Evaluation Of Financial Analysis

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LUBS 3865 FINANCIAL ANALYSIS

SESSION 2

OVERVIEW OF FINANCIAL ANALYSIS

Objectives

To introduce the framework that will be use in the module to evaluate company performance

Introduction

The framework adopted for evaluating the performance of a company focuses on three interrelated aspects of a firm’s performance:

1. its strategic direction
2. its financial statement performance
3 its stock market performance

An analysis of a company’s performance requires a thorough evaluation of these three aspects of a company’s performance. Essentially, the past and present outcomes of the company’s strategic decisions (for example, concerning its market positioning, product range, diversification strategies, etc.) should be reflected in its financial statement performance and the potential future outcomes of those strategic decisions should be reflected in its current stock market performance. Furthermore, an assessment of a company’s strategic directions, financial statement performance and stock market performance needs to consider the firm’s actions and performance in the context of both the industry in which it operates and the broader national and international environment. Clearly, the behaviour and performance of a firm’s competitors will affect its behaviour and performance. The nature of competitiveness in the industry will affect that industry’s profitability and hence affect the individual firm’s competitiveness. At the broader national and international level, factors such as the state of the national and world economy, and social and demographic factors will affect corporate profitability.

Hence, an analysis of corporate performance requires an evaluation of the strategic direction, financial statement performance and stock market performance. Furthermore, an assessment of each of these areas requires an analysis at the company, industry and broader environmental level. The framework to be considered is shown below:

The Holistic View of Analysis

Having formed the basic framework for the analysis of a company’s performance, the next step is to consider the form of the analysis and type of information required in evaluating performance. This is considered briefly below: a much more detailed examination of the form of the analysis and the type of information required is provided in the relevant lectures.

The key elements of the analysis to be undertaken are summarised below.

Assessing strategic direction
Financial statement analysis
Stock market assessment

Company
Identify and assess corporate and business unit strategies, management resource, product market positions, etc.
Assessment of the current, past and future outcomes to company’s strategies - sales, profitability, cash flow, etc.
Understand market assessment and rating of the company.
Industry
Evaluate competitive forces and relative strengths and strategies of competitors. Review key industry drivers and likely future pattern of industry development

Make comparisons with other companies operating in the same or similar product markets
Compare company’s rating to other companies in the same sector. Review performance of sector against overall market.
Broad context
Assess key PEST (or PESTEL) change agents, ie
P - political
E - economic
S - social
T - technological
E – environmental
L – legal factors Assess the performance of companies in general and evaluate opportunities for fund raising (debt and equity), likely tax and interest rate changes, etc.
Identify movements in overall stock market and likely future pattern of share prices.
(Source, Ellis and Williams, Corporate Strategy and Financial Analysis, 1993, Pitman Publishing)

ASSESSING COMPANY, INDUSTRY AND ENVIRONMENTAL INFORMATION

Assessing strategic direction

Company

At this point, we are trying to answer a basic question: ‘what is the company attempting to achieve’. That is, what are its objectives and what strategies are being adopted by the company in order to meet