financial statement analysis & projections

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Financial Statement Analysis & Projections

Ashraf HelekaGOL Trainer

26 March, 20133/26/2013

What Can You Measure with Financial Statement Analysis (FSA)?

Sales & Profitability

Asset Efficiency

Liquidity

Solvency & Financial Structure

Why Is FSA Important?

Set targets

Measure progress

Compare to peers or industry

Risk analysis/problem identification

Getting Started with FSA

Accounting Knowledge

Business Life Cycle

Industry Analysis

Financial Ratios

Business Life Cycle

SalesProfits

0

Start-Up PhaseGrowth PhaseMaturity PhaseDecline Phase

Start-Up Growth Maturity Decline

Focus Survival Build Client Base

Sustainability Preservation

Leader Entrepreneur Marketer Controller Asset Stripper

Using Porter’s 5 Forces for Industry Analysis

Rivalry Among

Competitors

Threat of Potential Entrants

Bargaining Power of Buyers

Threat of Substitutes

Bargaining Power of Suppliers


Industry Analysis Terminology Cyclical

Seasonal

High Operational Leverage

Differentiated

Commoditized 3/26/2013

Sales & ProfitabilityRatio Formula What it Measures? If Increases…

Sales Growth

Growth in sales from year to year

Selling more quantity; selling at higher or more efficient price;

Gross Profit Margin

Profitability in core operations before overheads

Higher sales prices, cost efficiencies (top-line)

Operating Profit Margin

Profitability in core operations including overheads

Higher sales prices, cost efficiencies, better operating performance, changes in product mix

Net Profit Margin

Profitability for shareholders of the company

Above + successful management of the business (bottom- line)

Return on Equity (ROE)

How much profit a company generates with the money shareholders have invested.

Increased bottom line profitability, improved asset efficiency, and/or reduction in equity

Asset Efficiency

Ratio Formula What it Measures? If Increases…

Working Investment

(Accounts Receivable + Inventory)- (Accounts Payable + Accrued Exp.)=Trading Assets – Spontaneous Finance

The amount of trading assets that are not financed by spontaneous finance

Giving longer credit terms; greater inventory levels (stock up, longer production period); paying suppliers in advance to get discounts

A/R= 100INV = 200A/P = 50A/E = 100

Working Investment = 100 + 200 – (50 +100) = 150

Example 1 – Sales Growth 2010 -2011

2008 2009 2010 2011 2012

Sales 500 600 620 750 700COGS (100) (100) (110) (130) (130)SG&A (75) (90) (80) (90) (80)Other Operating Costs

(25) (30) (30) (30) (30)

Interest Expense

(20) (30) (30) (30) (30)

Interest Income

10 10 20 20 10

Taxes (70) (80) (70) (70) (70)

== 20.97%

Example 1 - Net Profit Margin for 2012

2008 2009 2010 2011 2012


(25) (30) (30) (30) (30)

Interest Expense

(20) (30) (30) (30) (30)

Interest Income

10 10 20 20 10

Taxes (70) (80) (70) (70) (70)

Net Profit = 700 - 130 - 80 -30 – 30 +10 – 70 = 370Net Profit Margin =

Example 1 - Gross Profit Margin for 2008

2008 2009 2010 2011 2012


(25) (30) (30) (30) (30)

Interest Expense

(20) (30) (30) (30) (30)

Interest Income

10 10 20 20 10

Taxes (70) (80) (70) (70) (70)

Gross Profit = 500 – 100 = 400Gross Profit Margin =

Why Use Financial Projections?

Assess feasibility of a business or

project

Required by most investors and

banks

Set targets

Scenario analysis

Information Needed Before Projecting – Creating Projection Assumptions

Understanding of Business Life Cycle

Industry Analysis

FSA

Marketing Research

Educated Estimations

Marketing Research For Projections

Who are my customers?

What are their spending habits?

How much are they willing to pay for my products/services?

What quantity of my product/service are they willing and

able to purchase?

Financial Projections - Mechanics

Start with Sales

Economic Environment?

Competition in Market?

Customer Demand?

Past Performance?

Volume vs. Value?

Capacity?

Division Volume Value

A 100 units 10 EGP

B 300 units 5 EGP

C 500 units 1 EGP

A = 100 * 10 = 500B = 300 * 5 = 1500C = 500 * 1 = 500Total Sales = 2500



Continue with Costs

COGS/COS

▪ Cost needed in producing product or rendering a

service

Selling & Distribution Costs

General & Administrative Costs3/26/2013



Other/Special Factors that May Affect Costs Major macro issues that can increase costs▪ Legal, regulatory, or insurance-related factors

Commodity prices ▪ If dealing with commodities, fluctuation in price can harm business)

FX rates ▪ If dealing with customers or companies abroad

Labor environment ▪ Shortage of qualified labor can increase costs

R&D

3/26/2013

Example 2 Quarter 1

2010December 2009 – February 2010

Quarter 2 2010March - May

Quarter 3 2010June-August

Quarter 4 2010September – November

Sales 100,000 40,000 30,000 60,000COGS (20,000) (15,000) (15,000) (15,000)SGA (15,000) (10,000) (10,000) (25,000)What quarter in 2011, do you

anticipate will have the greatest sales? Profit?What are possible explanations?

Example 2

What trend do you notice when comparing data for 2010 with 2011? What explanation can you give for the difference between the 2 years?

Quarter 1 2011December 2010 – February 2011

Quarter 2 2011March - May

Quarter 3 2011June-August

Quarter 4 2011September – November

Sales 40,000 35,000 25,000 35,000COGS (20,000) (15,000) (15,000) (15,000)SGA (15,000) (10,000) (10,000) (15,000)

Example 2

What other information would you gather to

project Shariff Travel Sharm’s 2013 sales?

What information would you gather to project

costs? Hint: list all potential costs for this

business, then think how you would project each

cost.

Other Financial Tips

Manage your Cash Monitor inflows and outflows Trade Credit Terms (A/P and A/R)

Focus on Sales and Margins Constantly Monitor Progress


Ashraf Heleka

3/26/2013

GOL Trainer

financial statement analysis & projections

Documents

total sales

greatest sales

corehigher sales prices

project costs

costs legal

potential costs

costs rd3262013

costs cogscos cost