Chuyên Đề Giáo trình Business analysis and valuation - Text &amp Cases FULL

The purpose of this chapter is to outline a comprehensive framework

for financial statement analysis. Because financial statements provide the most widely

available data on public corporations’ economic activities, investors and other stake-holders rely on financial reports to assess the plans and performance of firms and corpo-rate managers.

A variety of questions can be addressed by business analysis using financial state-ments, as shown in the following examples:

ã A security analyst may be interested in asking: “How well is the firm I am follow-ing performing? Did the firm meet my performance expectations? If not, why not?

What is the value of the firm’s stock given my assessment of the firm’s current and

future performance?”

ã A loan officer may need to ask: “What is the credit risk involved in lending a certain

amount of money to this firm? How well is the firm managing its liquidity and sol-vency? What is the firm’s business risk? What is the additional risk created by the

firm’s financing and dividend policies?”

ã A management consultant might ask: “What is the structure of the industry in which

the firm is operating? What are the strategies pursued by various players in the in-dustry? What is the relative performance of different firms in the industry?”

ã A corporate manager may ask: “Is my firm properly valued by investors? Is our in-vestor communication program adequate to facilitate this process?”

ã A corporate manager could ask: “Is this firm a potential takeover target? How much

value can be added if we acquire this firm? How can we finance the acquisition?”

ã An independent auditor would want to ask: “Are the accounting policies and accru-al estimates in this company’s financial statements consistent with my understand-ing of this business and its recent performance? Do these financial reports

communicate the current status and significant risks of the business?”

Financial statement analysis is a valuable activity when managers have complete in-formation on a firm’s strategies and a variety of institutional factors make it unlikely that

they fully disclose this information. In this setting, outside analysts attempt to create “in-side information” from analyzing financial statement data, thereby gaining valuable in-sights about the firm’s current performance and future prospects.

To understand the contribution that financial statement analysis can make, it is im-portant to understand the role of financial reporting in the functioning of capital markets