Introduction to Financial Analysis

Balance sheet
Profit and loss statement
Methods and indicators of FA
 Financial analysis
• The main purpose of the financial analysis
is to prepare documents for quality
decision-making about functioning of the
company.
• It is obvious that there is a very strong
connection between financial accounting and
company decision-making.
 Financial analysis
• Financial analysis is not only the part of
financial management, FA serves to
identifications of weaknesses in the
economic health of the company
 Sources of information for FA
• External
• Internal
 External information
• Information from:
– International analyses,
– Analyses of national economy or industrial
sectors,
– Official statistics,
– Market report.
 Internal information
• directly concerned with the analysed
company
– Balance sheet,
– Profit and Loss statement,
– Statement of cash flows,
– Statement of shareholders’ Equity
 Users of financial analysis
• FA is crucial for management of the company,
shareholders, creditors and other external
users
• External users X Internal users
 External users
• Investors, shareholders,
• Commercial banks and other creditors,
• Government and its bodies,
• Business partners,
• Managers, competitors.
 Internal users
• Managers,
• Trade unionists,
• Staff.
 Financial statements
• The statements provide a survey of
economic situation, structure of the
property, allocation of resources and cash
flows.
• Financial statements represent a summary of
the financial information prepared in the
required manner for the purpose of use by
manger and external stake holders.
 Objectives of financial statements
• To provide information about the financial position,
performance and changes in financial position of an
enterprise that is useful to a wide range of users in
making economic decisions.
• To provide reliable financial information about
economic resources and obligations of a business
enterprise.
• To provide reliable information about in net
resources (resources minus obligations) of an
enterprise that results from its activities.
 Objectives of financial statements
• To provide financial information that assist in
estimating the earning potentials of a business.
• To provide other needed information about
changes in economic resources of obligation.
• To disclose, to the extent possible, other
information related to the financial statements
that is relevant to the needs of the users of
these statements.
 Balance sheet
• The balance sheet is a summary of all
transactions of the company recorded in its
accounting and therefore it provides
information about a financial situation of
an accounting unit which is necessary for
financial management.
 Balance sheet
• the attention is paid to:
• Structure and development of assets, an
adequate size of particular components,
• Structure and development of liabilities,
particularly stockholder’s equity, bank and
supplier’s loans,
• Relation among assets and liabilities
components.
Possible difficulties of balance sheet analysis

• Balance sheet does not exactly reflect the present

value of the company because accounting principles
use the historical costs – past purchase price - for
evaluation of assets and liabilities
• Accounting principles use the estimate to determine
the real value of some balance sheet components,
• In financial statements there are not included some
components which have certain “internal” values, e.g.
human resources or experience and qualification of
• employees.
 Balance sheet
ASSETS LIABILITIES

1. Receivables for subscribed capital

2. Fixed assets 1. Equity

- intangible fixed assets - registered capital
- tangible fixed assets - capital funds
- long-term financial assets - funds created from profit
- profit/loss

3. Current assets 2. External resources

- inventory - allowances
- short-term receivables - long-term liabilities
- long-term receivables - short-term liabilities
- financial assets - bank loans

4. Accrued assets accounts 3. Accrued liabilities accounts

Total assets Total liabilities

 BS
• Assets express what the company owns and equity
what belongs to whom.
• An immediate overview of assets and equity is shown
in the balance sheet of a business which has the form
of an account, which shows the specific structure of
corporate equity (all assets) on the left side and all
equity resources (equity + liabilities) on the right.
• The economic stability of the business depends on its
ability to create and maintain a balanced assets and
equity condition.
 Assets
• they represent future economic benefit for the
business and this benefit belongs exclusively to
the business,
• future growth expectations must be sufficiently
reliable and conclusive,
• assets are the result of economic operations
done in the past,
• assets must be reliably valuable (in money) to a
sufficient extent.
 Assets
• ASSETS

• Fixed assets x Current assets

• Intangible fixed assets Inventory
• Tangible fixed assets Receivables
• L-T financial assets S-T fin.assets
 Fixed assets
• Fixed assets, representing assets serving the business
in the long run, are not spent at once, but gradually.
• Assets are spent in the form of depreciation, through
which the value of fixed assets transfers into expenses
proportionately to their wear and tear.
• Tangible and intangible fixed assets may also be non-
depreciable, such as land which is not worn or
artworks and collections which are, on the contrary,
gaining value in time.
• Long-term financial assets are not depreciated, either.
 Intangible fixed assets
• For intangible fixed assets, some components are tracked
without financial value and valuated if being sold, e.g.
corporate brand or know-how.
• An example of intangible fixed assets are results of
research and development, software, valuable rights and
goodwill.
• The business will decide itself what items it intends to put
into the fixed assets category and how long it is going to
depreciate them.
• The tax legislation set a limit of CZK 60,000 for intangible
assets in the Czech Republic.
 Tangible fixed assets
• Tangible fixed assets include e.g. land, buildings, structures,
artwork, collections, objects of cultural value, objects from
precious metals and other..
• Independently movable things and groups of movable things
(such as inventory, vehicles, computers and computer networks,
machines, devices, machine technology and machinery).

• What is regarded as long-term financial assets are securities and

shares, loans provided to businesses within the group and other
loans with the due period over one year (e.g. investment of a
silent partner).
 Currents assets
• Current assets represent assets spent at once in
the course of business activities and/or where
the transformation process does not exceed
one year.
• The operating cycle of a business during which
current assets are gradually transformed from
one form to another is shown below.
• Financial assets – material – finished products –
receivables – financial assets
 Current assets
• From an accounting point of view, we have to realise
that current assets often exist in different forms in
parallel and that the character of the economic cycle
and especially the transformation speed for different
asset forms depends on the nature of business.
• The course and shape of the cycle will be different in
a business which buys goods and sells them on in
unchanged condition than in a manufacturing
business.
 Accrued assets accounts
• So-called accrued assets accounts belong to
assets, as well.
• These assets include temporary assets as
deffered expenses, complex deferred
expenses, deffered incomes.
 Question
• Give examples of fixed and current assets that
might be used in businesses engaged in:

• manufacturing
• trade
 Question - answer
• Manufacturing
• Fixed assets: operating buildings, manufacturing halls, inventory
storerooms, office buildings, assembly lines, railway sidings, land,
manufacturing machines, vehicles, devices, lifting mechanisms,
pumps, software, computers, computer networks, furniture for
storerooms, workshops, offices, technological lines, licences,
inventions, design, workshop drawings, know-how, etc.
• Current assets: inventory of raw materials and material, auxiliary
materials, operating substances, unfinished products, finished
products, semi-finished products, receivables, securities for trade,
cash in cashdesk and on accounts, valuables, etc.
 Question - answer
• Business firm
 
• Fixed assets: operating buildings, goods storerooms, sales
areas, land, machinery, devices and inventory in
storerooms, vehicles, shop and office furniture, computers
and computer networks, software, licences, etc.
• Current assets: goods inventory in storerooms and shops,
cash in cashdesk and on bank accounts, receivables
towards consumers, valuables, securities for trade, office
items, etc.
 Equity + liabilities
• If we want to express the origin of assets
(from what financial sources they were
acquired), we talk about sources of funding,
equity or liabilities.
• In the narrower sense, liabilities are
obligations (debts) of a business for the
transfer or use of assets it is administering.
 Equity + liabilities
• Liabilities have these distinct features:
• a liability exists which, when met in the future, will
reduce corporate assets (e.g. delivery of goods),
• an economic operation was done in the past
causing an existing liability of the business,
• the term of debt is known with sufficient reliability
and the amount of debt is expressed in money,
• the creditor towards whom the liability exists is
known.
 Equity + liabilities
• Equity x Liabilities (other sources)
Registered capital Reserves (provisions)
Capital funds Long-term liabilities
Funds from profit Short-term liabilities
Profit Bank loans
 Equity
• Equity representing the entitlement of business
owners (partners) to assets administered by the
business.
• Equity is the main carrier of business risk and its share
in total equity is therefore the indicator of financial
security (independence) of the company.
• Business firms – as entities – regard the resources
provided by owners as the entitlement of the latter to
be satisfied in the future.
• Equity, usually has the following structure:
 Equity
• Registered capital consisting of monetary and non-monetary investments into the
company by partners. Stock companies are obliged to create registered capital
and also limited net book values (consisting of investments of limited partners as
a minimum) have it. Unlimited liability companies are obliged to have registered
capital as well if agreed so by the partners in the articles of net book value 35.
• Equity funds created from equity contributions (gifts, discovered non-depreciable
fixed assets, other contributions by partners) and those that do not raise
registered capital. This also includes the share premium, i.e. difference between
the market and nominal price of shares and/or contributions into registered
capital.
• Funds created from profit, e.g. reserve fund (to cover losses and overcome poor
financial situations in the business), indivisible funds (for associations), statutory
and other funds.
• Business result (profit or loss) of the current period and
• Retained earnings (accumulated loss) from previous years.
 Liabilities (other sources)
• Liabilities (external resources) are obligations
to creditors (not towards company owners).
• For external resources the business must pay
interest and incurs other expenses related to
its acquisition (bank fees, commissions, etc.).
This capital is divided into:
 Liabilities (other sources)
• Reserves may be created by businesses for a specific purpose (e.g.
repairs of fixed assets, back taxes, etc.) or have a general nature
(e.g. risks and losses from business).
• Long-term liabilities consist of issued bonds, payables towards
other companies, payables from rent, advances received, bills of
exchange to be paid and other long-term liabilities with a due
period over one year.
• Short-term liabilities represent debt to contractors for products
supplied on commercial credit, advances received from clients,
loans, wages and salaries to be paid, taxes and insurance to be
paid, other payables towards partners and staff, etc.
• Bank loans, i.e. liabilities to financial institutions – current liabilities
or long-term liabilities.
 Accrued accounts of liabilities
• Liabilities also include so-called Accrued
accounts of liabilities to which accrued
liabilities resulting from the independence of
accounting periods (e.g. accrued expenses,
deferred revenues) belong.
 Balance sheet
• The balance sheet expresses the balance of assets and liabilities as of a
specific date.
• Depending on the moment of compilation, we distinguish:
 
• starting balance sheet – compiled when a new business is set up and shows
assets invested by owners and corresponding resources on the side of
liabilities too,

• annual balance sheet – compiled as of the last day of every accounting

period and when the business is dissolved. The annual balance sheet
accounts the balance of assets following transformations in the economic
cycle. At the beginning of a new accounting period it traces the ownership
potential ready to enter the business in the given period and changes its
form,
 Balance sheet
• extraordinary balance sheet – unlike the two balance sheet types above (so-called
proper balance sheets), an extraordinary balance sheet is prepared during the
accounting period, on an irregular basis, at occasions that do not normally happen
during the economic useful life of businesses. The duty to prepare the extraordinary
balance sheet arises e.g. as of the day the business is dissolved without liquidation
(expect for business transformations), as of the day preceding the day of entering
liquidation, as of the bankruptcy declaration or settlement effect day and as of the
liquidation end or bankruptcy cancellation day.

• Annual and extraordinary balance sheets are always compiled as of the moment of
closing books in the company, as of the so-called balance sheet day. Entities may,
however, prepare the balance sheet also as of another moment than the balance
sheet day end – such balance sheets are called provisional balance sheets (part of
provisional financial statements). In these cases, books are not closed and inventory
check is done only to express valuation according to the principle of caution.
 Balance sheet
• The balance sheet is prepared based on the
balance sheet equation expressing the
balance between assets and liabilities:
 
ASSETS = OWNER´S EQUITY + LIABILITIES
Minimum compulsory information under BALANCE SHEET
Balance sheet Comercial name or other ASSETS row
Current accouning period
Previous
name of an accounting unit period
Regulation 500/2002 Coll.
in a full format a b c Gross Adjustment Net Net
as at 31.12.2014 1 2 3 4
( in thousands of Czech Crowns) Registered office or adress C. Current assets (r. 32 + 39 + 47 + 58) 031 0 0 0 0
of an accounting unit
IC C. I. Inventory (r.33 to 38) 032 0 0 0 0
0 C. I. 1 Materials 033 0 0 0 0
0 2 Work in progress and semi-products 034 0 0 0 0
3 Finished products 035 0 0 0 0
ASSETS row Previous
Current accounting period
period 4 Animals 036 0 0 0 0
a b c Gross Adjustment Net Net 5 Merchandise 037 0 0 0 0
1 2 3 4
TOTAL ASSETS (r. 02 + 03 + 31 + 63)
6 Advance payments for inventory 038 0 0 0 0
001 0 0 0 0
A. Receivables from s ubscriptions 002 0 0 0 0 C. II. Long-term receivables (r. 40 to 47) 039 0 0 0 0

B. Fixed assets (r. 04 + 13 + 23) 003 0 0 0 0 C. II. 1 Trade receivables 040 0 0 0 0

B. I. Intangible fixed assets (r.05 to 12) 004 0 0 0 0 2 Receivables - controlled and controlling organizations 041 0 0 0 0
Receivables - accounting units with substantial
B. I. 1 Incorporation expenses 005 0 0 0 0 3 042 0 0 0 0
influence
2 Research and development 006 0 0 0 0
4 Receivables from partners 043 0 0 0 0
3 Software 007 0 0 0 0
5 Long-term deposits given 044 0 0 0 0
4 Valuable rights 008 0 0 0 0
6 Estimated receivable 045 0 0 0 0
5 Goodwill ( +/- ) 009 0 0 0 0
7 Other receivables 046 0 0 0 0
6 Other intangible fixed assets 010 0 0 0 0
8 Deffered tax receivable 047 0 0 0 0
7 Intangible fixed ass ets under construction 011 0 0 0 0
C. III. Short-term receivables (r. 49 to 57) 048 0 0 0 0
8 Advance payments for intangible fixed assets 012 0 0 0 0
C. III. 1 Trade receivables 049 0 0 0 0
B. II. Tangible fixed assets (r.14 to 22) 013 0 0 0 0
2 Receivables - controlled and controlling organizations 050 0 0 0 0
B. II. 1 Lands 014 0 0 0 0
Receivables - accounting units with substantial
2 Constructions 015 0 0 0 0 3 051 0 0 0 0
influence
3 Equipment 016 0 0 0 0 4 Receivables from partners 052 0 0 0 0
4 Perennial corps 017 0 0 0 0 5 Receivables from social security and health insurance 053 0 0 0 0
5 Breeding and draught animals 018 0 0 0 0 6 Due from state - tax receivable 054 0 0 0 0
6 Other tangible fixed assets 019 0 0 0 0 7 Short-term deposits given 055 0 0 0 0
7 Tangible fixed assets under construction 020 0 0 0 0 8 Estimated receivable 056 0 0 0 0
8 Advance payments for tangible fixed assets 021 0 0 0 0 9 Other receivables 057 0 0 0 0
9 Adjustment to acquired assets 022 0 0 0 0 C. IV. Short-term financial assets (r. 59 to 62) 058 0 0 0 0
B. III. Long-term financial assets (r. 24 to 30) 023 0 0 0 0 C. IV. 1 Cash 059 0 0 0 0
B. III. 1 Shares - controlled organizations 024 0 0 0 0 2 Bank accounts 060 0 0 0 0
2 Shares in accounting units with substantial influence 025 0 0 0 0 3 Short-term securities and ownership interests 061 0 0 0 0
3 Other securities and shares 026 0 0 0 0 4 Short-term financial assets acquired 062 0 0 0 0
Loans - controlled and controlling organizations,
4 027 0 0 0 0 D. I. Accruals (r. 64 to 66) 063 0 0 0 0
substantial influence
5 Other financial investments 028 0 0 0 0 D. I. 1 Deferred expenses 064 0 0 0 0
6 Financial investments acquired 029 0 0 0 0 2 Complex deferred costs 065 0 0 0 0
7 Advance payments for long-term financial assets 030 0 0 0 0 3 Deferred income 066 0 0 0 0
 LIABILITIES row
Balance sheet
Current
period
Previous
period
LIABILITIES row Current
period
Previous
period
a b c
5 6 a b c
5 6
TOTAL LIABILITIES (r. 68 + 88 + 121) 067 0 0
B. III. Short-term payables (r. 107 to 117) 106 0 0
A. Equity (r. 69 + 73 + 80 + 83 + 87 ) 068 0 0
A. I. Registered capital (r. 70 to 72 ) 069 0 0 B. III. 1 Trade payables 107 0 0
1 Registered capital 070 0 0
2 Payables - controlled and controlling organizations 108 0 0
2 Company´s own shares and ownership interests (-) 071 0 0
3 Changes of registered capital ( +/- ) 072 0 0 3 Payables - accounting units with substantial influence 109 0 0
A. II. Capital funds (r. 74 to 79) 073 0 0
4 Payables to partners 110 0 0
A. II. 1 Share premium 074 0 0
2 Other capital funds 075 0 0 5 Payroll 111 0 0
3 Diferences from revaluation of assets and liabilities ( +/- ) 076 0 0 6 Payables to social securities and health insurance 112 0 0
4 Diferences from revaluation in tranformation of companies ( +/- ) 077 0 0
5 Diferences from tranformation of companies ( +/- ) 078 0 0
7 Due from state - tax liabilities and subsidies 113 0 0
6 Diferences from valuation in tranformation of companies ( +/- ) 079 0 0 8 Short-term deposits received 114 0 0
A. III. Funds from earnings (r. 81 + 82) 080 0 0
9 Issues bonds 115 0 0
A. III. 1 Reserve fund 081 0 0
2 Statutory and other funds 082 0 0 10 Estimated payables 116 0 0
A. IV. Profit / loss - previous years (r. 84 to 86) 083 0 0
11 Other payables 117 0 0
A. IV. 1 Retained earnings from previous years 084 0 0
2 Accumulated losses from previous years 085 0 0 B. IV. Bank loans and financial accomodations (r. 119 to 121) 118 0 0
3 Other profit / loss - previous years 086 0 0 B. IV. 1 Long-term bank loans 119 0 0
A. V. 1 Profit / loss - current year (+/-) 087
0 0 2 Short-term bank loans 120 0 0
/r.01 - (+ 69 + 73 + 79 + 83 - 88 + 89 + 122)/

2 Decided on advance for payment of a profit share (-) 088 0 0 3 Short-term accomodations 121 0 0
B. Other sources (r. 87 + 94 + 105 + 118) 089 0 0
C. I. Accruals (r. 123 + 124) 122 0 0
B. I. Reserves (r. 91 to 94) 090 0 0
B. I. 1 Reserves under special statutory regulations 091 0 0 C. I. 1 Accrued expenses 123 0 0
2 Reserves for pension and similar payables 092 0 0
2 Deffered revenues 124 0 0
3 Income tax reserves 093 0 0
4 Other reserves 094 0 0
B. II. Long-term payables (r. 96 to 105) 095 0 0
B. II. 1 Trade payables 096 0 0
2 Payables - controlled and controlling organizations 097 0 0
3 Payables - accounting units with substantial influence 098 0 0
4 Payables to partners 099 0 0
5 Long-term advances received 100 0 0
6 Issues bonds 101 0 0
7 Long-term notes payables 102 0 0
8 Estimated payables 103 0 0
9 Other payables 104 0 0
10 Deffered tax liability 105 0 0
 Profit and loss statement
• The income statement provides information
about the company performance over an
accounting period.
• the attention is paid to the structure of the
income statement and dynamism of particular
components
• The information from the income statement is a
very important source material for evaluation of
profitability.
 Profit and loss statement
• if the balance sheet enables us to evaluate
whether the company is economically stable,
the profit and loss statement tells us about its
ability to create enough profit
• the arrangement of the profit and loss
statement lets us gradually calculate the gross
margin (gross profit/ commercial profit), the
added value and the business result of the
individual phases of the company’s activities
 Profit and loss statement
• operating (business) result as the difference of costs and revenues
achieved during operating activities,
• financial (business) result as the difference between financial costs
and revenues
• profit/loss from ordinary activities which is the sum of operating
and financial ER from which the income tax for ordinary activities
is deducted,
• extraordinary (business) result is created for things such as
changes in the assessment method, shortages and damages or
surpluses, etc.
• profit/loss for the accounting period (total business result after
taxation)
 Profit and loss statement
Profit and Loss Statement  
Trade activity:  
Sales of merchandise 1,000,000
- Costs for merchandise sold - 820,000
- gross margin 180,000
Manufacturing activity  
Revenues from sales of own products 2,500,000
- Costs of materials - 2,100,000
- Value added 580,000
Other operational costs -330,000
Operating result 250,000
Financial result 0
Income tax on ordinary activities -47,500
Economic result from ordinary activities 202,500
Income tax on extraordinary activities 0
Extraordinary result 0
P/L for the accounting period 202,500
Assets
Connection of BS and P/LS
Balance Sheet of CBA Liabilities
Fixed assets 100,000 Owner`s equity
Fixed tangible assets - cars 80,000 Legal capital 100,000
Long-term financial assets – purchased 20,000 Capital funds 50,000
bonds
Business result of the current period 202,500

Current assets 370,000 External resources

Inventory - merchandise 120,000 Trade payables 30,000
Trade receivables 30,000 Tax payables (income tax) 47,500
Cash 220,000 Bank loans 40,000
Total assets 470,000 Total liabilities 470,000

Profit and Loss Statement

Trade activity:
Sales of merchandise 1,000,000
- Costs for merchandise sold - 820,000
- gross margin 180,000
Manufacturing activity
Revenues from sales of own products 2,500,000
- Costs of materials - 2,100,000
- Value added 580,000
Other operational costs -330,000
Operating result 250,000
Financial result 0
Income tax on ordinary activities -47,500
Economic result from ordinary activities 202,500
Income tax on extraordinary activities 0
Extraordinary result 0
P/L for the accounting period 202,500
 Profit and loss statement
• like the balance sheet, the profit and loss
statement is an important source material for
analysing the financial management of the
company, the objective of which is to evaluate
the economics and profitability for a particular
period
Revenues – Costs = Economic result
(Profit/loss)
 Profit and loss statement
•  The most important component of the
statement is “net income on operating
activities” because it reflects the efficiency
of the company to generate positive net
income on company’s main operations
 Differences between BS and P/LS
• The basic difference between the balance sheet
and the income statement is that the balance
sheet records assets and liabilities at a given
moment, while the income statement is always
related to a given time interval – an overview of
resulting operations over a time interval
• The income statement includes flow quantities
based on a cumulative basis and their changes
at the time do not have to be even
Possible difficulties of P/LS analysis
• Revenues and costs appear in financial
statements even though there are no flows
of cash over a given period; revenues on selling
(sales) include sales paid in cash immediately
and selling to customers on the trade credit,
• Sales – revenues of current period – do not
include the encashment of payments from
selling that was realized on credit in a previous
period,
Possible difficulties of P/LS analysis
• Costs of a given period represent all the costs
made during the process of making of revenues of
a given period; wages, salaries and other costs do
not have to be paid in the same period when they
appear in the income statement,
• Some of the costs included in ‘the profit and
loss account’ are not a cash expenses, e.g. the
depreciation does not mean the outflow of cash in
spite of the fact that the depreciation is subtracted
when calculating the net income.
 Methods and indicators of FA
• The development of mathematical, statistical
and economic sciences enabled to establish a
wide range of methods for evaluation of
company’s financial health within financial
analysis.
• It is necessary to realize that the attention
should be paid to the suitability when
choosing methods of analysis.
 Methods and indicators of FA
• Choice of methods must be done with respect to:
– Usefulness – it means that the method must correspond
to the stated aim; exactly the same methods and
indicators are not suitable for every company,
– Expensiveness – there are many expenses (time,
competence) connected with the analysis; the expenses
should be appropriate to the return of invested expenses,
– Reliability – the more reliable and quality is the input
information, the more reliable are results of the analysis.
 Methods and indicators of FA
• There are two approaches to the evaluation of
economic methods in economics:
– Fundamental analysis – based on the knowledge of
mutual connections between economic and non-
economic processes which influence activities of an
analyzed company; deduces conclusions mostly without
algorithm processes,
– Technical analysis – uses mathematic, mathematic-
statistics and algorithm methods to compile data
quantitatively in order to assess conclusions from
economic point of view.
 Methods and indicators of FA
• It is obvious that fundamental and
technical analyses are relatively close
because it would be quite difficult to assess
conclusions of technical analyses without
the “fundamental” knowledge of economic
processes so it is necessary to combine these
two approaches to financial analysis.
 Methods and indicators of FA
• financial analysis belongs to the category
of technical analyses because it works with
mathematical processes which are
presented as the explanation of computed
values.
 Overview of elementary methods of FA
(by Sedláček)

• Analysis of Absolute Indicators (state and flow):

– Trend Analysis (horizontal analysis),
– Percentage Analysis of Components (vertical
analysis).

• Analysis of Subtractive Indicators:

– Net Working Capital.
 Overview of elementary methods of FA
(by Sedláček)

• Analysis of Ratio Indicators:

– Profitability Ratios,
– Asset Management Ratios,
– Debt Management Ratios,
– Liquidity Ratios,
– Market Value Ratios.

• Analysis of Cumulative Indicators:

– Kralicek Quick Test,
– Altman Model (Z – Score),
– The Du Pont Analysis.
 Overview of elementary methods of FA
(by Růčková)

• Extensive (volumetric) Indicators:

– Subtractive Indicators,
– Non-financial Indicators,
– State Indicators,
– Flow Indicators.

• Intensive (relative) Indicators:

– Homogeneous,
– Heterogeneous.
 Extensive (volumetric) indicators
• Extensive indicators are holders of information
about the range or volume of analysed
component and present the quantity in natural
(volumetric) units.
• In the case of analysis of basic financial statements,
the quantity is expressed in financial units.
• The category of extensive indicators includes:
subtractive, non-financial, state and flow
indicators.
 Substractive indicators
• Subtractive indicators present the difference
of state of given groups of assets or
liabilities which are always applied to the
same time.
• The typical representative of subtractive
indicator is net working capital – the
difference among total current assets and
total short-term liabilities.
 Non-financial indicators
• Non-financial indicators are the necessary part
of the analysis and are drawn from data stated
in the in-house financial accounting.
• This category includes the total number of
employees, the amount of products, energy
consumption, the productivity of labour etc.
 State indicators
• State indicators show the state of property
and its financial resources of cover to the
given time.
• These quantities serve as a basic to the
other indicators, particularly components
from the balance sheet.
 Flow indicators
• Flow indicators inform about the change in
extensive indicators which happened in the
given period of time.
• The most common flow indicator is net
income which is expressed as the subtraction
of incomes and expenditures
 Intensive indicators
• Intensive indicators characterize the degree
of how often these indicators are used in
the company and how fast or strong they
are changed.
• The category of intensive indicators includes
homogeneous and heterogeneous intensive
indicators.
 Homogenous intensive indicators
• Homogeneous intensive indicators are the
ratio of extensive indicators which are
expressed in the same figures.
 Heterogenous intensive indicators
• Heterogeneous intensive indicators are defined as
the ratio of two indicators expressed in different
figures.
• The most typical examples are turnover and
speed indicators in the category of asset indicators.
• The reason why these indicators are so frequently
used is that they enable to do the analysis of
time development of financial position of a given
company.
• Furthermore, the indicators are used when compiling
both short-term and long-term financial planning.
 Analysis of Absolute Indicators
• This method of analysis uses direct data involved in
financial statements for assessing and following of
financial situation of a given company.
• On the one hand, it enables to assess particular changes in
the structure of assets and liabilities, and at the same time
it assesses their development in time (trend analysis).
• On the other hand, the method enables to compare
relative changes in assets and liabilities among other
companies mutually by means of percentage analysis of
components (vertical analysis).
Trend Analysis (horizontal analysis)
• The horizontal analysis compares changes of
indicators in the time line with retrospective
from five to ten years.
• It considers horizontally (line by line) both
changes of absolute indicators and
proportional changes of particular
components in financial statements.
Percentage Analysis of Components (vertical
analysis)
• Vertical analysis shows how the different
components of a financial statement relate to a
total figure in the statement.
• The analyst sets the total figure at 100 percent
and computes each component’s percentage of
that total. On the balance sheet, the figure
would be total assets or total liabilities and
stockholders’ equity, and on the income
statement, it would be net revenues or net sales.
Percentage Analysis of Components (vertical
analysis)
• The main advantage of vertical analysis could
be the fact that it is independent of the
interim inflation and therefore it allows the
comparability of results of analysis from
various years and even comparison of various
companies.
 Analysis of Subtractive Indicators
• Subtractive indicators are used for
analysing and management of company’s
financial situation with orientation to
company’s liquidity.
• The most important subtractive indicator is
net working capital.
 Net working capital
• Net working capital is defined as:

Net Working Capital = Total Current Assets −

Total Current Liabilities
 Net working capital
• Net working capital represents that part of
current assets which is financed with long-
term financial resources – either own
resources (company’s capital) or liabilities
(bank loans, bonds).
• The development of net working capital and
short-term solvency interest the company’s
management and its short-term creditors
(banks, suppliers).
 Net working capital
• working capital could be used to purchase
inventory, obtain credit, and finance expanded
sales.
• When a company lacks the net working
capital, it can lead to a company’s failure.