Entrepreneurial Finance Lectures Y3 – S2
Lecture 1
Financial statement analysis
Financial Analysis is probably the most important instrument for companies’ stakeholders to
assess a company in a uniform way.
Analysing the financial statements is important to assess the:
• Company’s performance
• Company’s future performance
• Company’s capital structure
• Company’s investment strategy
Analysing financial statements is an important instrument to companies’ management when
making corporate and investment decisions, including with respect to management’s
fiduciary duties.
Financial Statement Analysis
The three basics of Financial Statement Analysis
1. The Balance Sheet
2. The Income Statement Financial Statements
3. The Cash Flow Statement
How do they relate to each other and interact?
Financial Statement Analysis
Disclosure of Financial Information
• Financial statements are prepared by the firm’s auditor according to General Accepted
Accounting Principles (GAAP; BW 2 Titel 9/RJ, IFRS)
• Financial statements are accounting written reports issued periodically to present
business activities and past performance of a company.
- Public companies must file financial results with the Autoriteit Financiële Markten
(AFM) > Trade Register of Chamber of Commerce (handelsregister).
- Private companies must file financial results with the Trade Register of the Chamber
of Commerce.
• Investors, financial analysts, managers and other interested parties such as creditors rely
on financial statements to obtain reliable information about a corporation.
• The annual report with financial statements must be sent to their shareholders every
year.
,The balance sheet
Definition:
-Financial statement that shows the value of the firm’s assets and liabilities at a particular
time (from an accounting perspective)
• Represents the company’s assets, liabilities, and its equity at a specific moment in time.
In most cases per 31 December or 30 June.
• The Balance Sheet reflects a ‘snapshot’ of the company’s financial position at a point in
time.
• The Balance Sheet therefore doesn’t show any movement.
• It balances between what the company owns and what is owes, including the claim of
the shareholders, i.e., Equity.
Assets = Liabilities + Equity
The Main Balance Sheet Items
,• The assets are listed in order by the length of time it would normally take a firm with
ongoing operations to convert them into cash.
• Clearly, cash is much more liquid than property, plant, and equipment.
• The Balance Sheet reflects the company’s (financial) strategy and management choices.
• The Balance Sheet shows how the company has invested its capital and how it financed
the invested capital.
Common-size balance sheet
- All items in the balance sheet are expressed as a percentage of total assets.
Book values and market values
• Book Values
- Value of assets or liabilities according to the balance sheet
• Market Values
- The value of assets or liabilities were they to be resold in a market
• Generally Accepted Accounting Principles (GAAP)
• Procedures for preparing financial statements
• Equity and asset “market values” are usually higher than their “book values”
Example
According to GAAP, your firm has equity worth $6 billion, debt worth $4 billion, assets worth
$10 billion. The market values your firm’s 100 million shares at $75 per share and the debt at
$4 billion
Q: What is the market value of your assets?
A: Since (Assets = liabilities + equity), your assets must have a market value of $11.5 billion.
, The income statement
Definition
• Financial statement that shows the revenues, expenses, and net income of a firm over a
period of time (from an accounting perspective).
• The Income Statement reflects a certain period, mostly a financial year.
• The Income Statement reflects revenue, expenses, and ultimately the net income during
that period.
Lecture 1
Financial statement analysis
Financial Analysis is probably the most important instrument for companies’ stakeholders to
assess a company in a uniform way.
Analysing the financial statements is important to assess the:
• Company’s performance
• Company’s future performance
• Company’s capital structure
• Company’s investment strategy
Analysing financial statements is an important instrument to companies’ management when
making corporate and investment decisions, including with respect to management’s
fiduciary duties.
Financial Statement Analysis
The three basics of Financial Statement Analysis
1. The Balance Sheet
2. The Income Statement Financial Statements
3. The Cash Flow Statement
How do they relate to each other and interact?
Financial Statement Analysis
Disclosure of Financial Information
• Financial statements are prepared by the firm’s auditor according to General Accepted
Accounting Principles (GAAP; BW 2 Titel 9/RJ, IFRS)
• Financial statements are accounting written reports issued periodically to present
business activities and past performance of a company.
- Public companies must file financial results with the Autoriteit Financiële Markten
(AFM) > Trade Register of Chamber of Commerce (handelsregister).
- Private companies must file financial results with the Trade Register of the Chamber
of Commerce.
• Investors, financial analysts, managers and other interested parties such as creditors rely
on financial statements to obtain reliable information about a corporation.
• The annual report with financial statements must be sent to their shareholders every
year.
,The balance sheet
Definition:
-Financial statement that shows the value of the firm’s assets and liabilities at a particular
time (from an accounting perspective)
• Represents the company’s assets, liabilities, and its equity at a specific moment in time.
In most cases per 31 December or 30 June.
• The Balance Sheet reflects a ‘snapshot’ of the company’s financial position at a point in
time.
• The Balance Sheet therefore doesn’t show any movement.
• It balances between what the company owns and what is owes, including the claim of
the shareholders, i.e., Equity.
Assets = Liabilities + Equity
The Main Balance Sheet Items
,• The assets are listed in order by the length of time it would normally take a firm with
ongoing operations to convert them into cash.
• Clearly, cash is much more liquid than property, plant, and equipment.
• The Balance Sheet reflects the company’s (financial) strategy and management choices.
• The Balance Sheet shows how the company has invested its capital and how it financed
the invested capital.
Common-size balance sheet
- All items in the balance sheet are expressed as a percentage of total assets.
Book values and market values
• Book Values
- Value of assets or liabilities according to the balance sheet
• Market Values
- The value of assets or liabilities were they to be resold in a market
• Generally Accepted Accounting Principles (GAAP)
• Procedures for preparing financial statements
• Equity and asset “market values” are usually higher than their “book values”
Example
According to GAAP, your firm has equity worth $6 billion, debt worth $4 billion, assets worth
$10 billion. The market values your firm’s 100 million shares at $75 per share and the debt at
$4 billion
Q: What is the market value of your assets?
A: Since (Assets = liabilities + equity), your assets must have a market value of $11.5 billion.
, The income statement
Definition
• Financial statement that shows the revenues, expenses, and net income of a firm over a
period of time (from an accounting perspective).
• The Income Statement reflects a certain period, mostly a financial year.
• The Income Statement reflects revenue, expenses, and ultimately the net income during
that period.
