Accounting And Finance Skills

Templates And Examples For Financial Statement Analysis




1. Financial Statement Analysis Templates

A. Balance Sheet Analysis Template

Purpose: To assess a company’s financial health by evaluating assets, liabilities, and equity.

| Category | Details | Key Metrics | Formula | Analysis |
|-----------------------|----------------------------|------------------------------------|-----------------------------------------------|--------------------------|
| Current Assets | Cash, receivables, inventory | Current Ratio | ( \frac{{Current Assets}} / {{Current Liabilities}} ) | Should be > 1.5 |
| Non-Current Assets| Property, equipment, goodwill | Debt-to-Equity Ratio | ( \frac{{Total Liabilities}} / {{Total Equity}} ) | Lower ratios are safer. |
| Current Liabilities | Accounts payable, short-term debt | Working Capital | ( {Current Assets} - {Current Liabilities} ) | Positive = healthy. |
| Equity | Retained earnings, owner’s equity | Asset-to-Equity Ratio | ( \frac{{Total Assets}} / {{Total Equity}} ) | Shows power. |

B. Income Statement Analysis Template

Purpose: Evaluate profitability and operational efficiency.

| Category | Details | Key Metrics | Formula | Analysis |
|------------------------|----------------------------|-------------------------------------|-----------------------------------------------|--------------------------|
| Revenue | Sales or service income | Revenue Growth Rate | ( \frac{{Revenue}{{Current}} - {Revenue}{{Previous}}} / {{Revenue}_{{Previous}}} * 100 ) | Indicates growth. |
| COGS | Direct costs of production | Gross Profit Margin | ( \frac{{Gross Profit}} / {{Revenue}} * 100 ) | Healthy > 40%. |
| Operating Expenses | Overhead costs | Operating Profit Margin | ( \frac{{Operating Income}} / {{Revenue}} * 100 ) | Measures efficiency. |
| Net Income | Profit after taxes | Net Profit Margin | ( \frac{{Net Income}} / {{Revenue}} * 100 ) | > 10% = strong. |

C. Cash Flow Statement Analysis Template

Purpose: Analyze liquidity and cash management efficiency.

| Category | Details | Key Metrics | Formula | Analysis |
|---------------------------|----------------------------|-------------------------------------|-----------------------------------------------|--------------------------|
| Operating Activities | Core business cash inflow | Operating Cash Flow Ratio | ( \frac{{Cash from Operations}} / {{Current Liabilities}} ) | > 1 = good liquidity. |
| Investing Activities | Asset purchases or sales | CapEx Ratio | ( \frac{{CapEx}} / {{Revenue}} * 100 ) | < 20% for stable growth.|
| Financing Activities | Borrowing, dividends | Debt Coverage Ratio | ( \frac{{Operating Cash Flow}} / {{Total Debt}} ) | > 0.2 is preferred. |
| Net Cash Flow | Total cash movement | Free Cash Flow (FCF) | ( {Operating Cash Flow} - {CapEx} ) | Positive = good health. |

2. Specific Calculations for Financial Analysis

Calculation A: Liquidity Metrics

  1. Current Ratio: Measures short-term financial stability.
    [ {Current Ratio} = \frac{{Current Assets}} / {{Current Liabilities}} ]

  2. Example: Current assets = $100,000; current liabilities = $50,000.
    [ {Current Ratio} = \frac{100,000}{50,000} = 2.0 ]
    Interpretation: The company has $2 in assets for every $1 of liability.

  3. Quick Ratio: Excludes inventory to measure liquidity more conservatively.
    [ {Quick Ratio} = \frac{{Current Assets} - {Inventory}} / {{Current Liabilities}} ]

  4. Example: Current assets = $100,000, inventory = $20,000, current liabilities = $50,000.
    [ {Quick Ratio} = \frac{100,000 - 20,000}{50,000} = 1.6 ]
    Interpretation: The company is liquid enough to meet its obligations without selling inventory.

Calculation B: Profitability Metrics

  1. Gross Profit Margin: Indicates core operational efficiency.
    [ {Gross Profit Margin} = \frac{{Gross Profit}} / {{Revenue}} * 100 ]

  2. Example: Revenue = $500,000; Gross Profit = $200,000.
    [ {Gross Profit Margin} = \frac{200,000}{500,000} * 100 = 40\% ]
    Interpretation: The company retains 40% of revenue after direct costs.

  3. Net Profit Margin: Reflects overall profitability after all expenses.
    [ {Net Profit Margin} = \frac{{Net Income}} / {{Revenue}} * 100 ]

  4. Example: Net Income = $50,000; Revenue = $500,000.
    [ {Net Profit Margin} = \frac{50,000}{500,000} * 100 = 10\% ]
    Interpretation: For every $1 in revenue, the company earns $0.10 in profit.

Calculation C: Efficiency Metrics

  1. Inventory Turnover Ratio: Measures how quickly inventory is sold.
    [ {Inventory Turnover} = \frac{{COGS}} / {{Average Inventory}} ]
  2. Example: COGS = $300,000; Average Inventory = $60,000.
    [ {Inventory Turnover} = \frac{300,000}{60,000} = 5 ]
    Interpretation: The company sells and replaces its inventory 5 times annually.

3. Clarification on Financial Statement Analysis

Understanding Key Relationships:

  1. Connection Between Financial Statements:
  2. Net Income (Income Statement) flows into Retained Earnings (Balance Sheet).

  3. Operating Cash Flow (Cash Flow Statement) starts with Net Income.

  4. Why Liquidity Ratios Matter:

  5. Liquidity ratios (like current ratio) reveal short-term financial health. A ratio below 1 suggests that the company may struggle to cover immediate liabilities.

  6. Red Flags to Watch For:

  7. Negative Cash Flow: Indicates operational inefficiency.
  8. High Debt-to-Equity Ratio: Suggests over-power and higher financial risk.
  9. Declining Margins: Signals increased costs or pricing pressure.

4. Use Cases and Situations

Scenario A: Investor Assessing a Startup

  • Objective: Evaluate profitability and scalability.
  • Approach:
  • Use the income statement to analyze revenue growth and net profit margins.
  • Check cash flow statements for positive free cash flow.
  • Review the balance sheet for excessive liabilities.
  • Outcome: An investor identifies strong revenue growth (50% YoY) but highlights weak cash flow due to high CapEx.

Scenario B: Small Business Owner Evaluating Liquidity

  • Objective: Determine if short-term obligations can be met.
  • Approach:
  • Calculate the current ratio and quick ratio from the balance sheet.
  • Review operating cash flow from the cash flow statement.
  • Outcome: A current ratio of 1.2 and negative operating cash flow suggest liquidity issues.

Scenario C: Manager Reviewing Cost Efficiency

  • Objective: Identify areas to cut costs.
  • Approach:
  • Analyze the gross profit margin and operating profit margin on the income statement.
  • Compare COGS and operating expenses against benchmarks.
  • Outcome: Operating margin declines by 5%, prompting a review of staffing costs.

Scenario D: Valuing a Company for Acquisition

  • Objective: Determine if the target company is financially sound.
  • Approach:
  • Review revenue growth, EBITDA margins, and debt levels.
  • Analyze trends in cash flow and the sustainability of operating income.
  • Outcome: Steady growth and low debt-to-equity ratios justify the acquisition.
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