Sei sulla pagina 1di 4


FROM FINANCIAL STATEMENTS TO BUSINESS ANALYSIS Because managers insider knowledge is a source both of value and distortion in accounting data, it is difficult for outside users of financial statements to separate true information from distortion and noise. Investors make a probabilistic assessment of the extent to which a firms reported numbers reflect economic reality. Financial and information intermediaries can add value by improving investors understanding of a firms current performance and its future prospects. Successful intermediaries have at least as good an understanding of the industry economics as do the firms managers, and a reasonably good understanding of the firms competitive strategy. Figure 1-3 provides a schematic overview of how business intermediaries use financial statements to accomplish four key steps: (1) business strategy analysis, (2) accounting analysis, (3) financial analysis, and (4) prospective analysis.

Figure 1-3 Analysis Using Financial Statements

Financial Statements - Managers superior information on business activities - Noise from estimation errors - Distortions from managers accounting choices Other Public Data Industry and firm data Outside financial statements Business Application Context - Credit analysis - Securities analysis - Mergers and acquisitions analysis. - Debt/Dividend analysis - Corporate communication strategy analysis - General business analysis

Business Strategy Analysis Generate performance expectations through industry analysis and competitive strategy analysis.

Accounting Analysis Evaluate accounting quality by assessing accounting policies and estimates.

Financial Analysis Evaluate performance using ratios and cash flow analysis.

Prospective Analysis Make forecasts and value business.

Analysis Step 1: Business Strategy Analysis The purpose of business strategy analysis is to identify key profit drivers and business risks, and to assess the companys profit potential at a qualitative level. Business strategy analysis involves analyzing a firms industry and its strategy to create a sustainable competitive advantage. Assessment of a firms competitive strategy facilitates evaluating whether current profitability is sustainable. Finally, business analysis enables the analyst to make sound assumptions in forecasting a firms future performance. Analysis Step 2: Accounting Analysis The purpose of accounting analysis is to evaluate the degree to which a firms accounting captures the underlying business reality. By identifying places where there is accounting flexibility, and by evaluating the appropriateness of the firms accounting policies and estimates, analysts can assess the degree of distortion in a firms accounting numbers. Another important step in accounting analysis is to undo any accounting distortions by recasting a firms accounting numbers to create unbiased accounting data. Sound accounting analysis improves the reliability of conclusions from financial analysis, the next step in financial statement analysis. Analysis Step 3: Financial Analysis The goal of financial analysis is to use financial data to evaluate the current and past performance of a firm and to assess its sustainability. There are two important skills related to financial analysis. First, the analysis should be systematic and efficient. Second, the analysis should allow the analyst to use financial data to explore business issues. Ratio analysis and cash flow analysis are the two most commonly used financial tools. Ratio analysis focuses on evaluating a firms product market performance and financial policies; cash flow analysis focuses on a firms liquidity and financial flexibility. Analysis Step 4: Prospective Analysis Prospective analysis, which focuses on forecasting a firms future, is the final step in business analysis. Two commonly used techniques in prospective analysis are financial statement forecasting and valuation. Both these tools allow the synthesis of the insights from business analysis, accounting analysis, and financial analysis in order to make predictions about a firms future. Strategy analysis, accounting analysis, and financial analysis, the first three steps in the framework discussed here, provide an excellent foundation for estimating a firms intrinsic value. Strategy analysis, in addition to enabling sound accounting and financial analysis, also helps in assessing potential changes in a firms competitive advantage and their implications for the firms future ROE and growth. Accounting analysis provides an unbiased estimate of a firms current book value and ROE. Financial analysis allows you to gain an in-depth understanding of what drives the firms current ROE. The four analytical steps described above are useful in each of these contexts. Appropriate use of these tools, however, requires a familiarity with the economic theories and institutional factors relevant to the context.


PUBLIC COMPANY AND A PRIVATE COMPANY ( Distinction Between A Public Company And a Private Company Following are the main points of difference between a Public Company and a Private Company :1. Minimum Paid-up Capital : A company to be Incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000. 2. Minimum number of members : Minimum number of members required to form a private company is 2, whereas a Public Company requires atleast 7 members. 3. Maximum number of members : Maximum number of members in a Private Company is restricted to 50, there is no restriction of maximum number of members in a Public Company. 4. Transerferability of shares : There is complete restriction on the transferability of the shares of a Private Company through its Articles of Association , whereas there is no restriction on the transferability of the shares of a Public company 5 .Issue of Prospectus : A Private Company is prohibited from inviting the public for subscription of its shares, i.e. a Private Company cannot issue Prospectus, whereas a Public Company is free to invite public for subscription i.e., a Public Company can issue a Prospectus. 6. Number of Directors : A Private Company may have 2 directors to manage the affairs of the company, whereas a Public Company must have atleast 3 directors. 7. Consent of the directors : There is no need to give the consent by the directors of a Private Company, whereas the Directors of a Public Company must have file with the Registrar a consent to act as Director of the company. 8. Qualification shares : The Directors of a Private Company need not sign an undertaking to acquire the qualification shares, whereas the Directors of a Public Company are required to sign an undertaking to acquire the qualification shares of the public Company .

9. Commencement of Business : A Private Company can commence its business immediately after its incorporation, whereas a Private Company cannot start its business until a Certificate to commencement of business is issued to it. 10. Shares Warrants : A Private Company cannot issue Share Warrants against its fully paid shares, Whereas a Private Company can issue Share Warrants against its fully paid up shares.

11. Further issue of shares : A Private Company need not offer the further issue of shares to its existing share holders, whereas a Public Company has to offer the further issue of shares to its existing share holders as right shares. Further issue of shares can only be offer to the general public with the approval of the existing share holders in the general meeting of the share holders only. 12. Statutory meeting : A Private Company has no obligation to call the Statutory Meeting of the member, whereas of Public Company must call its statutory Meeting and file Statutory Report with the Register of Companies. 13. Quorum : The quorum in the case of a Private Company is TWO members present personally, whereas in the case of a Public Company FIVE members must be present personally to constitute quorum. However, the Articles of Association may provide and number of members more than the required under the Act. 14. Managerial remuneration : Total managerial remuneration in the case of a Public Company cannot exceed 11% of the net profits, and in case of inadequate profits a maximum of Rs. 87,500 can be paid. Whereas these restrictions do not apply on a Private Company. 15. Special privileges : A Private Company enjoys some special privileges, which are not available to a Public Company.