• read and understand a financial statement (annual report)
• conduct a profitability analysis using financial ratios
• conduct a growth analysis using financial ratios
• conduct a liquidity risk analysis using financial ratios
• prepare pro forma (budgetted) statements (income statement, balance sheet and cash flow statement) which articulate
• estimate firm values
• perform a credit analysis
• assess accounting-based bonus plans
• understand the concept of accounting quality

The first part of the course focuses on refreshing the students’ knowledge of basic financial accounting and components of the financial statements including the income statement, balance sheet, statement of changes in owners’ equity and cash flow statement. The first part also addresses the conceptual differences between accrual and cash flow based accounting. After completing the first part the student should be able to read and understand the financial statements in the annual report of a company.
 
The second part of the course focuses on ways to measure profitability. Key financial ratios like return on invested capital (ROIC) and Economic Value Added (EVA) are defined and analysed. After completing the second part the student should be able to conduct a ratio analysis measuring the profitability of a firm. Further, the student should be able to compare similar firms’ profitability.
 
The third part of the course focuses on different ways to measure growth and particularly on the fact that growth in any parameter is not necessarily beneficial. After completing the third part the student should be able to analyse growth and understand which kind of growth is beneficial for company value.
 
The fourth part of the course concerns credit analysis. Different techniques including ratio analysis and forecasting are introduced with the purpose of assessing a firm’s credit worthiness and the risk of default. The advantages of each approach are highlighted. For example, ratio analysis is simple to apply and typically less costly than other approaches available for credit analysis. After completing the fourth part the student should be able to conduct a simple credit analysis using financial ratios.
 
The fifth part of the course focuses on forecasting. Forecasting is essential as it serves as the foundation for many business decisions including whether to give or extend loans to firms or estimating the value of a corporation. Two issues are addressed. The first issue is how to technically develop pro forma statements; i.e. to ensure that the forecasted income statement, balance sheet and cash flow statement articulate. The second issue concerns how to add realism in the projected earnings and cash flow measures. After completing the fifth part of the course the student should be able to develop pro forma statements which articulate and are based on achievable (realistic) assumptions.

The final part of the course focuses on firm valuation primarily through discounting the cash flows forecasted in the fifth part. Different valuation approaches are introduced and the strengths and weaknesses of each approach are discussed. After completing the fifth and final part the student should be able to estimate the value of a firm.

Christian Petersen and Thomas Plenborg,
Financial Statement Analysis
Valuation • Credit analysis • Executive compensation
FT Prentice Hall 2012, 1^st edtion