The role of financial statement analysis is to use
financial reports prepared by companies, combined with other information, to
evaluate the past, current, and potential performance and financial position of
a company for the purpose of making investment, credit, and other economic
decisions.
Financial statement analysis starts
when the role of financial reporting is done. Accountants who record the
transactions of the companies are financial accountants. Once their job is
done, the financial statement analyst can come into picture and start analyzing
the financial statements reports. Financial analysis within the organization
though does not necessarily rely on financial statements but rather on
financial information available within the company.
In financial statement analysis, we
use financial reports and other information. So what are these financial
reports? Let’s take a look at these reports that are being used by financial
analyst to evaluate the past, current, and potential performance and financial
position of a company for the purpose of making investment, credit, and other
economic decisions.
1. Balance Sheet
-
(also called the statement of financial position or statement of financial
condition) presents a company’s current financial position by disclosing the
resources the company controls (assets) and its obligations to lenders and
other creditors (liabilities) at a specific point in time. Owners’ equity
represents the excess of assets over liabilities.
2. Income
Statement - presents information on the financial
results of a company’s business activities over a period of time.
3. Statement
of Changes in Equity - variously
called the “statement of changes in owners’ equity” or “statement of changes in
shareholders’ equity,” primarily serves to report changes in the owners’
investment in the business over time.
4. Cash Flow
Statement- disclosing the sources and uses of
cash helps creditors, investors, and other statement users evaluate the
company’s liquidity, solvency, and financial flexibility.
5. Financial
Notes and Supplementary Schedules -
The notes provide information that is essential to understanding the
information provided in the primary statements. The notes disclose the basis of
preparation for the financial statements.
6. Management
Commentary or Management’s Discussion and Analysis - The management commentary or MD&A is a good starting
place for understanding information in the financial statements.
In the Philippines, aside from the
above listed reports that publicly listed companies must provide every year,
they also need to disclose other information to the investing public. Below are
some of the reports required to be submitted to Philippine Stock Exchange (PSE):
Annual Report
|
Quarterly Report
|
Public Ownership
|
Corporate Governance Report
|
List
of Top 100 Stockholders
|
Record And Payment Dates For Dividend
Declarations
|
Documentary Requirements For Mining Companies
|
Progress Reports For Fund Raising Activities
|
Supplemental
Listing And Disclosure Requirements For Petroleum And Renewable Companies
|
Buyback
Transactions
|
Result
of Annual Stockholders Meeting
|
Clarification
of News Article
|
Changes
in shareholdings of officers/directors
|
Press
Releases
|
Aside from the information inside the organization, the economy, industry and sector, and comparable peer companies must be evaluated as well in order to come up with a decision or recommendation. These include economic statistics, industry reports, trade publications, and databases containing information on competitors.
A financial analyst evaluates the
past, current, and potential performance and financial position of a company to
recommend or make an investment decision.
Examples of these decisions include
the following:
■ Evaluating an equity investment for
inclusion in a portfolio.
■ Evaluating a merger or acquisition
candidate.
■ Evaluating a subsidiary or operating
division of a parent company.
■ Deciding whether to make a venture
capital or other private equity investment.
■ Determining the creditworthiness of a
company in order to decide whether to extend a loan to the company and if so,
what terms to offer.
■ Extending credit to a customer.
■ Examining compliance with debt
covenants or other contractual arrangements.
■ Assigning a debt rating to a company
or bond issue.
■ Valuing a security for making an
investment recommendation to others.
■ Forecasting future net income and cash
flow.
Managers within a company perform
financial analysis to make operating, investing, and financing decisions but do
not necessarily rely on analysis of related financial statements. They have
access to additional financial information that can be reported in whatever
format is most useful to their decision.
Source: CFA, PSE
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