Financial Statements evaluation

The financial statements analysis aims to understand the economic, financial and strategic state of a company through the study of its financial statements and the data that can be obtained from them.

The analysis are carried out by examining the last financial statements and the previous two. Otherwise, in case of strategic financial assessments, analysis are forward looking, thus considering future time span in probabilistic terms- Obviously in this case, it is necessary to carry out careful market researches to forecast the data.

The financial statements are composed by:

  • Income statement
  • Balance sheet
  • Cash flow
  • Equity statement

Then the analyst prepares:

  • Ratio analysis (Ratio analysis) that pay attention to company’s:
    • Profitability
    • Liquidity
    • Efficiency
    • Solvency
  • and, in some cases, the margin analysis

Later are prepared some charts, to better describe the most important ratios, often compared one another.

  • ROTA/ROI on the Cost of debt

It compares the return of all assets and the cost of debt

  • Acid test on Defensive interval ratio

The acid test is composed by current asset less current liabilities. The defensive interval margin is the number of days available to the company before selling asset to pay back its debt

  • Average payable and collectable days

The number of days that the company uses to get paid by its customers and pay its creditors

  • Leverage – Interest coverage ratio

The leverage is the ratio between the total asset and the equity. The interest coverage ratio is the ratio between the EBIT and the annual cost of debt