Unit 10

FINANCIAL ANALYSIS

CIAL TER

Overview

In this unit, students will be learned language and knowledge related to the main types
of financial analysis.

Learning objectives
After this unit, students should be able to:
>> Understand the purpose of financial analysis
>> Differentiate between main types of financial analysis

Think and discuss

1. What is the purpose of analyzing financial statements?
2. What do the financial analysts do?

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 1. SPECIAL TERMS

Match the words or expressions in column A with their definition in column B.

You can look it up for more detailed explanations in a specialist dictionary.

Column A Column B
A. a method of analyzing financial statements
1. financial analysis that list each line item as a percentage of a
base figure within the statement
B. any contract between individuals or parties
that holds a monetary value, including cash,
2. financial instrument
debt (bonds, loans), equity (shares), or
derivatives (options, futures, forwards)
C. a mathematical calculation that compares
3. horizontal analysis
one amount to another
D. the process of evaluating businesses,
projects, budgets, and other finance-related
4. vertical analysis
transactions to determine their performance
and suitability
E. used to analyze financial statements by
comparing specific financial information for
5. trend analysis
a certain accounting period with information
from other periods
6. ratio F. the ability of a business to earn profits
G. the short-term ability of a company to pay
7. ratio analysis
its debts when they come due
H. the examination is based on the
8. solvency ratio relationship between two amounts determined
by the number of times one contains the other
I. the examination of a movement in a certain
9. profitability ratio
direction
J. a company's ability to meet long-term
10. liquidity ratio
debts and continue operating into the future

2. READING

READING 1

Reading text 1: Financial Analysis and do exercises 2.1,2.2 below

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 FINANCIAL ANALYSIS
Financial statement analysis is the process of examining relationships among
financial statement elements and making comparisons with relevant information. It is a
valuable tool used by investors, creditors, financial analysts, and others in their decision-
making processes related to stocks, bonds, and other financial instruments. The goal of
analyzing financial statements is to assess past performance and current financial position
and to make predictions about the future performance of a company. Investors who buy
stock are primarily interested in a company's profitability and their prospects for earning a
return on their investment by receiving dividends and/or increasing the market value of
their stock holdings. Creditors and investors who buy debt securities, such as bonds, are
more interested in liquidity and solvency: the company's short-and long-run ability to pay
its debts. Financial analysts, who frequently specialize in following certain industries,
routinely assess the profitability, liquidity, and solvency of companies in order to make
recommendations about the purchase or sale of securities, such as stocks and bonds.
Analysts can obtain useful information by comparing a company's most recent financial
statements with its results in previous years and with the results of other companies in the
same industry. Three primary types of financial statement analysis are commonly known
as horizontal analysis, vertical analysis, and ratio analysis.
Horizontal Analysis
When an analyst compares financial information for two or more years for a single
company, the process is referred to as horizontal analysis, since the analyst is reading
across the page to compare any single line item, such as sales revenues. In addition to
comparing dollar amounts, the analyst computes percentage changes from year to year for
all financial statement balances, such as cash and inventory. Alternatively, in comparing
financial statements for several years, the analyst may prefer to use a variety of horizontal
analysis called trend analysis. Trend analysis involves calculating each year's financial
statement balances as percentages of the first year, also known as the base year. When
expressed as percentages, the base year figures are always 100 percent, and percentage
changes from the base year can be determined.
Vertical Analysis
When using vertical analysis, the analyst calculates each item on a single financial
statement as a percentage of the total. The term vertical analysis applies because each year's
figures are listed vertically on a financial statement. The total used by the analyst on the
income statement is net sales revenue, while on the balance sheet it is total assets. This
approach to financial statement analysis, also known as component percentages, produces
common-size financial statements. Common-size balance sheets and income statements
can be more easily compared, whether across the years for a single company or across
different companies.

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 Ratio analysis enables the analyst to compare items on a single financial statement
or to examine the relationships between items on two financial statements. After
calculating ratios for each year's financial data, the analyst can then examine trends for the
company across years. Since ratios adjust for size, using this analytical tool facilitates
intercompany as well as intracompany comparisons. Ratios are often classified using the
following terms: profitability ratios (also known as operating ratios), liquidity ratios, and
solvency ratios. Profitability ratios are gauges of the company's operating success for a
given period of time. Liquidity ratios are measures of the short-term ability of the company
to pay its debts when they come due and to meet unexpected needs for cash. Solvency
ratios indicate the ability of the company to meet its long-term obligations on a continuing
basis and thus to survive over a long period of time. In judging how well on a company is
doing, analysts typically compare a company's ratios to industry statistics as well as to its
own past performance.
Financial statement analysis, when used carefully, can produce meaningful insights
about a company's financial information and its prospects for the future. However, the
analyst must be aware of certain important considerations about financial statements and
the use of these analytical tools. For example, the dollar amounts for many types of assets
and other financial statement items are usually based on historical costs and thus do not
reflect replacement costs or inflationary adjustments. Furthermore, financial statements
contain estimates of numerous items, such as warranty expenses and uncollectible
customer balances. The meaningfulness of ratios and percentages depends on how well the
financial statement amounts depict the company's situation. Comparisons to industry
statistics or competitors' results can be complicated because companies may select
different, although equally acceptable, methods of accounting for inventories and other
items. Making meaningful comparisons is also hampered when a company or its
competitors have widely diversified operations.
The tools of financial statement analysis, ratio and percentage calculations, are
relatively easy to apply. Understanding the content of the financial statements, on the other
hand, is not a simple task. Evaluating a company's financial status, performance, and
prospects using analytical tools requires skillful application of the analyst's judgment.
(Source: Financial Statement Analysis, Mary Brandy Greenawalt,
https://www.encyclopedia.com/)

2.1 Answer the following questions based on the information in the text

1. What is the importance of financial statement analysis?

2. What is the purpose of analyzing financial statements?
3. What do the financial analysts do?
4. How can financial analysts get useful information to make financial statements?

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 5. Why is it called Horizontal Analysis?
6. What is the character of ratio analysis?
7. In ratio analysis, how can analysis judge on the performance of a company?

2.2
According to the text, which of the following sentences are true (T) or false (F)
1. The purpose of analyzing the financial statements is only to make a prediction
about the future performance of a company.
2. Financial analysts often specialize in assessing the performance of many
different industries at the same time.
3. Trend analysis assesses the performance of a company in a year based on the
comparison between the figures of that year to that of the base year.
4. It is more difficult to compare common-size balance sheets and income sheets
either across the years or across different companies.
5. Liquidity ratios are measures of the company’s ability to pay its debts in a short term.

READING 2

Reading text 2: Sources of data for financial analysis and do exercise 2.3 below
SOURCES OF DATA FOR FINANCIAL ANALYSIS
Financial analysis is the selection, evaluation, and interpretation of financial data,
along with other pertinent information, to assist in investment and financial decision-
making. Financial analysis may be used internally to evaluate issues such as employee
performance, the efficiency of operations, and credit policies, and externally to evaluate
potential investments and the creditworthiness of borrowers, among other things.
The analyst draws the financial data needed for financial analysis from many
sources. The primary source is the data provided by the company itself in its annual reports
and required disclosures. The annual report comprises the income statement, the balance
sheet, and the statement of cash flow, as well as footnotes to these statements. Certain
businesses are required by securities laws to disclose additional information.
Besides the information that companies are required to disclose through financial
statements, other information is readily available for financial analysis. For example,
information such as the market prices of securities of publicly-traded corporations can be
found in the financial press and the electronic media daily. Similarly, information on stock
price indices for industries and the market as a whole is available in the financial press.
Another source of information is economic data, such as the Gross Domestic
Product and Consumer Price Index, which may be useful in assessing the recent
performance or future prospects of a company or industry. Suppose you are evaluating a
company that owns a chain of retail outlets. What information do you need to judge the

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company’s performance and financial condition? You need financial data, but it does not
tell the whole story. You also need information on consumer spending, producer prices,
consumer prices, and the competition. This is economic data that is readily available from
the government and private sources.
Besides financial statement data, market data, and economic data, in financial
analysis, you also need to examine events that may help explain the company’s present
condition and may have a bearing on its future prospects. For example, did the company
recently incur some extraordinary losses? Is the company developing a new product? Or
acquiring another company? Is the company regulated? Current events can provide
information that may be incorporated into financial analysis.
The financial analyst must select the pertinent information, analyze it, and interpret
the analysis, enabling judgments on the current and future financial condition and operating
performance of the company.
(Source: Financial Statement Analysis, Mary Brandy Greenawalt,
https://www.encyclopedia.com/)

2.2 Answer the following questions

1. What is financial analysis?

2. For what purpose is a financial analysis used internally?
3. For what purpose is a financial analysis used internally?
4. How many sources of data are available for financial analysis?
5. What are included in economic data?
6. What are included in economic data?
7. What are included in company events?

3. LISTENING

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 3.1 You are going to listen to the article. Listen carefully and fill in the
gaps.

Financial statement analysis is the process of (1) …………… a company's

financial statements for decision making (2) ……………. External stakeholders use
it to understand the overall (3) …………… of an organization as well as to (4)
…………… financial performance and business value. Internal constituents use it
as a monitoring tool for (5) …………… the finances.
Financial statement analysis is used by internal and external (6) ……………
to evaluate business performance and value. Financial accounting calls for all
companies to (7) …………… a balance sheet, income statement and cash flow
statement which form the basis for financial statement analysis. Horizontal,
vertical and ratio analysis are three techniques (8) …………… use when analyzing
financial statements.

3.2 Listen again and mark the following statements is true (T) or false (F)

1.……External stakeholders use financial analysis for decision making purposes.

2. …… Financial analysis is used only by internal users.
3. …… There are three primary types of financial statement analysis.

4. VOCABULARY EXERCISES

4.1 Complete the table with words and related forms. Then complete the
sentences below with the correct forms of words from the table. You
may need to change the form.

VERB NOUN
1.
to predict prediction LACISE
(1)
to …………. payment
(2)
to …………. comparison
(3)
to …………. calculation
(4)
to expect ………….
(5)
to …………. indication
(6)
to …………. expansion
(7)
to perform ………….

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 a. The figures are a little different to what we were ……………
b. The problems in the Middle East have made it really difficult to ……………
next year's turnover.
c. I think there are some mistakes in the ……………
d. The fund ……………much better last year. This year has been very
disappointing.
e. The …………… into Eastern Europe looks good.
f. We need to make sure that our customers …………… us on time.

4.2 Complete the paragraph with the corret words from the box.

average compare enables indications industry

problem similar successive them trends

Ratio Analysis (1) …………… the business owner/manager to spot trends in a

business and to (2) …………… its performance and condition with the (3) ……………
performance of similar businesses in the same (4) ……………. To do this, compare your
ratios with the average of businesses (5) …………… to yours and compare your own ratios
for several (6) …………… years, watching especially for any unfavorable (7) ……………
that may be starting. Ratio analysis may provide the all-important early warning (8)
…………… that allow you to solve your business (9) …………… before your business is
destroyed by (10) ……………

4.3
Complete the following paragraph with the correct form of the word in
parenthess
Ratio analysis is a (1) …………. (QUANTITY) method of gaining insight into a
company's (2) …………. (LIQUID), operational efficiency, and (3) …………. (PROFIT)
by studying its financial statements such as the balance sheet and income statement.
Investors and (4) …………. (ANALYZE) employ ratio analysis to evaluate the financial
health of companies by scrutinizing past and current financial statements. (5) ………….
(COMPARE) data can demonstrate how a company is (6) …………. (PERFORM) over
time and can be used to estimate likely future performance. This data can also compare a
company's financial standing with industry averages while (7) …………. (MEASURE)
how a company stacks up against others within the same sector. Investors can use ratio (8)
…………. (ANALYZE) easily, and every figure needed to calculate the ratios is found
on a company's financial statements.

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 Choose the best alternative to complete each sentence
4.4 1. ………. analysis is used to evaluate the trend in the accounts over the years.
a. Horizontal
b. Vertical
c. Ratio
d. Finance
2. ………. analysis is the proportional analysis of a financial statement, where
each line item on a financial statement is listed as a percentage of another item
a. Horizontal
b. Vertical
c. Ratio
d. Trend
3. Financial analysis is the selection, ………. (EVALUATE) and the
interpretation of financial data.
a. evaluated
b. evaluation
c. evaluating
d. evaluate
4. One of the major information sources is used in financial analysis if ……….
(ECONOMY) data
a. economy
b. economics
c. economical
d. economic
5. The ratios are measures of the short-term ability of the company to pay its debts
when they come due
a. liquidity ratios
b. profitability ratios
c. solvency ratios
d. Operational ratios
6. GDP, CPI are examples of ………. data
a. market
b. economic
c. financial statement
d. economy

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5. SPEAKING

5.1 Individual work

Based on the information in the two texts above, answer the following
questions with your own words
1. What is financial statement analysis?
2. What is the purpose of analyzing financial statements?
3. How many types of financial statement analysis?
4. What is the difference between vertical analysis and horizontal analysis?

5.2 Pair work or group work

Work with your partner(s) and discuss your answers.

6. WRITING

6.1 Rearrange the following words to make complete sentences

1. expresses/ amount/ financial/ statement/ percentage/ amount/vertical analysis/
each/ on/ a/as/a/ of/ another.
………………………………………………………………………………………
2. horizontal analysis/ financial/ over/ many/ horizon/ statements/ amounts/looks/ at
from/ the/ a/ of/ years.
………………………………………………………………………………………
3. financial ratios/ express / relationships / items/ more/ between /the/ two/ or/ on/
financial statements.
………………………………………………………………………………………
4. liquidity ratios/ company’s short-term/ debts/ ability/ pay/measure/ a/ to/ its.
………………………………………………………………………………………
5. financial statement/ process/ analyzing/ for decision-making purposes/ analysis/
is/ the/ of/ a/ company's financial statements.
………………………………………………………………………………………

6.2
Complete the following sentences using the given words.
1. Analyst/ draw/financial/data/need/financial/analysis/many/sources.
………………………………………………………………………………………
2. Financial/ratio/be/compare/one/bit/financial/information/another.

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 ………………………………………………………………………………………
3.Ratios/can/classify/according/way/they/construct/and/their/general/characteristics.
………………………………………………………………………………………
4. Financial statement analysis/use/by/internal/ and/ external/
stakeholders/evaluate/business/performance/value.
………………………………………………………………………………………
5. A profitability ratio/can/compare/a/similar/firm’s ratio/determine/ how/
profitable/business/ relative/ its/ competitors.
……………………………………………………………………………………

6.3
Translate the following sentences into Vietnamese
1. Financial analysis is the process of evaluating businesses, projects, budgets, and other
finance-related transactions to determine their performance and suitability.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. Horizontal, or trend, analysis is used to spot and evaluate trends over a specific
period of time.
………………………………………………………………………………………
……………………………………………………………………………………………...
3. Horizontal analysis looks at changes line by line between specific accounting
periods, usually quarterly or yearly, whereas vertical analysis restates balance sheet or
income statement amounts as a percentage of total assets (balance sheet) or net sales
(income statement).
………………………………………………………………………………………
……………………………………………………………………………………………...
4. Investors and analysts employ ratio analysis to evaluate the financial health of
companies by scrutinizing past and current financial statements.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Liquidity ratios measure a company's ability to pay off its short-term debts as
they become due, using the company's current or quick assets.
………………………………………………………………………………………
……………………………………………………………………………………………...

6.4 Translate the following sentences into English

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 1. Phân tích tài chính là việc lựa chọn, đánh giá và giải thích các dữ liệu tài chính
cùng với các thông tin phù hợp khác nhằm hỗ trợ trong việc đưa ra các quyết định tài chính
và đầu tư.
………………………………………………………………………………………
……………………………………………………………………………………………..
2. Phân tích tài chính thường được sử dụng để đánh giá các vấn đề nội bộ một doanh
nghiệp như hiệu suất lao động, hiệu quả hoạt động và các chính sách tín dụng.
………………………………………………………………………………………
……………………………………………………………………………………………..
3. Phân tích tài chính thường đánh giá những yếu tố sau của doanh nghiệp: khả
năng sinh lời, khả năng thanh toán ngắn hạn và khả năng thanh toán dài hạn.
………………………………………………………………………………………
……………………………………………………………………………………………..
4. Có nhiều nguồn dữ liệu khác nhau sử dụng trong phân tích tài chính bao gồm
dữ liệu từ các báo cáo tài chính, dữ liệu từ thị trường và dữ liệu chung về nền kinh tế.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Thông qua việc phân tích các chỉ số phân tích tài chính các nhà đầu tư và các chủ
nợ có thể so sánh kết quả hoạt động và tình hình tài chính của một công ty năm nay so với
năm trước cũng như với những công ty khác cùng ngành.
………………………………………………………………………………………
……………………………………………………………………………………………...

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