Chapter 3: Financial Statement Analysis: Business Ratios

 

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n Chapter 2, you saw how easy it is to access company filings with Valuation Tutor.  In this chapter, we begin analyzing this data. As stated in the introduction, financial statement analysis is a set of techniques to analyze the financial performance of a company, to assess its strengths and weaknesses, and to compare it to other firms in the same industry.  This is important to both investors in the financial markets and managers in the firms.   

 

Figure 1: Capital Markets

 

Three major decisions made by manager’s of a firm are the investment, financing and dividend decisions.  These decisions are important for financial statement analysis because the major statements result from the firm’s decision. As a result, over time various measures have evolved to provide insight into and assess the performance of these decisions.  An overview of these measures and their interrelationships is depicted in the following figure:

 

 Figure 2:  Financial Statement Analysis:  A Conceptual Framework

 In this chapter we will work through the above flow chart so that you acquire:

·         Conceptual skills required for understanding this flowchart,

·         Practical skills associated with what the metrics are and how they are constructed using current real world financial statements (including terminology, aggregation and critical accounting judgments)

·         Professional judgment skills including how to interpet and make decisions from information in the current 10-K filings

To reinforce important concepts and measures we will reconcile each metric using the 2010 10-K filing of Procter and Gamble (PG) and demonstrate how you can immediately extend this to any current filing with the SEC

The Valuation Tutor software for this Chapter is organized as follows:

In the next topic, we first review how you bring up the 2010 10-K of PG which will be used in each of the subsequent topics for reconciliation purposes.  As a result, you may refer back to this topic if you want to skip forward to later topics.