Chapter 18 – Figuring Financials

Overview

The previous few chapters have covered all of the key financial statements, and a few incidental ones. The next few pages move on to look at how you analyse and interpret them together, and also how you compare published figures between companies. Accounting ratios and foreign currency issues are introduced here, and developed in the next couple of chapters.

Mastering financial analysis

After reading this chapter, you should be able to answer the following questions:

• How do index numbers help you when interpreting trends in reported figures?
• Three factors which make inter-company financial comparisons difficult are accounting policies, accounting periods and accounting currencies. Right or wrong?
• How could you minimize the effects of inflation on reported financials?
• What is the best way to measure a company’s liquidity? What if cash flow forecasts are not available? Name three measures of liquidity that you could use with published financial statements.
• How do turnover ratios provide a measure of the efficiency of a company’s financial policies?
• What is the major problem with using ratios which rely on figures from the balance sheet?
• Why would you use index numbers to common size the profit and loss accounts of two companies? What does common size mean?
• If a foreign company provided you with financials in its base operating currency and in a currency of your choosing, which set would you use to calculate ratios and trends?
• If the net profits of a foreign company were unchanged between two years, and you translated them into another currency which depreciated by 10% during the same period, what would appear to have happened to the translated profits?
• For what type of comparisons would you have to translate a foreign company’s accounts into your own currency?