• • Demonstrate understanding of central elements of financial statements
• • Conduct a profitability analysis using financial ratios
• • Conduct a credit analysis using financial ratios
• • Prepare pro forma (budgetted) statements (income statement, balance sheet and cash flow statement) which articulate
• Estimate firm values

This course gives you an introduction to financial statement analysis and firm valuation.

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 you should be able to read and understand the financial statements in the annual report. In this part of the course students will also be reminded that financial accounting is not an entirely objective endeavor meaning that subjective assessments underlie many of the seemingly objective numbers we interpret. The students will learn that numbers should therefore be interpreted with care. The students will also have the chance to discuss when the subjective assessments made by management can be considered manipulative and unethical and when they are in fact just assessments which need to be made.

The second part of the course focuses on ways to measure profitability. Key financial ratios like return on invested capital (ROIC) and return on equity (ROE) are defined and analysed. The students will learn that the profitability analysis consists of a number of profitability ratios that are mathematically and logically coherent allowing us to make fairly reliable in-depth assessments of profitability. After completing the second part you should be able to conduct a ratio analysis measuring the profitability of a firm. Further, you should be able to compare similar firms’ profitability.

The third part of the course concerns liquidity risk analysis. The students will learn about the most commonly applied accounting ratios reflecting liquidity risk analysis. They will also learn that whereas the profitability analysis is coherent and in-depth, the typical liquidity risk analysis consist of individual measures that each are somewhat piecemeal and superficial, meaning that care should be taken when using these. In other words the students will not only learn how and when the ratios should be applied but indeed also how and when they should not be applied. After completing the third part you should be able to conduct a liquidity risk analysis using financial ratios.