Financial and Economic Analysis презентация

Financial analysis is the study of the main indicators of the financial condition and financial performance of an organization in order to make management, investment and other decisions by interested parties.

Financial analysis includes analysis of the assets and liabilities of the organization, its solvency, liquidity, financial results and financial stability, analysis of asset turnover (business activity). Financial analysis allows to identify such important aspects as the possible probability of bankruptcy. Financial analysis is an integral part of such specialists as auditors, appraisers

The main components of the financial - economic analysis of the enterprise are
accounting analysis;
horizontal analysis;
vertical analysis;
trend analysis;
calculation of financial ratios.

Horizontal analysis is comparing reporting indicators with indicators of previous periods.
Vertical analysis is carried out in order to identify the proportion of individual reporting items in the total final indicator and then compare the result with the data of the previous period.
The trend analysis is based on the calculation of the relative deviations of the reporting indicators for a number of years from the level of the base year.

Calculation of financial ratios

Altman Z-score
The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman
The formula may be used to predict the probability that a firm will go into bankruptcy within two years

Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5.
X1 = working capital / total assets. Measures liquid assets in relation to the size of the company.
X2 = retained earnings / total assets. Measures profitability that reflects the company's age and earning power.
X3 = earnings before interest and taxes / total assets. Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability.
X4 = market value of equity / book value of total liabilities. Adds market dimension that can show up security price fluctuation as a possible red flag
X5 = sales / total assets. Standard measure for total asset turnover (varies greatly from industry to industry).

Z-score estimated for non-manufacturers & emerging markets
Z = 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4
Z = 3.25 + 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4 (emerging markets)
X1 = (current assets − current liabilities) / total assets
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = book value of equity / total liabilities

Zones of discriminations
Z > 2.6 – “Safe” Zone, low probability of bankruptcy
1.1 < Z < 2.6 – “Grey” Zone, border state, the probability of bankruptcy is not high, but not excluded;
Z < 1.1 – “Distress” Zone, there is a probability of bankruptcy of the enterprise

Z-score estimated for manufacturing enterprises
Z′ = 0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5
X1 = (current assets − current liabilities) / total assets
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = book value of equity / total liabilities
X5 = sales / total assets

Zones of discrimination:
Z′ > 2.9 – “Safe” Zone
1.23 < Z′ < 2.9 – “Grey” Zone
Z′ < 1.23 – “Distress” Zone

Commonly-used financial ratios can be divided into the following five categories.
Liquidity or Solvency Ratios
Financial Leverage or Debt Ratios
Asset Efficiency or Turnover Ratios
Profitability Ratios
Market Value Ratios

3.3 Solvency analysis
The solvency of an enterprise is the ability of a company to pay its long-term debt and the interest on that debt.
Solvency is one of the key features of a normal (sustainable) financial position of an enterprise. Solvency ratios, as a part of financial ratio analysis, help the business owner determine the chances of the firm's long-term survival

The solvency of the company consists of two factors:

In the analysis of the first factor, the organization has net assets (equity).
If the organization has negative net assets, i.e. If there is no equity capital, then in principle it cannot pay off all of its obligations. Such an organization can be solvent in the short term, rely on current debts, but in the long term, there is a high probability of bankruptcy.

If an organization has positive net assets, this does not indicate its good solvency.
It is necessary to analyze the second factor - liquidity of assets.
A situation may arise where there is a discrepancy between the liquidity of the assets and the forthcoming maturity of the liability.
For example, an enterprise, on the one hand, has a large share of non-current assets that are more difficult to realize (low-liquid assets), on the other, a large proportion of short-term liabilities. In this scenario, there may come a time when the organization does not have enough money to pay off current liabilities.

There are several different solvency ratios, some of them technical and of use primarily to auditors or corporate analysts, others easily assessed and of interest to professional accountants, business owners and shareholders alike. A few of these basic solvency ratios are:
1) The Total Debt/Total Assets Ratio measures how much of the firm's asset base is financed using debt.

2) The Equity Ratio explains how much of the company is owned by its investors.
The Equity Ratio = total equity / total assets.
It answers a basic, but very important question: if the company goes out of business after it pays all liabilities how much will be left for its investors.
In general, higher equity ratios are typically favorable for companies. This is usually the case for several reasons.
Higher investment levels by shareholders shows potential shareholders that the company is worth investing in since so many investors are willing to finance the company.
A higher ratio also shows potential creditors that the company is more sustainable and less risky to lend future loans.

The Equity Ratio = 100000/150000 = 0,67
As you can see, ratio is .67. This means that investors rather than debt are currently funding more assets. 67 percent of the company’s assets are owned by shareholders and not creditors. Depending on the industry, this is a healthy ratio.

3) Interest Earned measures a company's ability meet its long-term debt obligations. It's calculated by dividing corporate income before interest and income taxes (commonly abbreviated EBIT) by interest expense related to long-term debt.
Earnings before interest and taxes ÷ Interest expense = Times interest earned
The ratio is commonly used by lenders to ascertain whether a prospective borrower can afford to take on any additional debt. The ratio is calculated by comparing the earnings of a business that are available for use in paying down the interest expense on debt, divided by the amount of interest expense.

A ratio of less than one indicates that a business may not be in a position to pay its interest obligations, and so is more likely to default on its debt. A much higher ratio is a strong indicator that the ability to service debt is not a problem for a borrower.

The solvency of the company in terms of asset liquidity is analyzed by means of special financial ratios - liquidity ratios:
Cash ratio. Compares the amount of cash and investments to short-term liabilities. This ratio excludes any assets that might not be immediately convertible into cash, especially inventory.
Quick ratio. Same as the cash ratio, but includes accounts receivable as an asset. This ratio explicitly avoids inventory, which may be difficult to convert into cash.
Current ratio. Compares all current assets to all current liabilities. This ratio includes inventory, which is not especially liquid, and which can therefore mis-represent the liquidity of a business.