Forms of Business Organization

• The Sole

Proprietorship

• The Partnership

– General Partnership
– Limited Partnership

• The Corporation

A Comparison

 

Corporation

Partnership

Liquidity

Shares can be easily
exchanged

Subject to substantial
restrictions

Voting Rights

Usually each share
gets one vote

General Partner is in
charge; limited
partners may have
some voting rights

Taxation

Double

Partners pay taxes on
distributions

Reinvestment and
dividend payout

Broad latitude

All net cash flow is
distributed to partners

Liability

Limited liability

General partners may
have unlimited
liability; limited
partners enjoy limited
liability

Continuity

Perpetual life

Limited life

The Agency Problem

• Agency relationship

– Principal hires an agent to represent

his/her interest

– Stockholders (principals) hire managers

(agents) to run the company

• Agency problem

– Conflict of interest between principal and

agent

Managerial Goals

• Managerial goals may be different

from shareholder goals:

– Expensive perquisites
– Survival
– Independence

• Increased

growth and size

are not

necessarily equivalent to increased
shareholder wealth

Managing Managers

• Managerial compensation

– Incentives can be used to align management

and stockholder interests

– The incentives need to be structured carefully

to make sure that they achieve their intended
goal

• Corporate control

– The threat of a takeover may result in better

management

• Other stakeholders

Financial Statement

• A

financial statement

(or

financial

report

) is a formal record of the financial

activities of a business, person, or other
entity.

• For a business enterprise -

all the relevant

financial information

, presented in a

structured manner and in a form easy to
understand.

An annual report

• An annual report is a comprehensive report on a

company's activities throughout the preceding year.

• Annual reports are intended to give shareholders

and other interested people information about the

company's activities and financial performance.

• Most jurisdictions require companies to prepare and

disclose annual reports, and many require the

annual report to be filed at the company's registry.

• Companies listed on a stock exchange are also

required to report at more frequent intervals

(depending upon the rules of the stock exchange

involved).

Typically annual reports will

include:

• Chairman's report

• CEO's report

• Auditor's report on corporate governance

• Mission statement

• Corporate governance statement of compliance

• Statement of directors' responsibilities

• Invitation to the company's AGM as well as financial statements

including:

• Auditor's report on the financial statements

• Balance sheet

• Statement of retained earnings

• Income statement

• Cash flow statement

• Notes to the financial statements

• Accounting policies

Financial Statements

•

Balance sheet

(BS):

also referred to as

statement of financial position or condition,

reports on a company's assets, liabilities,

and ownership equity at a given point in

time.

•

Income statement

: also referred to as

Profit and Loss statement ("

P&LA

") provides

information on the operation of the

enterprise, reports on a company's income,

expenses, and profits over a period of time.

Financial Statements

• Statement of Owner's Equity

shows the change in

owner's equity during a given time period. It lists
the owner equity balance at the beginning of the
period, additions and subtractions to the balance,
and the ending balance. Additions come from
owner investments and income; subtractions from
owner withdrawals and losses.

•

Statement of cash flows

: reports on a

company's cash flow activities, particularly its
operating, investing and financing activities.
Indicates whether enough cash is available to carry
on routine operations.

Financial Statements

• For large corporations, these statements

are often complex and may include an
extensive set of notes to the financial
statements and management discussion
and analysis.

• The notes typically describe each item on

the balance sheet, income statement and
cash flow statement in further detail. Notes
to financial statements are considered an
integral part of the financial statements.

Financial statements

Financial statements should be
understandable, relevant, reliable
and comparable.

Identification of the user

• The IASB Framework states:

The

objective of financial statements

is to provide

information … that is useful to a wide range of

users in making economic decisions.

• Owners, prospective investors and managers

require financial statements to make

important

business (investment) decisions

(buy/sell/hold)

that affect its continued operations.
Return on capital employed (ROCE) and related

performance and asset management ratios are

likely to be of interest to this group of users.

Financial statements - users

• Employees

they need to be able to assess the stability

and performance of the entity in order to assess how

reliable it is to be employed in it in the longer term.
Employees are likely to be interested in disclosures

about retirement benefits, remuneration and promotion.

• Suppliers

- interested in information that helps them to

decide whether or not to supply goods or services to an

entity. Availability of cash will be of particular interest.

Working capital ratios, and the working capital cycle,

may be appropriate calculations for this class of user.

Financial statements - users

• Lenders and potential lenders

- are interested

in assessing whether or not the loans that they have

made are likely to be repaid, and whether or not the

related interest charge will be paid in full and on

time.
They are particularly interested in ratios such as

interest cover and gearing, and will be interested in

the nature and longevity of other categories of loan

to the entity.

• Customers

- interested in assessing the risks which

threaten their supplier.

Financial statements - users

• Government entities

require special-purpose

reports, especially tax computations, general-
purpose reports- statistics.

• Media and the general public

are also interested

in financial statements for a variety of reasons.

Audit and legal implications

• Although laws differ from country to country, an

audit

of the financial statements of a public

company is usually required for investment,

financing, and tax purposes. These are usually

performed by independent accountants or auditing

firms.

• Results of the audit are summarized in an

audit report

that either provide an unqualified

opinion on the financial statements or qualifications

as to its fairness and accuracy.

• The audit opinion on the financial statements is

usually included in the annual report.

Standards and regulations

• Different countries have developed their own

accounting principles

over time, making international

comparisons of companies difficult.

• Recently there has been a push towards standardizing

accounting rules made by the

International

Accounting Standards Board

("IASB"). IASB develops

International Financial Reporting Standards

that have

been adopted by e.g.

Australia

, Canada and the

European Union

(for publicly quoted companies only)

• It ensures

uniformity and comparability

between

financial statements prepared by different companies

( a set of guidelines and rules).

Financial statement analysis

…

is the application of analytical tools and

techniques to general-purpose financial

statements and related data to derive

estimates and inferences useful in business

analysis.

…

refers to an assessment of the viability,

stability and profitability of a business.

…

decreases the uncertainty of business

analysis, and provides a systematic and

effective basis for it.

Comparability problems

(

Accounting

risk

)

1. Lack of uniformity

in accounting leads to

comparability problems.

2.

Discretion and imprecision

in accounting can

distort financial statement information(

errors, omissions

).

3. Managers might use their discretion in accounting
to manipulate or

window-dress

financial statements.

The Balance Sheet



An accountant’s snapshot of the firm’s

accounting value at a

specific point in time

.



BS

reports the resources of the entity, useful

for evaluating the ability of the company to

meet its long-term obligations.



BS

summarizes the assets, liabilities, and

owners’ equity of a company at a specific point

in time.

The Balance Sheet

Current

Assets

Fixed

Assets

1 Tangible

2

Intangible

Total Value of Assets:

Shareholde

rs’ Equity

Current

Liabilities

Long-Term

Debt

Total Firm Value to

Investors:

The Balance Sheet Identity :

• Assets ≡ Liabilities + Stockholder’s Equity

• Assets

- what a company owns

• Liabilities

-  what a company owes

• Owners' Equity -

   claims of owners against the business

Assets -

valuable resources providing

future benefits to the company

• Current assets

are assets that quickly and easily

can be converted into cash (within 12 months),

sometimes at a discount to the purchase price.

Current assets include cash, accounts receivable,

marketable securities, notes receivable, inventory,

and prepaid assets such as prepaid insurance.

• Fixed assets (relatively long life)

include

tangible

assets

(land, buildings, and equipment, recorded

at historical cost, which often is much lower than

the market value), and

intangible assets

such as

trademark, patents.

U.S. Composite Corporation

Balance Sheet

2007 2006

2007 2006

Current assets:

Current Liabilities:

Cash and equivalents

$140 $107 Accounts payable

$213

$197

Accounts receivable

294

270 Notes payable

50

53

Inventories

269

280 Accrued expenses

223

205

Other

58

50 Total current liabilities

$486

$455

Total current assets

$761

$707

Long-term liabilities:

Fixed assets

:

Deferred taxes

$117

$104

Property, plant, and equipment$1,423 $1,274 Long-term debt

471

458

Less accumulated depreciation (550) (460) Total long-term liabilities

$588

$562

Net property, plant, and equipment

873

814

Intangible assets and other

245

221 Stockholder's equity:

Total fixed assets

$1,118 $1,035 Preferred stock

$39

$39

Common stock ($1 per value)

55

32

Capital surplus

347

327

Accumulated retained earnings

390

347

Less treasury stock

(26)

(20)

Total equity

$805

$725

Total assets

$1,879 $1,742Total liabilities and stockholder's equity

$1,879 $1,742

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.

Average values

Clearly, cash is much
more liquid than
property, plant, and
equipment.

Liabilities (claims to assets)

• represent the portion of a firm's assets that are

owed to creditors;

• present obligation of the enterprise arising from

past events, the settlement of which is expected to

result in an outflow from the enterprise of

resources embodying economic benefits

• Current liabilities (

expected to be liquidated within

a year

)

include accounts payable, notes payable,

interest payable, wages payable, and taxes

payable.

• Long-term liabilities (

expected not to be liquidated

within a year

)

include mortgages, notes payable

and bonds payable.

Equity (TA – TL)

• Equity

is referred to as owner's equity in a

sole proprietorship or a partnership, and

stockholders' equity or shareholders'

equity in a corporation.

• The equity owners of a business are

residual claimants, having a right to what

remains only after the creditors have been

paid.

• In the case of a corporation, equity would

be listed as

common stock, preferred

stock, and retained earnings.

U.S. Composite Corporation

Balance Sheet

Labilities and Owners’ Equity 2007 2006

Total current liabilities 486 455

Accounts payable

213 197

Notes payable 50 53
Accrued expenses 223 205

Long-term debt 588 562
Total owners’ equity 805 725

Preferred stck 39 39

Common stock ($1) 55 32

Capital surplus 347 327
Retained earnings 390 347

Total liabilities 1879 1742

The Capital Budgeting Decision

Current

Assets

Fixed

Assets

1 Tangible

2

Intangible

Shareholde

rs’ Equity

Current

Liabilities

Long-Term

Debt

What long-

term

investments

should the

firm

choose?

The Capital Structure Decision

How should
the firm raise
funds for the
selected
investments?

Current

Assets

Fixed

Assets

1 Tangible

2

Intangible

Shareholde

rs’ Equity

Current

Liabilities

Long-Term

Debt

Balance Sheet Analysis

When analyzing a balance sheet,
the analyst should be aware of
three concerns:

1. Liquidity
2. Debt versus equity
3. Value versus cost

Liquidity

• Refers to the ease and quickness with which

assets can be converted to cash—without a
significant loss in value (cost, time)

• Current assets are the most liquid.

• The more liquid a firm’s assets, the less likely

the firm is to experience problems meeting
short-term obligations (financial distress).

Net Working Capital

A measure of both a company's efficiency

and its short-term financial health.

Net Working Capital ≡

Current Assets – Current Liabilities

NWC usually grows with the firm

Short-Term Asset Management

How should

short-term

assets be

managed and

financed?

Net

Working

Capital

Shareholde

rs’ Equity

Current

Liabilities

Long-Term

Debt

Current

Assets

Fixed

Assets

1 Tangible

2

Intangible

Net Working Capital

• Positive working capital

means that the company

is able to pay off its short-term liabilities.

•  

Negative working capital

means that a company

currently is unable to meet its short-term

liabilities with its current assets (cash, accounts

receivable and inventory).

• A

declining working capital ratio

over a longer

time period could also be a red flag that warrants

further analysis.

U.S.C.C. Balance Sheet

2007 2006

2007 2006

Current assets:

Current Liabilities:

Cash and equivalents

$140

$107 Accounts payable

$213

$197

Accounts receivable

294

270 Notes payable

50

53

Inventories

269

280 Accrued expenses

223

205

Other

58

50 Total current liabilities

$486

$455

Total current assets

$761

$707

Long-term liabilities:

Fixed assets:

Deferred taxes

$117

$104

Property, plant, and equipment$1,423 $1,274 Long-term debt

471

458

Less accumulated depreciation (550) (460 Total long-term liabilities

$588

$562

Net property, plant, and equipment

873

814

Intangible assets and other

245

221 Stockholder's equity:

Total fixed assets

$1,118 $1,035 Preferred stock

$39

$39

Common stock ($1 par value)

55

32

Capital surplus

347

327

Accumulated retained earnings

390

347

Less treasury stock

(26)

(20)

Total equity

$805

$725

Total assets

$1,879 $1,742Total liabilities and stockholder's equity

$1,879 $1,742

Here we see NWC
grow to $275 million in
2006 from $252 million
in 2005.

This increase of $23
million is an investment
of the firm.

$23 million

$275m = $761m- $486m

$252m = $707-
$455

Debt versus Equity

• Creditors generally receive the first

claim on the firm’s cash flow.

• Shareholder’s equity is the residual

difference between assets and liabilities.

• Shareholders’ equity = Assets –

Liabilities

Capital Structure

The value of the firm
can be thought of as a
pie.

The goal of the
manager is to increase
the size of the pie.

The Capital Structure
decision can be
viewed as how best to
slice the pie.

If how you slice the pie affects the size
of the pie, then the capital structure
decision matters.

50%

Debt

50%

Equity

25%

Debt

75%

Equity

70%

Debt

30%

Equity

Value versus Cost

• Under Generally Accepted Accounting

Principles (GAAP), audited financial
statements of firms in the U.S. carry

assets at cost

.

• Market value

is the price at which the

assets, liabilities, and equity could
actually be bought or sold, which is a
completely different concept from
historical cost.

The Income Statement (a video)

• measures financial performance (the results of the entity's

operations) over a specific period of time.

• summarizes the revenues and expenses of a company for a

period of time.

• The accounting definition of income is:

Revenue – Expenses ≡ Income

Income Statement

Revenue

refers to inflows from the

delivery or manufacture of a product or
from the rendering of a service.

Expenses

are outflows incurred to

produce revenue (cost of doing business).
It is an outflow of cash or other valuable
assets from a person or company to
another person or company.

U.S.C.C. Income Statement

Total operating revenues

Cost of goods sold

Selling, general, and administrative expenses

Depreciation

Operating income

Other income

Earnings before interest and taxes

Interest expense

Pretax income

Taxes

Current: $71

Deferred: $13

Net income

Addition to retained earnings $43

Dividends: $43

The operations
section of the
income
statement
reports the
firm’s
revenues and
expenses from
principal
operations.

$2,262

1,655

327

90

$190

29

$219

49

$170

84

$86

Total operating revenues

$2,262

Cost of goods sold

1,655

Selling, general, and administrative expenses

327

Depreciation

90

Operating income

$190

Other income

29

Earnings before interest and taxes

$219

Interest expense

49

Pretax income

$170

Taxes

84

Current: $71

Deferred: $13

Net income

$86

Addition to retained earnings: $43

Dividends: $43

The non-
operating
section of the
income
statement
includes all
financing
costs, such as
interest
expense.

U.S.C.C. Income Statement

Total operating revenues

Cost of goods sold

Selling, general, and administrative expenses

Depreciation

Operating income

Other income

Earnings before interest and taxes

Interest expense

Pretax income

Taxes

Current: $71

Deferred: $13

Net income

Retained earnings: $43

Dividends: $43

Net income is
the “bottom
line.”

$2,262

1,655

327

90

$190

29

$219

49

$170

84

$86

U.S.C.C. Income Statement

Cash Flow Statement

• The nature of accrual accounting is such that

a company may be profitable but nonetheless
experience a shortfall in cash.

• The statement of cash flows is useful in

evaluating a company's ability to pay its bills.
For a given period, the cash flow statement
provides the following information:

– Sources of cash
– Uses of cash
– Change in cash balance

Cash Flow Statement

• The financial statement that summarizes an

entity’s cash receipts and cash payments
during the period. It breaks the sources and
uses of cash into the following categories:

– operating activities –

concerned with the

acquisition and sale of products and services

– investing activities –

concerned with the

acquisition and disposal of long-term assets

– Financing activities

- concerned with the raising

and repayment of funds in the form of debt and
equity.

Financial Cash Flow

• The information used to construct the

cash flow statement comes from the
beginning and ending balance sheets for
the period and from the income
statement for the period.

• the cash flow received from the firm’s

assets must equal the cash flows to the
firm’s creditors and stockholders.

CF(A)≡ CF(C) + CF(S)

CASH FLOW EQUATIONS – Cash flow from assets

Cash flow from assets

=

operating cash flow

–

net

capital spending

-

Change in net working capital

OCF = EBIT + depreciation – taxes

NCS = ending net fixed assets – beginning

net fixed assets + depreciation

change in

NWC = ending NWC – begining

NWC

CASH FLOW EQUATIONS- cash flow to creditors

Cash flow to creditors

= interest

expense-

net new borrowing from

creditors

Net new borrowing = ending long-term

liabilities – begining long-term
liabilities

CASH FLOW EQUATIONS- cash flow to owners

Cash flow to owners

=

dividends –

net new borrowing from owners

Net new borrowing from owners

=

change in

equity

Change in equity

= ending common stock

and paid-in-surplus

–

beginning common

stock and paid-in-surplus

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

-173

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

-23

Total

$42

Cash Flow of Investors in the Firm

Debt

$36

(Interest plus retirement of debt

minus long-term debt financing)

Equity

6

(Dividends plus repurchase of

equity minus new equity financing)

Total

$42

Operating Cash
Flow:

EBIT

$219

Depreciation

$90

Current Taxes

-

$71

OCF

$238

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

Total

Cash Flow of Investors in the Firm

Debt

(Interest plus retirement of debt

minus long-term debt financing)

Equity

(Dividends plus repurchase of

equity minus new equity financing)

Total

Capital Spending

Purchase of fixed assets

$198

Sales of fixed assets

-

$25

Capital Spending

$173

-173

-23

$42

$36

6

$42

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

Total

Cash Flow of Investors in the Firm

Debt

(Interest plus retirement of debt

minus long-term debt financing)

Equity

(Dividends plus repurchase of

equity minus new equity financing)

Total

NWC grew from
$275 million in 2007
from $252 million in
2006.

This increase of $23
million is the
addition to NWC.

-173

-23

$42

$36

6

$42

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

Total

Cash Flow of Investors in the Firm

Debt

(Interest plus retirement of debt

minus long-term debt financing)

Equity

(Dividends plus repurchase of

equity minus new equity financing)

Total

-173

-23

$42

$36

6

$42

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

Total

Cash Flow of Investors in the Firm

Debt

(Interest plus retirement of debt

minus long-term debt financing)

Equity

(Dividends plus repurchase of

equity minus new equity financing)

Total

Cash Flow to
Creditors

Interest

$49

Retirement of debt
73

Debt service
122

Proceeds from new
debt sales

-86

Total

$36

-173

-23

$42

$36

6

$42

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

Total

Cash Flow of Investors in the Firm

Debt

(Interest plus retirement of debt

minus long-term debt financing)

Equity

(Dividends plus repurchase of

equity minus new equity financing)

Total

Cash Flow to Stockholders

Dividends

$43

Repurchase of stock
6

Cash to

Stockholders 49

Proceeds from new stock
issue

-43

Total

$6

-173

-23

$42

$36

6

$42

U.S.C.C. Financial Cash

Flow

Cash Flow of the Firm

Operating cash flow

$238

(Earnings before interest and taxes

plus depreciation minus taxes)

Capital spending

(Acquisitions of fixed assets

minus sales of fixed assets)

Additions to net working capital

Total

Cash Flow of Investors in the Firm

Debt

(Interest plus retirement of debt

minus long-term debt financing)

Equity

(Dividends plus repurchase of

equity minus new equity financing)

Total

)

(

)

(

)

(

S

CF

B

CF

A

CF





The cash flow
received from the
firm’s assets must
equal the cash flows
to the firm’s
creditors and
stockholders:

-173

-23

$42

$36

6

$42

U.S.C.C. Cash Flow from Operations

To calculate cash
flow from
operations, start
with net income,
add back non-
cash items like
depreciation and
adjust for
changes in
current assets
and liabilities
(other than
cash).

Operations

Net Income

Depreciation

Deferred Taxes

Changes in Assets and Liabilities

Accounts Receivable

Inventories

Accounts Payable

Accrued Expenses

Notes Payable

Other

Total Cash Flow from Operations

$86

90
13

-24

11
16
18

-3

$199

-8

U.S.C.C. Cash Flow from Investing

Cash flow from
investing
activities involves
changes in
capital assets:
acquisition of
fixed assets and
sales of fixed
assets (i.e., net
capital
expenditures).

Acquisition of fixed assets

Sales of fixed assets

Total Cash Flow from Investing Activities

-$198

25

-$173

U.S.C.C. Cash Flow from Financing

Cash flows to
and from
creditors and
owners include
changes in
equity and debt.

Retirement of debt (includes notes)
Proceeds from long-term debt sales

Dividends

Repurchase of stock

Proceeds from new stock issue

Total Cash Flow from Financing

-$73

86

-43

43

$7

-6

U.S.C.C. Statement of Cash Flows

The statement
of cash flows is
the addition of
cash flows
from
operations,
investing, and
financing.

Operations

Net Income

Depreciation

Deferred Taxes

Changes in Assets and Liabilities

Accounts Receivable

Inventories

Accounts Payable

Accrued Expenses

Notes Payable

Other

Total Cash Flow from Operations

$86

90

13

-24

11

16

18

-3

$199

-8

Acquisition of fixed assets

Sales of fixed assets

Total Cash Flow from Investing Activities

-$198

25

-$173

Investing Activities

Financing Activities

Retirement of debt (includes notes)

Proceeds from long-term debt sales

Dividends

Repurchase of stock

Proceeds from new stock issue

Total Cash Flow from Financing

-$73

86

-43

43

$7

-6

Change in Cash (on the balance sheet)

$3

3

Statement of Owners' Equity

(Statement of Retained Earnings)

• It explains the changes in retained earnings.

Retained earnings appear on the balance sheet

and most commonly are influenced by income

and dividends.

• It uses information from the Income Statement

and provides information to the Balance Sheet.

• The following equation describes the equity

statement for a sole proprietorship:

Ending Equity  =  
Beginning Equity  +  Investments  Withdrawals  +

 Income

The stockholders' equity in a

corporation is calculated:

    

Common Stock

(recorded at par value)

+  Premium on Common Stock (issue price minus

par value)

+  Preferred Stock (recorded at par value)

+  Premium on Preferred Stock (issue price minus

par value)

+  Retained Earnings

----------------------------------------------------------------

=  Stockholders' Equity

• Note that the premium on the issuance of stock is

based on the price at which the corporation

actually sold the stock on the market. Afterwards,

market trading does not affect this part of the

equity calculation. Stockholders' equity does not

change when the stock price changes!

Methods of financial

statements

analysis

• Horizontal analysis –

a comparison of

financial statement items over a period of
time.

• Vertical analysis –

a comparison of

various financial statement items within a
single period with the use of commonsize
statements.

Financial Statements Analysis

• Common-Size Balance Sheets

(

Vertical)

– Compute all accounts as a percent of total

assets

• Common-Size Income Statements

– Compute all line items as a percent of sales

Standardized statements make it easier to compare

financial information, particularly as the company
grows.

They are useful for comparing companies of different

sizes, particularly within the same industry.

Using Financial Statements

• Ratios are not very helpful by

themselves: they need to be
compared to something

• Time-Trend Analysis

– Used to see how the firm’s performance

is changing through time

• Peer Group Analysis

– Compare to similar companies or within

industries

Methods

• Past Performance

- Across historical time

periods for the same firm (the last 5 years for

example),

• Future Performance

- Using historical figures

and certain mathematical and statistical

techniques, including present and future

values. This extrapolation method is the main

source of errors in financial analysis as past

statistics can be poor predictors of future

prospects.

• Comparative Performance

- Comparison

between similar firms.