Aswath Damodaran1Financial Statement Analysis
Aswath Damodaran2Questions we would like answered…AssetsLiabilitiesAssets in PlaceDebtEquityWhat is the value of the debt?How risky is the debt?What is the value of the equity?How risky is the equity?Growth AssetsWhat are the assets in place?How valuable are these assets?How risky are these assets?What are the growth assets?How valuable are these assets?
Aswath Damodaran3Basic Financial StatementsQThe balance sheet, which summarizes what a firm owns and owes at apoint in time.QThe income statement, which reports on how much a firm earned inthe period of analysisQThe statement of cash flows, which reports on cash inflows andoutflows to the firm during the period of analysis
Aswath Damodaran4The Balance SheetAssetsLiabilitiesFixed AssetsDebtEquityShort-term liabilities of the firmIntangible AssetsLong Lived Real AssetsAssets which are not physical,like patents & trademarksCurrent AssetsFinancial InvestmentsInvestments in securities &assets of other firmsShort-lived AssetsEquity investment in firmDebt obligations of firmCurrent LiabiltiesOther LiabilitiesOther long-term obligationsFigure 4.1: The Balance Sheet
Aswath Damodaran5A Financial Balance SheetAssetsLiabilitiesAssets in PlaceDebtEquityFixed Claim on cash flowsLittle or No role in managementFixed MaturityTax DeductibleResidual Claim on cash flowsSignificant Role in managementPerpetual LivesGrowth AssetsExisting InvestmentsGenerate cashflows todayIncludes long lived (fixed) and short-lived(working capital) assetsExpected Value that will be created by future investments
Aswath Damodaran6The Income StatementFigure 4.2: Income StatementRevenuesGross revenues from sale of products or services- Operating ExpensesExpenses associates withgenerating revenues= Operating IncomeOperating income for theperiod- Financial ExpensesExpenses associated withborrowing and other financing- TaxesTaxes due on taxable income= Net Income before extraordinary itemsEarnings to Common & Preferred Equity forCurrent Period- (+) Extraordinary L