Chapter 4, analyzing financial statements. After studying this chapter, you should understand: How to standardize fi nancial statements for comparison purposes; how to compute and, more importantly, interpret some common ratios; the determinants of a fi rm’s profi tability; some of the problems and pitfalls in fi nancial statement analysis. | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 4: Analyzing Financial Statements NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Explain the three perspectives from which financial statements can be viewed Describe common-size financial statements, explain why they are used, and be able to prepare and use them to analyze the historical performance of a firm Discuss how financial ratios facilitate financial analysis and be able to compute and use them to analyze a firm’s performance Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Describe the DuPont system of analysis and be able to use it to evaluate a firm’s performance and identify corrective actions that may be necessary Explain what benchmarks are, describe how they are prepared, and discuss why they are important in financial statement analysis Identify the major limitations in using financial statement analysis Copyright© 2015 John Wiley & Sons, Inc. 4 Background for Financial Statement Analysis Perspectives for Analysis Stockholders focus on net cash flows, risk, rate of return, and the market value of the firm’s stock Managers focus on rate of return, efficient use of assets, controlling costs, increasing net cash flows, increasing the market value of the firm’s stock, and job security Creditors focus on the predictability of revenues and expenses, the ability to meet short-term obligations, the ability to make loan payments as schedule, and avoidance of changes in risk Common-Size Financial Statements Common-size financial statements show the dollar amount of each item as a percentage of a reference value Common-size balance sheet may use total assets as the reference value; each item is expressed as a percentage of total assets Common-size income statement may use net sales as the reference value; each item is expressed as a percentage of net sales | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 4: Analyzing Financial Statements NEED UPDATED PHOTO Copyright© 2015 John Wiley & Sons, Inc. 2 Learning Objectives Explain the three perspectives from which financial statements can be viewed Describe common-size financial statements, explain why they are used, and be able to prepare and use them to analyze the historical performance of a firm Discuss how financial ratios facilitate financial analysis and be able to compute and use them to analyze a firm’s performance Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Describe the DuPont system of analysis and be able to use it to evaluate a firm’s performance and identify corrective actions that may be necessary Explain what benchmarks are, describe how they are prepared, and discuss why they are important in financial statement analysis Identify the major .
