Financial statement analysis for investment banking

How to read a financial report-Trilogy

1. Asset form combination analysis-overall analysis of the left-side columns in Table B/S-asset quality is the benchmark for Statically determining the company's value;
2. Asset Ownership analysis-overall analysis of the column on the Right of Table B/S-capital structure and management capability of the company;
3. asset profitability analysis-B/s table and income statement comprehensive analysis-the company's core growth capability and value judgment benchmark.
-- Mainly relies on the balance sheet and income statement, and the cash flow statement and accounting notes as auxiliary financial report information sources;
-- Identify major problems as the basis for in-depth analysis of enterprise value and Financial diagnosis.

How to view a financial report -- FAQs about asset form Combination Analysis
1. large transactions, especially huge balances in other receivables-inflated assets;
2. The balance volatility of accounts receivable is huge-the company's sales policies are inconsistent, and there are problems with the company's marketing management capabilities;
3. sudden increase in inventory balance-the actual asset value is lower than the book value, or the company has the motivation to quickly convert it into a false profit;
4. Long-term investment is huge-the company's external investment control is ineffective, or the company is a shell company;
5. The long-term assets are huge-the company's actual operating assets are too low, and the acquired value is declining.
6. the intangible assets are huge-the company has increased profits or the number of assets.

View a financial report-asset ownership Analysis
1. debt and equity ratio: capital management capability of the company;
2. fluctuating accounts payable balance-the company's bargaining power for suppliers is weak;
3. Abnormal short-term loan balance fluctuations-the company's financing capacity is in crisis and other financing credit needs to be analyzed;
4. Other accounts payable have a huge balance-whether there is a motive for inflated assets or the company's registered capital is insufficient;
5. Excessive tax payable balance fluctuations-the company's main business is unstable;
6. The balance in the capital accumulation is too large-there are potential tax liabilities.

How to view a financial report-asset profitability
1. mismatch between the revenue of the main business and the cost growth of the main business-motivation of the company to adjust profits;
2. Excessive growth in management fees and financial fees-the company's management and financial management capabilities are insufficient;
3. Large amount of non-frequent profit and loss-the company's main business profitability is insufficient, and the company's overall value is reduced;
4. The company's profit margin is declining-the company lacks future profit growth points.

Financial Report Quality Analysis
Asset Quality Analysis
Profit Quality Analysis
Cash Flow Quality Analysis

Financial report quality analysis-Asset Quality Analysis
1. Asset Quality Analysis: analyzes the differences between the asset book value and "actual value.
2. assets that are expected to be realized based on the book value: monetary capital.
3. assets that are expected to be realized below the book value, including:
<1> short-term claims. Due to bad debt, and insufficient preparation for bad debt (pay attention to the ability of the specific debtor to taste the debt ).
<2> some short-term investments. This is because the stock price may fall and the accrued price loss may not be sufficient (you must pay attention to the stock held by the enterprise and its stock price trend ).
<3> partial inventory. Because the inventory may be devalued, and the inventory Depreciation Preparation may not be sufficient (the accrual process is subjective ). <4> some fixed assets. Especially high-tech assets. Pay attention to corporate depreciation policies.
<5> some intangible assets. Such as patent rights, due to the emergence of new technologies and accelerated devaluation.
<6> purely amortized "assets", including deferred charges, net losses to assets to be processed, and deferred assets.

4. assets that are expected to be implemented based on amounts higher than the book value, including:
<1> most inventories. Because inventory is revealed at "historical costs", it is often sold "normally.
<2> some external investments. Especially under the "cost method.
<3> some fixed assets. Especially real estate.
<4> non-account/table assets, for example, fixed assets, low-value consumable items, research and development achievements/investment, advertising investment, and human resources that have been fully depreciated but are still in use by the Enterprise
Financial report quality analysis-Profit Quality Analysis
1. Profit Quality Analysis: analyzes the authenticity and rationality of profit formation and the impact on cash flow.

2. The Quality Analysis of Operating income should be focused on:
<1> variety structure of business income;
<2> regional structure of business income;
<3> Proportion of income produced by related party transactions to total income;
<4> contribution of local or departmental protectionism to enterprise business income.

3. For the quality analysis of investment income, check whether there is a corresponding cash/operating capital inflow in the investment income.

4. For the quality analysis of operating costs, pay attention to the following:
<1> is cost calculation true?
<2> is the inventory valuation method "appropriate"/stable?
<3> is depreciation accrued normally?
<4> is the decrease in the business cost level caused by temporary factors?
<5> the contribution of the related party's transaction and local or departmental protectionism to the enterprise's "Low Cost.

5. The Quality Analysis of business and management expenses should be noted as follows:
<1> are depreciation and other amortized expenses processed properly?
<2> is the control of enterprise business and management expenses short-term?

6. Pay attention to the quality analysis of financial expenses:
<1> is the liability of an enterprise "too small?
<2> do enterprises rely too much on short-term loans?
<3> does an enterprise rely too much on natural liabilities?

7. Characteristics of deteriorating enterprise profit quality:
<1> future income decline caused by short-term business behaviors or incorrect decision-making;
<2> efficiency damage caused by short-term behaviors in cost control;
<3> account profit increases due to pure profit manipulation;
<4> high financial risks associated with high profits due to excessive liabilities;
<5> the profit of an enterprise is excessively dependent on non-main business;
<6> asset (especially inventory and receivables) Turnover efficiency is low;
<7> abnormal accounting policy changes;
<8> An exception occurred in the audit report (retained, denied, or denied ).

Financial report quality analysis-Cash Flow Quality Analysis 1
1. Analysis of the Quality of cash flow generated by business activities:
<1> If the cash flow generated by the business activities is less than zero, it generally means that there is a problem in the cash flow conversion in the business process, and the business operation is "out of service ".
<2> If the cash flow generated by the business activities is equal to zero, it means that the cash balance in the business process can be maintained in the short term, but not in the long term.
<3> If the cash flow generated by the business activities is greater than zero, but it is not enough to compensate for the current non-Pay cost, this is only a quantitative difference with Case 2, but there is no qualitative difference.
<4> If the cash flow generated by the business activities is greater than zero and the current non-pay-as-you-go cost can be compensated, the enterprise can maintain a "simple reproduction" in the cash flow transition ".
<5> If the cash flow generated by the business activities is greater than zero and there is still surplus after the current non-pay-as-you-go cost is compensated, this means that the cash flow generated by the business activities will contribute to the enterprise's investment development.
2. Analysis on the Quality of cash flow generated by investment activities:
<1> If the cash flow generated by an investment activity is less than zero, it means that the cash flow of the investment activity itself is "out of balance", which is usually normal, however, we must pay attention to the rationality of investment expenditures and the realization of investment income.
<2> If the cash flow generated by investment activities is greater than or equal to zero, this is usually abnormal. However, it is necessary to consider the possible causes of long-term asset disposal/monetization, realization of investment income, and low investment expenditure.
Financial report quality analysis-cash flow analysis 2
Analysis on the Quality of cash flow generated by funding activities:
<1> If the cash flow generated by financing activities is greater than zero, you must pay attention to: IS funding coordinated with investment and business planning? <2> If the cash flow generated by fund-raising activities is less than zero, you must note: Are enterprises facing debt repayment pressure and lack new financing capabilities? Do enterprises have no new investment and development opportunities?
Financial Report Analysis Method-horizontal analysis technology
The financial ratio analysis can be classified into several types. Generally, the financial ratio is classified into the following five categories:
<1> liquidity ratio, which is the financial ratio used to measure the company's ability to repay current liabilities, mainly including the current ratio and quick ratio.
<2> the long-term financial security ratio is used to measure the degree of guarantee provided by long-term financial service providers, that is, the financial ratio of the company's long-term debt tasting capability. It mainly includes the asset-liability ratio and Interest Guarantee multiple.
<3> Profitability ratio: the financial ratio used to measure the company's overall profitability, including the sales profit margin, asset profit margin, and capital profit margin.
<4> financial ratios of special interest to investors, that is, financial ratios used to measure the contributions made by the company to investors or the benefits that investors obtain from the company, mainly including earnings per share and price-earnings ratio of common shares.
<5> financial ratios related to the cash flow statement, that is, the financial ratios used to measure the company's cash flow status, including the ratio of cash flow to debt and cash flow per share.
Financial analysis aims to analyze existing problems, propose solutions to short-term strategic issues, and support enterprises to maximize their long-term value.

Enterprise profitability can be studied from several aspects

The following financial indicators are the best data for understanding the company's financial situation. The key is to learn to use these indicators for horizontal and vertical comparisons.

It is not enough to understand the overall profitability of an enterprise. We should also understand the components of the profitability to understand why profit and how to make profits?

We can divide the indicators into three layers, from top to bottom for enterprise Analysis

The three indicators in the middle indicate which important business indicators have an important impact on the net return on capital, the lower-layer ratio shows how the impact on the balance sheet and income statement can affect the net return on capital.

The total input asset return (roic or RONA) before interest is easier to remove the impact of different financial policies on the analysis than the return on net assets.

Another indicator to estimate the profitability of an enterprise is the ability to create economic value.

Costs can be classified according to different standards

Activitybased costing)

Cost System-Comparison Between Activity-Based Costing and traditional costing



Basic Cost analysis tools (1): horizontal comparison of cost structures

Basic Cost analysis tools (2): breakeven point analysis


Basic Cost analysis tools (3): operational leverage Analysis

An important supplement to financial report analysis-Technical and Economic Analysis of Investment Projects

The investment analysis can help answer the following investment questions:
1. Whether the future return matches the current investment after considering the risks
2. analyze whether the proposed investment is the most effective means to achieve the goal
Unlike profit analysis and cost analysis that focus on historical data, investment analysis focuses on estimating the future value of investment projects.
Common tools include:
Payback Period
Internal ROI (IRR)
Net Present Value Method (NPV)
Investment analysis provides a quantitative analysis framework to analyze investment opportunities. It is mainly used to supplement the Strategic Analysis Framework of enterprises.
Advantages of Investment Analysis
It is useful when selecting different investment and policy directions:
Quantitative Analysis of Investment Opportunities
Help with "dry/dry" Decisions
Prioritize investment opportunities/strategic choices based on quantitative indicators
Investment Opportunity analysis is generally divided into three steps


The purpose of investment is to create value for the enterprise's shareholders.

Investment analysis tools (1): Payback Period

Investment analysis tools (2): Internal ROI (IRR)

Investment analysis tools (3): net present value (NPV) Method

Misleading investment analysis indicators-IRR indicators
1. irr Indicator = actual income of the project = accounting income;
2. The accounting return rate may be lower than or higher than the IRR indicator;
3. irr indicators can be used as reference indicators for investor fund management during project operation;
3. ** specific case analysis of project investment analysis.