set of 5 financial ratios and a weighting system to predict a company’s probability of failure using a total of 8 variables from the firm’s financial statements.
Each ratio is multiplied by its weight and then those results are totally added up:
A : Earnings/Total assets.
B : Net sales/Total assets.
C : Equity/Total liabilities.
D : Working Capital/Total assets.
E : Retained earnings/Total assets.
Z-score = A × 3.3 + B × 0.999 + C × 0.6 + D × 1.2 + E × 1.
— Z-score > 3.0 means that based on these financial figures, the company is safe.
— Z-score between 2.7 and 2.99 means that the insolvency is possible.
— Z-score between 1.8 and 2.7 means that there is a high probability to go bankrupt within the next 2 years.
— Z-score < 1.8 means that there is a very high probability of the company going bankrupt. © Ediciones Pirámide
Summary
The financial statements analysis is used by investors, brokers, creditors and stockholders for different purposes: to calculate company’s profitability, liquidity, solvency, valuation or expected returns.
There are liquidity ratios such as current ratio, quick ratio; there are activity ratios such as accounts receivable turnover, inventory turnover; solvency ratios such as debt ratio, debt to equity ratios; profitability ratios such as the return on equity or return on assets or Economic value added.
An equation combining determined ratios with different weighs, called the Z-score can be used to forecast the failure of a firm.
A balanced strategic framework of different ratios, historical or forecasted, financial or non-financial, short term or long term, all related with causal relationships (strategic maps) developed for a company can be very useful for internal and external analysis.
© Ediciones Pirámide BEYOND FIGURES: Introduction to Financial Accounting
CHAPTER 7:
Analysing
Financial Data
© Ediciones Pirámide BEYOND FIGURES: Introduction to Financial Accounting
CAMACHO-MIÑANO, M.M.; AKPINAR, M.; RIVERO-MENÉNDEZ, M.J.; URQUIA.GRANDE, E. and ESKOLA, A. (2012).