11/5/2020

Chapter 7: Financial Analysis

Techniques (Lecture 1)
Bushra Ferdous Khan

Who relies on financial statement analysis

for making investment decisions?
Option A: Insiders of a firm
Option B: Outsiders of a firm

1
 11/5/2020

Who relies on financial statement analysis

for making investment decisions?
Option A: Insiders of a firm
Option B: Outsiders of a firm (Correct option)

What are the objectives behind

analyzing financial statements?
• Deciding on if the investor should buy, sell, or hold capital market instruments

• Deciding on if the investor should supply equity or credit to the firm

• Analyzing management’s performance to make voting decision to influence

management’s actions

To sum, analyzing past performance of a firm to decide

future course of action from the perspective of ‘present’
and/or ‘potential’ debt and/or equity supplier

2
 11/5/2020

Limitations of financial reports towards

supporting future decision making
• They contain data about past performance (Income Statement,
Cash Flow Statement)

• The provide insight on current financial condition (Balance

Sheet)

• They do not provide all the information useful for estimating

future results They do provide ‘a lot’ of important
information, but not ‘all’. We need to look
beyond annual reports to make
investment decisions as outsiders of an
firm

Financial statement analysis must be supported by analysis

of information on…
Economy

Industry
Comparable firms
within the
Industry

Past financial
performance
of the firm

Latest
financial
performance
of the firm

3
 11/5/2020

This chapter describes various techniques used to

analyze a company’s financial statements.

The techniques discussed in this chapter (and in most of this course) are
useful for analyzing
(1) latest financial performance of the firm,
(2) past financial performance of the firm,
(3) comparing a firm’s performance with comparable firms within the industry
– based on the information reported in annual reports

Once we start working on the report as part of our Project, you will receive
instructions on how to analyze (4) industry and (5) economy for
understanding financial performance of a firm.

Standard Techniques of Financial

Statement Analysis
1. Common-size Analysis
1.1 Vertical Common-size Analysis
1.2 Horizontal Common-size Analysis
2. Ratio Analysis
2.1 Activity Ratios
2.2 Liquidity Ratios
2.3 Solvency Ratios
2.4 Profitability Ratios
2.5 Valuation Ratios
3. DuPont Analysis

4
 11/5/2020

1. Common-size Analysis
“Common-size analysis involves expressing financial data,
including entire financial statements, in relation to a single
financial statement item, or base.”
(Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)

1.1 Vertical Common-size Analysis

Vertical common-size analysis is a “popular method of financial
statement analysis that shows each item on a statement as a
percentage of a base figure within the statement”.
(Accounting for Management, 2019)

“Items used most frequently as the bases are total assets or

revenue.”
Total assets and revenue are most frequently (Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)
used bases, not the only acceptable ones. As
an analyst you can choose to use some other
base if you can justify you choice.

In essence, vertical common-size analysis creates a ratio

between every financial statement item and the base item.”
(Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)

5
 11/5/2020

Vertical Common Size Analysis of Balance Sheet

2014 2015 2016 2017 2018
ASSETS

NON-CURRENT ASSETS
Property, plant and equipment 62.06% 57.20% 56.13% 53.36% 61.98%
Intangible assets 4.68% 4.17% 3.95% 4.52% 10.90%
Other receivables 0.73% 0.68% 0.65% 0.71% 0.53%

CURRENT ASSETS
Inventories 7.82% 6.91% 5.94% 6.24% 8.84%
Trade receivables 4.33% 4.39% 6.49% 7.11% 7.02%
Other receivables 10.97% 10.95% 9.21% 11.13% 9.00%
Derivative instruments 0.00% 0.01% 0.00% 0.07% 0.06%
Cash and cash equivalents 9.41% 15.70% 17.62% 16.86% 1.66%

TOTAL ASSETS 100.00% 100.00% 100.00% 100.00% 100.00%

EQUITY & LIABILITIES

Share capital 58.08% 56.12% 55.36% 53.89% 43.19%

Retained earnings 6.48% 11.71% 16.63% 14.53% 13.64%
Other components of equity 0.31% 0.26% 0.39% 0.22% 0.43%
Foreign currency translation 2.04% 1.82% 1.68% 2.67% 1.54%
SHAREHOLDERS’ EQUITY- PARENT COMPANY 66.29% 69.40% 73.27% 70.87% 57.94%

Non-controlling interests 0.00% 0.00% 0.00% 0.00% 0.00%

NON-CURRENT LIABILITIES
Borrowings 0.00% 0.00% 0.00% 0.00% 3.66%
Long-term debt 0.66% 0.00% 0.00% 0.00% 0.00%
Deferred tax liability 9.53% 11.20% 10.85% 10.34% 11.55%
Employee benefits 0.53% 0.24% 0.31% 0.14% 0.76%
Provisions 0.13% 0.13% 0.14% 0.17% 0.14%
TOTAL NON-CURRENT LIABILITIES 10.86% 11.57% 11.30% 10.65% 16.11%

CURRENT LIABILITIES
Trade payables 11.46% 11.95% 11.12% 13.46% 16.05%
Other payables 2.48% 1.82% 1.80% 2.43% 2.49%
Derivative instruments 0.07% 0.01% 0.01% 0.00% 0.00%
Current portion of long term debt 2.03% 0.00% 0.00% 0.00% 0.00%
Short-term debt 5.88% 5.25% 2.50% 2.59% 0.00%
Current tax liabilities 0.93% 0.00% 0.00% 0.00% 0.00%
Borrowings 0.00% 0.00% 0.00% 0.00% 7.41%
Calculation Source: Work of
TOTAL CURRENT LIABILITIES 22.85% 19.03% 15.43% 18.48% 25.95% Team Lafarge Holcim Cement,
TOTAL EQUITY AND LIABILITIES 100.00% 100.00% 100.00% 100.00% 100.00%
Spring 2020

Composition of Assets
Property, plant and equipment Intangible assets Other receivables Inventories
62.06%

61.98%

Trade receivables Other receivables Derivative instruments Cash and cash equivalents
57.20%

56.13%

53.36%

70.00%
60.00%
50.00%
17.62%

16.86%
15.70%

40.00%
11.13%
10.97%

10.95%

10.90%

30.00%
9.41%

9.21%

9.00%
8.84%
7.82%

7.11%

7.02%
6.91%

6.49%

6.24%
5.94%
4.68%

4.52%
4.33%

4.39%
4.17%

3.95%

1.66%
0.73%

0.68%

0.65%

0.71%

0.53%
0.00%

0.01%

0.00%

0.07%

0.06%

20.00%
10.00%
0.00%
2014 2015 2016 2017 2018

Composition of Liabilities & Owner's Equity

Share capital Retained earnings Other components of equity Foreign currency translation
Non-controlling interests Borrowings Long-term debt Deferred tax liability
Employee benefits Provisions Trade payables Other payables
Derivative instruments Current portion of long term debt Short-term debt Current tax liabilities
Borrowings
58.08%

56.12%

55.36%

53.89%

43.19%

80.00%
60.00%
16.63%

16.05%
14.53%

13.64%
13.46%
11.95%
11.71%

11.55%
11.46%

11.20%

11.12%
10.85%

10.34%
9.53%

7.41%
6.48%

5.88%

5.25%

40.00%
3.66%
2.67%
2.48%

2.50%

2.43%

2.59%

2.49%
2.04%

2.03%

1.82%

1.82%

1.68%

1.80%

1.54%
0.93%
0.66%

0.76%
0.53%

0.39%

0.43%
0.31%

0.13%

0.26%

0.24%
0.13%

0.31%
0.14%

0.22%

0.14%
0.17%

0.14%
0.00%
0.00%

0.07%

0.00%

0.00%
0.00%
0.00%

0.01%
0.00%
0.00%
0.00%

0.00%
0.00%

0.01%
0.00%
0.00%
0.00%

0.00%
0.00%

0.00%
0.00%
0.00%
0.00%

0.00%

0.00%
0.00%
0.00%
0.00%

20.00%
0.00%
0.00%

0.00%

0.00%

-20.00% 2014 2015 2016 2017 2018

6
 11/5/2020

Composition of Assets (Without Property, plant and equipment)

17.62%

16.86%
Intangible assets Other receivables Inventories Trade receivables Other receivables Derivative instruments Cash and cash equivalents

15.70%
20.00%

11.13%
10.97%

10.95%

10.90%
9.41%

9.21%

9.00%
8.84%
15.00%
7.82%

7.11%

7.02%
6.91%

6.49%

6.24%
5.94%
4.68%

4.52%
4.39%
4.33%

4.17%

3.95%
10.00%

1.66%
0.73%

0.68%

0.71%
0.65%

0.53%
0.07%

0.06%
0.00%

0.01%

0.00%
5.00%

0.00%
2014 2015 2016 2017 2018

Composition of Liabilities & Owner's Equity (Without Share Capital)

Retained earnings Other components of equity Foreign currency translation Non-controlling interests
Borrowings Long-term debt Deferred tax liability Employee benefits
Provisions Trade payables Other payables Derivative instruments
Current portion of long term debt Short-term debt Current tax liabilities Borrowings

16.63%

16.05%
14.53%

13.64%
20.00%

13.46%
11.95%
11.71%

11.55%
11.46%

11.20%

11.12%
10.85%

10.34%
15.00%
9.53%

7.41%
6.48%

5.88%

5.25%

10.00%

3.66%
2.67%

2.59%
2.50%
2.48%

2.49%
2.43%
2.04%

2.03%

1.82%

1.82%

1.80%
1.68%

1.54%
0.93%

0.76%
0.66%
0.53%

0.43%
0.39%
0.31%

0.31%
0.26%

0.24%

0.22%

0.17%
0.13%

0.13%

0.14%

0.14%

0.14%
0.07%
0.00%
0.00%

0.00%

0.00%
0.00%
0.00%

0.01%
0.00%
0.00%
0.00%

0.00%
0.00%

0.01%
0.00%
0.00%
0.00%

0.00%
0.00%

0.00%
0.00%
0.00%
0.00%

0.00%

0.00%
0.00%
0.00%
0.00%
5.00%

0.00%
0.00%

0.00%

0.00%
2014 2015 2016 2017 2018
-5.00%

Composition of Assets

2014 2015 2016 2017 2018

Property, plant and equipment Intangible assets Other receivables Inventories
Trade receivables Other receivables Derivative instruments Cash and cash equivalents

Composition of Assets (Without Property, plant and equipment)

2014 2015 2016 2017 2018

Intangible assets Other receivables Inventories Trade receivables Other receivables Derivative instruments Cash and cash equivalents

7
 11/5/2020

Vertical Common Size Analysis of Income Statement

2014 2015 2016 2017 2018
REVENUE 100.00% 100.00% 100.00% 100.00% 100.00%
Cost of sales 61.44% 64.27% 64.86% 75.98% 75.35%
GROSS PROFIT 38.56% 35.73% 35.14% 24.02% 24.65%

General and administrative

expenses 6.40% 6.59% 6.33% 9.97% 7.75%
Sales and marketing expenses 1.63% 1.89% 1.83% 2.44% 3.08%
Other operating income 2.08% -0.90% -0.10% 0.13% 0.07%
OPERATING INCOME 32.62% 26.36% 26.88% 11.74% 13.89%

Finance cost 2.62% 1.67% 0.67% 0.38% 2.62%

Finance income 0.50% 1.05% 1.26% 1.17% 0.04%
INCOME BEFORE TAX 30.50% 25.74% 27.47% 12.53% 11.32%

Income tax 6.16% 4.87% 6.72% 5.09% 4.62%

INCOME FOR THE YEAR 24.34% 20.87% 20.75% 7.44% 6.70%

Attributable to:
Owners of the parent Company 24.34% 20.87% 20.75% 7.44% 6.70%
Non-controlling interests 0.00% 0.00% 0.00% 0.00% 0.00%
24.34% 20.87% 20.75% 7.44% 6.70%

Basic earnings per share

(Taka) 0.00% 0.00% 0.00% 0.00% 0.00% Calculation Source: Work of
Diluted earnings per share Team Lafarge Holcim Cement,
(Taka) 0.00% 0.00% 0.00% 0.00% 0.00% Spring 2020

Distribitution of Revenue
Cost of sales General and administrative expenses Sales and marketing expenses
Other operating income Finance cost Finance income
75.35%

Income tax Owners of the parent Company Non-controlling interests

64.27%
61.44%

80.00%
75.98%
64.86%

60.00%
24.34%

20.87%

20.75%

40.00%
9.97%

7.75%
7.44%
6.72%

6.70%
6.59%
6.40%

6.33%
6.16%

5.09%
4.87%

4.62%
3.08%
2.62%

2.62%
2.44%
2.08%

1.89%

1.83%
1.63%

1.67%

1.26%

1.17%
1.05%

0.67%
0.50%

0.38%
0.13%
0.00%

0.00%

0.00%

0.00%

0.07%

0.04%

0.00%
20.00%

0.00%
-0.90%

-0.10%

2014 2015 2016 2017 2018

-20.00%

Distribitution of Revenue (Without COGS)

General and administrative expenses Sales and marketing expenses Other operating income Finance cost
Finance income Income tax Owners of the parent Company Non-controlling interests
24.34%

20.87%

20.75%

30.00%
25.00%
20.00%
9.97%

7.75%
7.44%

15.00%
6.72%

6.70%
6.59%
6.40%

6.33%
6.16%

5.09%
4.87%

4.62%
3.08%
2.62%

2.62%
2.44%

10.00%
2.08%

1.89%

1.83%
1.67%
1.63%

1.26%

1.17%
1.05%

0.67%
0.50%

0.38%
0.13%

0.07%

0.04%
0.00%

0.00%

0.00%

0.00%

0.00%

5.00%
-0.90%

-0.10%

0.00%
2014 2015 2016 2017 2018
-5.00%

8
 11/5/2020

1.2 Horizontal Common-size Analysis

“Horizontal common-size analysis,
• prepared by computing the increase or decrease in percentage
terms of each balance sheet or income statement item from the
prior year or
• prepared by dividing the quantity of each item by a base year
quantity of the item, highlights changes in items over time.”
(Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015)

Horizontal Common-size Analysis Showing Percentage

Changes from Prior Year

Source: (Wall Street Mojo, 2020)

9
 11/5/2020

Horizontal Common Size Analysis of Balance Sheet with 2014 as Base Year
2014 2015 2016 2017 2018
ASSETS

NON-CURRENT ASSETS
Property, plant and equipment 100.00% 95.39% 94.90% 92.67% 134.30%
Intangible assets 100.00% 92.15% 88.53% 104.17% 313.37%
Other receivables 100.00% 96.68% 94.14% 105.11% 97.67%

CURRENT ASSETS
Inventories 100.00% 91.39% 79.60% 85.98% 152.02%
Trade receivables 100.00% 104.97% 157.37% 176.97% 218.18%
Other receivables 100.00% 103.26% 88.09% 109.34% 110.33%
Derivative instruments 100.00% 75.56% 1368.44% 1444.72%
Cash and cash equivalents 100.00% 172.69% 196.47% 193.03% 23.71%

TOTAL ASSETS 100.00% 103.50% 104.92% 107.77% 134.47%

EQUITY & LIABILITIES

Share capital 100.00% 100.00% 100.00% 100.00% 100.00%

Retained earnings 100.00% 187.12% 269.37% 241.88% 283.11%
Other components of equity 100.00% 86.14% 134.51% 75.97% 190.07%
Foreign currency translation 100.00% 92.46% 86.48% 140.67% 101.70%
SHAREHOLDERS’ EQUITY- PARENT COMPANY 100.00% 108.34% 115.97% 115.22% 117.52%

Non-controlling interests 100.00% 48.15% -28.40% -4.94% -81.48%

EQUITY

NON-CURRENT LIABILITIES
Borrowings
Long-term debt 100.00% 0.00% 0.00% 0.00% 0.00%
Deferred tax liability 100.00% 121.60% 119.38% 116.89% 162.84%
Employee benefits 100.00% 45.75% 60.29% 27.97% 192.31%
Provisions 100.00% 107.67% 116.97% 143.34% 145.02%
TOTAL NON-CURRENT LIABILITIES 100.00% 110.26% 109.14% 105.67% 199.44%

CURRENT LIABILITIES
Trade payables 100.00% 107.91% 101.75% 126.50% 188.30%
Other payables 100.00% 75.99% 76.36% 105.50% 134.90%
Derivative instruments 100.00% 19.17% 8.48% 0.00% 0.00%
Current portion of long term debt 100.00% 0.00% 0.00% 0.00% 0.00%
Short-term debt 100.00% 92.36% 44.60% 47.53% 0.00%
Current tax liabilities 100.00% 0.00% 0.00% 0.00% 0.00% Calculation Source: Work of
Borrowings 100.00% Team Lafarge Holcim Cement,
TOTAL CURRENT LIABILITIES 100.00% 86.22% 70.85% 87.16% 152.75%
Spring 2020
TOTAL EQUITY AND LIABILITIES 100.00% 103.50% 104.92% 107.77% 134.47%

Change in Different Asset Category Since Base Year

1444.72%

2014 2015 2016 2017 2018

1368.44%
313.37%

218.18%

196.47%
193.03%
176.97%

172.69%
157.37%
152.02%
134.30%

110.33%
109.34%
104.17%

105.11%

104.97%

103.26%
100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%
96.68%

97.67%
95.39%
94.90%

94.14%
92.67%

92.15%

91.39%
88.53%

88.09%
85.98%
79.60%

75.56%

23.71%

Property, plant and Intangible assets Other receivables Inventories Trade receivables Other receivables Derivative Cash and cash
equipment instruments equivalents

10
 11/5/2020

Horizontal Common Size Analysis of Income Statement with

2014 as Base Year
2014 2015 2016 2017 2018
REVENUE 100.00% 94.69% 92.63% 93.41% 143.59%
Cost of sales 100.00% 99.05% 97.79% 115.52% 176.10%
GROSS PROFIT 100.00% 87.74% 84.39% 58.18% 91.79%

General and administrative

expenses 100.00% 97.42% 91.55% 145.47% 173.90%
Sales and marketing expenses 100.00% 110.24% 104.08% 140.01% 271.68%
Other operating income 100.00% -40.76% -4.48% 5.79% 4.77%
OPERATING INCOME 100.00% 76.52% 76.34% 33.63% 61.15%

Finance cost 100.00% 60.33% 23.57% 13.66% 143.47%

Finance income 100.00% 199.31% 233.07% 219.00% 12.51%
INCOME BEFORE TAX 100.00% 79.92% 83.43% 38.38% 53.29%

Income tax 100.00% 74.87% 101.11% 77.21% 107.72%

INCOME FOR THE YEAR 100.00% 81.19% 78.96% 28.56% 39.53%

Attributable to:
Owners of the parent Company 100.00% 81.19% 78.96% 28.56% 39.53%
Non-controlling interests 100.00% 81.48% 192.59% 137.04% 85.19%
100.00% 81.19% 78.96% 28.56% 39.53%

Calculation Source: Work of

Basic earnings per share (Taka) 100.00% 81.19% 78.96% 28.56% 39.53% Team Lafarge Holcim Cement,
Spring 2020
Diluted earnings per share (Taka) 100.00% 81.19% 78.96% 28.56% 39.53%

Horizontal Common Size Analysis of Income Statement with

2014 as Base Year
2014 2015 2016 2017 2018
It would be wrong to think
REVENUE 100.00% 94.69% 92.63% 93.41% 143.59% that here ‘income after
Cost of sales 100.00% 99.05% 97.79% 115.52% 176.10% tax’ > ‘income before
GROSS PROFIT 100.00% 87.74% 84.39% 58.18% 91.79% tax’. It is not. Remember,
here we are conducting
General and administrative horizontal analysis; not
expenses 100.00% 97.42% 91.55% 145.47% 173.90% vertical analysis.
Sales and marketing expenses 100.00% 110.24% 104.08% 140.01% 271.68%
Other operating income 100.00% -40.76% -4.48% 5.79% 4.77% Here, the interpretation is
OPERATING INCOME 100.00% 76.52% 76.34% 33.63% 61.15% that in 2015 ‘income
before tax’ was 79.92% of
Finance cost 100.00% 60.33% 23.57% 13.66% 143.47% ‘income before tax’ of
Finance income 100.00% 199.31% 233.07% 219.00% 12.51% 2014.
INCOME BEFORE TAX 100.00% 79.92% 83.43% 38.38% 53.29%
Similarly, in 2015 ‘income
Income tax 100.00% 74.87% 101.11% 77.21% 107.72% for year’ was 81.19% of
INCOME FOR THE YEAR 100.00% 81.19% 78.96% 28.56% 39.53% ‘income for year’ of 2014.

Attributable to: It does NOT mean that in

Owners of the parent Company 100.00% 81.19% 78.96% 28.56% 39.53% 2015 ‘income for the year’
calculated after deducting
Non-controlling interests 100.00% 81.48% 192.59% 137.04% 85.19%
‘income tax’ was higher
100.00% 81.19% 78.96% 28.56% 39.53%
than ‘income before tax’.

Calculation Source: Work of

Basic earnings per share (Taka) 100.00% 81.19% 78.96% 28.56% 39.53% Team Lafarge Holcim Cement,
Spring 2020
Diluted earnings per share (Taka) 100.00% 81.19% 78.96% 28.56% 39.53%

11
 11/5/2020

Changes in Distribution of Revenue since Base Year

271.68%
2014 2015 2016 2017 2018

233.07%
219.00%
199.31%

192.59%
176.10%

173.90%
145.47%
143.59%

143.47%
140.01%

137.04%
115.52%

110.24%

107.72%
104.08%

101.11%
100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%

100.00%
99.05%
97.79%

97.42%
94.69%
93.41%
92.63%

91.79%

91.55%
87.74%

85.19%
84.39%

83.43%

81.48%
81.19%

81.19%
79.92%

78.96%

78.96%
77.21%
76.52%
76.34%

74.87%
61.15%

60.33%
58.18%

53.29%

39.53%

39.53%
38.38%
33.63%

28.56%

28.56%
23.57%
13.66%

12.51%
5.79%
4.77%
-4.48%
-40.76%

References
Accounting for Managment. (2019). Vertical (common-size) analysis of financial
statements. Retrieved from: https://www.accountingformanagement.org/vertical-
analysis-of-financial-statements/

Wall Street Mojo. (2020). What is Horizontal Analysis? Retrieved from:

https://www.wallstreetmojo.com/horizontal-analysis/

Robinson, T.R.; Henry, E.; Pirie, W.L.; Broihahn, M.A; 2015. International Financial
Statement Analysis, Third Edition. CFA Institute Investment Series. Wiley.

Project Work of Team Lafarge Holcim Cement, Spring 2020. [Mehraj Khan ;
Shafayat-E-Rabbi Wazed ; Zarin Rahman ; Farhan Tajwar Rakin ; Afrida Rahman
Ava ; Zaunayat Khan ; Jannat Ara Ferdous ]

12