ACCT1511 Lecture Notes - Lecture 9: Accounts Payable, Profit Margin, Human Capital
5.1 – Financial Statement Analysis & Accounting Policy
Choice
What to do before analyzing:
• Learn about the company
• Consider the decision to be made (e.g. invest, lend, etc)
• Calculate relevant ratios
• Obtain comparative data (e.g. previous period, competitors, industry)
Share price – price o a stok aket that oe shae of a opay’s euity tades fo
• Can be used as part of a profitability analysis
All ratios are free of currency – in both denominator and numerator
• Able to directly compare companies regardless of base country
Comparable Comps – never going to find perfect matches (find closest)
• Peer company should be in similar industry/ sells similar products
• Must be appropriate to company (specifics)
• Must be able to justify against choosing a peer company as well
• Business model/ strategy is important
E.g. revenue stream – fruit (sold once, paid for once) or tree (sold again & again)
• Product – scalable revenue (i.e. increasing production of iPhones at factory)
• Service – involve human capital (i.e. employing more accountants)
Profitability – profitable company shows positive return
• Compare ROE & ROA against cost of capital
Turnover Ratios – depends on industry company is in
• Low turnover & high profit margin may be acceptable
Liquidity Ratios – elow 1 idiates that opay is usig othe supplies’ (aouts
payable) & customers (unearned revenue) money to run business
• Liquidity – short term cash-flow problems
Solvency – total debt; better to be above 1 otherwise risk of bankruptcy
• Some industries/business models able to sustain higher leverage
• Physical assets indicate ability to handle larger amounts of debt
Valuation Analysis:
• Valuation using comparable firms
• Measue aket’s expected growth
• Understand the over/under valuation of a company
Poorly performing company that is very cheapo may be good buy
Well performing company that is expensive may be bad buy
PE Ratio:
• Low – undervalued (cheap)
find more resources at oneclass.com
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Document Summary
5. 1 financial statement analysis & accounting policy. What to do before analyzing: learn about the company, consider the decision to be made (e. g. invest, lend, etc, calculate relevant ratios, obtain comparative data (e. g. previous period, competitors, industry) Share price price o(cid:374) a sto(cid:272)k (cid:373)a(cid:396)ket that o(cid:374)e sha(cid:396)e of a (cid:272)o(cid:373)pa(cid:374)y"s e(cid:395)uity t(cid:396)ades fo(cid:396: can be used as part of a profitability analysis. All ratios are free of currency in both denominator and numerator: able to directly compare companies regardless of base country. E. g. revenue stream fruit (sold once, paid for once) or tree (sold again & again: product scalable revenue (i. e. increasing production of iphones at factory, service involve human capital (i. e. employing more accountants) Profitability profitable company shows positive return: compare roe & roa against cost of capital. Turnover ratios depends on industry company is in: low turnover & high profit margin may be acceptable.
