1
Historical analysis
Ch. 2. Framework of financial analysis
•Classification
–Operating and financial items (2.1)
–Core and unusual items (2.2)
•Changes in Shareholders Equity and comprehensive income (2.3)
•Segmental reporting (2.4)
Ch.3. Historical profitability analysis
•Profitability analysis
–Ratios relevant for forecasting
–Operating profitability (3.2)
–Financial performance (3.3)
–Total profitability (3.4)
2
Lecture 2. ClassificationOperating and financial items
General rule:
•Classify both the income/expense and thecorresponding asset/liability in a consistentmanner
3
Operating and financial items:problematic issues
Informational restrictions
•Availability of information in the incomestatement (IS) and the balance sheet(BS), including the footnotes (refer tonumber of footnote in the annual reportfor 2007)
•Accept the classification of the incomestatement, with some exceptions
4
Operating and financial items:problematic issues
•Cash and cash equivalents
–Working cash (and its income) could be regarded asoperating
–(generally all) Financial
–exception: when a portion of this asset is distributedamong “real segments” (excl. “central andeliminations”) in the segmental report, together withthe corresponding interest revenues
•In this case the classification of the income statement is notaccepted
•Debt and equity securities
–Both long- and short-term
–Financial
5
Operating and financial items –problematic issues
•Participations in associated companies
–Ownership >= 20% , < = 50%
–Equity method
Classify according to the segmental report
(regard all as operating if some are distributed
among real segments)
6
Operating and financial items:problematic issues
•Current receivables and current liablilities
–Next year’s repayment of liabilities to credit institutions
–Accrued interest expense (interest payable)
–Financial
–Accounts receivables
–Implicit interest revenue included in sales
–Operating
–Accounts payable
–Implicit interest expense included in operating expenses
–Operating
7
Operating and financial items:problematic issues
•Long-term receivables and long-termpayables
–Explicit or implicit interest usually includedamong financial items in the incomestatement
–Financial
8
Long-term receivables
Example: Long-term accounts receivable
•Sale at the beginning of year 1 for 121
•Payment after 2 years, no interest, market rate ofinterest 10%
9
Long-term receivables
Example: Long-term accounts receivable
10
Operating and financial items:problematic issues
•Provisions for pensions
–Pension payments discounted to the present
–Implicit interest included in interest expense
–Financial
•Other provisions
–Unless discounting is evident
–Operating
11
Operating and financial items:problematic issues
•Deferred tax liabilities (“Provisions fortaxes”) / Deferred tax claims
–Estimated future tax payments (or reductionof tax payments) because of “temporarydifferences”
–Not discounted – no implicit interest in theincome statement (compare with pensionliabilities)
–Operating
12
Annual reports – order of analysis
Analyse four historical years in the following order
•Annual report for 2007
–Year 2007
–Year 2006 by using comparative figures
•Annual report for 2006
–Year 2005 by using comparative figures
•Annual report for 2005
–Year 2004 by using comparative figures
•Annual report for 2004
–Year 2003 by using comparative figures (BS only)