Ryan Roque: Financial Statements Analysis

Financial statements are crucial records of an organization's financial activities and conditions, consisting of four main components: balance sheet, income statement, statement of changes in equity, and statement of cash flows.

The balance sheet offers a snapshot of financial position at a specific date, showing assets equal to liabilities plus shareholders' equity. Assets and liabilities are classified as current or non-current, and shareholders' equity includes retained earnings and stock.

The income statement summarizes a firm's operating results over a period, detailing revenues and expenses from operating and non-operating activities, essentially serving as a report card for management's performance.

The statement of changes in equity shows changes in equity accounts during a period, including beginning and ending balances and transactions like net income and dividends, sometimes called the statement of retained earnings.

The statement of cash flows categorizes cash inflows and outflows into operating, investing, and financing activities, providing insight into cash management and financial health over a period.

Financial statement analysis has limitations due to differences in accounting methods across companies, making comparisons challenging. Analysts must look beyond ratios to factors like technology changes, industry trends, consumer tastes, and economic conditions.

Limitations of financial analysis include variations in accounting policies, economic factors, and industry differences. Analysts must consider these when comparing companies or periods, ensuring a comprehensive evaluation beyond mere numbers.

Vertical analysis (common size statements) expresses each financial statement item as a percentage of a base figure, such as total assets on the balance sheet or sales on the income statement, facilitating comparison across companies and time periods.

Horizontal analysis (trend analysis) compares financial data over multiple periods, calculating dollar and percentage changes to highlight significant economic shifts and unusual fluctuations for further investigation.

Liquidity ratios assess a company's ability to meet short-term obligations. Key ratios include working capital (current assets minus current liabilities), current ratio (current assets divided by current liabilities), and quick ratio (quick assets over current liabilities).

Asset management ratios evaluate how efficiently a company uses its assets. Examples include inventory turnover (cost of goods sold over average inventory), accounts receivable turnover, and operating cycle (sum of average selling and collection periods).

Debt management ratios measure financial leverage and ability to meet debt obligations. Important ratios include debt to asset ratio, debt to equity ratio, equity multiplier, interest earned ratio, and fixed charge coverage ratio, reflecting risk and solvency.

Profitability ratios gauge a company's ability to generate earnings relative to sales, assets, or equity. Common ratios are gross profit margin, operating profit margin, net profit margin, return on assets, and return on equity, helping assess operational efficiency.

Market ratios provide insights into stock valuation and investor expectations. Price-earnings ratio (market price per share divided by earnings per share) indicates how much investors pay per peso of earnings, while market-to-book ratio compares market value to book value per share.

Financial statement analysis involves interpreting ratios and trends, understanding their context, and applying knowledge to real-world problems such as computing liquidity, profitability, and turnover ratios, enabling informed managerial and investment decisions.

Practical exercises and problems enhance understanding by applying concepts to balance sheets and income statements, calculating ratios like current ratio, quick ratio, inventory turnover, and return on equity, reinforcing theoretical knowledge with real data.

In summary, financial statement analysis is a multifaceted process involving vertical and horizontal analyses, ratio computations, and contextual interpretation, essential for assessing a company's financial health, performance, and prospects.