Financial Statement Analysis Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

hi guys today we are going to discuss
financial statement analysis and to
start the discussion first of all what
we have to ask to ourselves is why we do
need to know financial statement
analysis now the wrong reason but this
assumes that you are here working in a
bank you're working as an analyst and
the bank basically asks you on a daily
basis to look at the share price of
these company for examples look at their
profitability look at the liquidity look
at their solvency ratio and so on and so
forth forget about those sophisticated
terms what is what these bots actually I
want you to do is answer this question
so if you buy these shares of the
company or if there's company who ask
for loans you'll be give them the loan
so this is basically the questions that
need to be answer when you know they're
talking about liquidity solvency and so
on and so forth how you can do that a
lot of ways through that but one of them
is you look at the financial statements
and you make some sort of analysis based
on financial statement now a financial
statement analysis is basically a small
part of business analysis so if your
company probably wants to invest in one
comp other company you conduct business
analysis if you're working in the bank
and the bank wants to give loan to
certain company you conduct business
analysis so business analysis self is
divided into several you know terms for
several specific goals some people say
it's it's a credit worthiness analysis
when a bank do business analysis to us a
company that's called credit worthiness
um
when there is a other company who wants
to invest in other companies shares the
call it called equity valuations but
basically this what is similar is these
two business analysis both of them use
financial statements as their main
sure's what do they choose to use
financial statements is because
financial statements reduce a certainty
and increase confidence in making
business decisions now we look at the
steps in analyzing financial statement
now we do know that there are series of
analysis we can do in financial analyzer
financial statement first is business
environment analysis
secondary content analysis financial
analysis and less one is perspective
analysis let's go through a one by one
in business environment analysis what
you're doing is you look at the
financial statement you look at the
directors report you observe the
industry characteristic you look at
where so say you are analyzing a company
working in mining industry so what you
want to do is look at the mining
industry as a whole
you want to look Bloomberg you want to
look at the age you want to look at
other media you want to know the
industry characteristic you wanna know
what drives the revenue in that industry
and we also want to know how the company
specifically our company that we're
going to analyze how the company deal
with this kind of industry what is is
there any motif of the management in
driving the the operational of the of
the company we can look at the motive
basically and on the remuneration report
you can look whether the management's
actually have some sort of compensation
based plan that could be given if the
company works well so basically we want
to know the overview of the company this
is step one now after we understand the
condition of the company we can go to
the step number two which is the
accounting analysis what you basically
do in accounting analysis is we make
some sort of adjustments now we do
understand that the company's financial
statements is on 31st December but
probably you use it not on the date
we'll probably use it on April you
probably use it in June or July now you
have to make some sort of adjustments
because things probably have changed the
asset value probably no longer no longer
a worth exactly the same as the stated
in financial statements so these kind of
adjustments that need to be conducted
before you go on further we just did not
value added information such as non
recurring items restructuring charts and
so on and we also looked at whether
there are some sort of earning
management's going on in the company now
let's look at how we can do this first
we look at the financing activities
we can analyze even with some sort of
judgment we look at whether the company
conducted in off-balance-sheet financing
whether the company miscategorized the
leasing that they they have after that
we can analyze and we adjust investing
activities we look at the securities
receivables derivatives whether they're
whether the company already valued them
according to these standards company
investment whether they our
international investment has been made
by the company whether there are some
sort of combination business combination
happen and the operation of the company
and the last one is also look at the
operational activities and we want to
make some sort of adjustments we
evaluate the equal principles in their
income statements we want to know
whether the the incomes generated by the
company is strong enough we also want to
be evaluate the cash flow probably and
the revenue or expense recognitions now
after we conduct the accounting analysis
and we are sure that we you know we
already have the numbers that reflect
the economic reality of the company we
can go on to the next step now the third
step we're going to do is we want to
conduct financial analysis now we want
to do is basically evaluating financial
positions and the performance of the
company using the financial statement
that we have already adjusted using the
accounting announce it now we want to do
the financial analysis by conducting
first what you cause cash flow analysis
we do this basically where you evaluate
the source and the use of the cash we
want to know the policy of the company
and make use of the most valuable asset
that the company probably has which is
the cash itself now if the company is
able to generate positive returns a
positive cash flow through its operating
activities it's probably a good sign now
we also want to look on the invested
capital ratio and the profitability
analysis we can do this by evaluating
the return on investments divided by the
assets that they have now basically we
have to do this and but not only stop in
here at this point but you also need to
continue by comparing with the
non-standard of the industry now you
also want to look at the rest of the
company we want network to be specific
we're looking at the financial resource
company we evaluate the riskiness and
the creditworthiness of the company by
using the financial race analysis we
basically look at whether the company
able to generate cash flow enough cash
flow to to convert the interest expense
the you know the payables the
liabilities that occurs in the current
period we'll look at the ratio we look
at the capital structure of the company
now the techniques that we can use to
you know to conduct financial analysis
is we can use the year-to-year analysis
we can compare the numbers in the
financial statements that we have when
we compare with the previous year or put
two years back and we will look at the
trend whether it is increase decrease or
steady and it's basically reflecting the
policy of the companies and we also want
to look at the common size what we mean
by common size is we look at the number
in the financial statements a balances
or income statements and we choose one
number that could be the benchmark say
we want to look at the income statement
we look at how many percent of the
revenue that goes into into the cost of
good souls probably how many percent of
the revenues that goes into net profit
now after you do the financial analysis
we can go one step further which is
conducting the prospective analysis now
this is one of the most important part
especially when you want to do the
equity valuation we look at the NPV of
one company and we basically look at the
value of this its equity or an it's tab
there's a lot of ways to value it in
equities but one of them is you look at
the beauty discount at the different
payment by its required return and you
could also look at the value of its step
by you know discounting the interest
payment by the effective coupon rate now
this
what we are going to do in perspective
analysis after we know the value is we
actually make it some sort of
forecasting the stream of the earning in
the futures now you by doing perspective
analysis you will understand the value
of the company and you could make a
better decisions in whether you should
give them credits or you want to buy the
shares so basically that's all for the
financial statement analysis thank you
for listening what we need to bear in
mind is that when we're doing financial
statement analysis we have to make sure
we don't really step out of the line so
we have to know on what frame that we're
going to do this statement analysis
whether we want to give a company alone
or we want to buy shares in the company
because probably the result is the same
but you might want to focus on different
elements of the financial statement and
also be aware that some of the
explanations here is quite simplifying
it's intended to be simple so there are
a lot of complexities instead of
performing the financial statement
analysis it also depends on the industry
and depends of the company itself