Intelligent Investor's Notes: Financial Statement Analysis

To evaluate the past, current and prospective performance and financial position of a company.
To perform valuation on the company based on the financial performance.
To compare one firm to another and form the basis of valuing the worth of a stock.

It reports how much revenue the company generated during a period of time, the expenses it incurred and the resulting profits or losses.
Investor uses it

To monitor revenues, expenses and profits t and their trends over time.
To see the rate of growth for revenue and net income – whether it is accelerating or decelerating.
Use EPS as denominator on P/E ratio – a key ration on financial analysis.

It provides information on what a company owns (assets), what it owes (liabilities), and the shareholder ownership interest (equity) for a specific date – financial year end.
Assets = Liabilities + Equity
Investor uses it

To determine trends in assets and liabilities and to ascertain how adequately the firm is financed.
To check on trends in inventory (an asset) and supplier invoices (“accounts payable,” a liability) this can provide insight on product demand and the ordering patterns of the firm. - An increase in inventory can suggest that a company is gearing up for an expected increase in product demand, but holding too much inventory can be problematic.
To view changes in a firm’s debt and provides clues as to whether the firm is becoming too highly levered.
To obtain shareholder’s equity determines the valuation of a firm by providing the book value (which is used as the denominator in the price-to-book ratio), or theoretical value left for the shareholders in event of liquidation.

To monitor cash flow from operations because it represents the exact amount of cash the firm has been able to generate using its core business operations. Increasing profits while cash flow from operations is shrinking is a potential red flag.
To check the if there is any strong demand for products and growth is expected by looking at cash outflow from investing activities.
To keep a watchful eye on cash flow from financing for a variety of reasons.

An increase in debt financing can generate additional value for shareholders if profits are successfully generated from the borrowed capital.
A company buying its own shares may indicate management’s willingness to return cash to shareholders, or it may signal management’s belief that the company’s shares are undervalued.

To use net cash flow as the basis of numerous cash flow valuation models; analysts often use cash flow as a basis to develop target prices for the company’s stock.

Information sources that analysts use in financial statement analysis besides annual financial statements.

Chairman’s Statement in the annual report gives his view about the company and its business which affect the prospects of the company
News releases and management forecasts through Bursa, company websites may impact the company’s future
Social or environmental impact statements
Company announcement through Bursa website; general announcement, change of major shareholders, share buyback, contracts secured, etc.
News and reports in publications such as The Edge, Bloomberg, Bizweek, business sections of newspapers etc.
Industrial reports such palm oil production and prices, construction projects and outlook etc affect the prospect of revenue and profitability of companies in the particular sector.
Interview with the management of the company, its suppliers, customers provide valuable insights about the company products and services, and its future prospects.
Quarterly reports on the interim performance of the company can give a glimpse of the annual performance.
Industry benchmark – To compare and determine position of the company in terms of rate of returns, etc
Analyst Report – how the professional analysts view on the company result, future growth capabilities and the valuation of the company.
Direct experience on company product \ service.

If company reported profit in income statement, is it translate in cash flows in the cash flow statement?
If there is no same amount of cash from from operations (sometime it might negative) - check out the reason.
Profit sometime is hidden in increase in Receivables in the balance sheet but netted off in the cash flow statement as it is non-operational.

Check if company has bad cash flow despite reporting good profits year in year out?
Are these “Receivables” confirmed?
Are they collectible?
Etc.

Make sure there is an increase in the equity amount and tally with profit.
Check if the cash equivalent increases nor the debt level reduces.
Check if increase in loans without much capital expenses in the cash flow statement.