-> DEF: process of selecting, evaluating and interpreting financial data, along with other pertinent information.

-> it:

• Provides the numbers;
• Essential for company evaluation:
  • Shares’ price and market capitalization (financial analysis);
  • Target price in an M&A (due diligence);
  • Selling price of shares in an IPO (due diligence);
  • Credit stability (rating service)

-> OBJ: formulate an assessment of a company’s present and future financial condition and performance.

-> Fundamental numbers:

• REVENUES: understand how big the company is;
• NET INCOME: how profitable the company is;
• CASH FORM CONTINUOUS OPERATIONS: how well the company is doing, about the real situation of the company.

-> INPUTS:

• MARKET DATA: information about the industry in general (company’s environment, economic situation);
• FINANCIAL DISCLOSURES: investor relations (traded public companies must publish)
• ECONOMIC DATA: economic information about industry.

-> Financial Analysis requires:

1. Sources Selection and Data “Triangulation”;
2. Segment Analysis;
3. Common size Analysis;
4. Reclassification and Adjustments;
5. Benchmarking;
6. Accounting Based Indicators (selection);
7. Interpretation of data.

1.1)Source Selection and Data “Triangulation”

❓ What data we have?

-> FINANCIAL DISCLOSURES (traded company):

• Financial statements schemes;
• Shareholder letter;
• Segmental analysis;

-> NON FINANCIAL DISCLOSURES:

• Sustainability report;
• Country report;

-> MARKET DATA:

• Market price of stock;
• Volume traded;
• Value of bonds;

-> INDUSTRY AND ECONOMIC DATA: information about industry in which the company is operating (pharmaceutical industry for AstraZeneca).

SEC FILLING: is a financial statement submitted to SEC by publicy traded corporations. There are different format:

• Form 10-K: audited financial statement. Audited means validated by an audit.
• Form 10-Q: unaudited financial statement.
• Form 20-F: annual financial statement filed by a non-US company that has listed equity shares in the US.

⚠The comparability of data depends by the regulation of the company;

Income Statement (Conto Economico):

-> DEF: displays the company’s revenue, costs, gross profit, selling and administrative expenses, other expenses and income, taxes paid, and net profit in a coherent and logical manner.

• Healthy of the business;

-> It is divided in 3 parts:

1. OPERATIONS: revenues and cost of sales are due to operations => this is the only part that changes based on the type of IS we chose. The application of one method or the other depends on what the company wants to highlight.
2. FINANCING: : financial incomes, financial interests, income from investments, interest payable and similar expenses, income receivables and similar incomes, value adjustments of financial assets, etc.
3. TAXATION: taxes;

-> METHODS: two methods to represent information

BY NATURE: costs are divided based on their nature, as cost of raw materials, cost of staff (wages , etc), cost of production.

-> Depreciation and amortization are due to long term assets;

-> Banks show costs by nature.

BY FUNCTION: or cost of sales, costs are provided based on their function (marketing costs, R&D costs, distribution costs)

-> Oblige to provide disclosure of the costs by nature in the notes;

-> If a majour cost for a company is related to a function => They’ll use this method, AstraZeneca is by function.

Balance Sheet (Bilancio di esercizio):

-> DEF: summarize an organization’s or individual’s assets, equity and liabilities at a specific point in time.

• How big is the comapny/ How operations are going;

ASSETS = how we are producing.

EQUITY + LIABILITIES = how we are financing the production.

ASSETS = EQUITY + LIABILITIES

👁 If PPE is very high respect other assets => production company. Cost that could be relevant for a production company are patents and intangible assets.

👁 E >> L => Proxy of satability (is difficult to understand the maturity from BS, better in Income.);

📌Usually non-current assets are higher than current ones. Current assets can be higher for re-selling companies (Amazon) than non-current.

Cash Flow Statement (Rendiconto Finanziario):

-> DEF: is a financial statement that shows how cash entered and exited a company during an accounting period.

• Net cash from continuous operation is the most important information.
• Could be benchmarked with EBIT (or EBITDA if comany is capital-intensive) because EBIT (or EBITDA) is proxy of the cash.
• How chief manage the company.

-> CF is important in budgeting process: we can see if there are some areas in which we have to invest more or less.

-> PARTS:

1. OPERATIONAL: could be different  ➕
2. INVESTMENTS: purchases of PPE, proceeds from sale of equipement  ➕
3. FINANCING: proceeds from issuance of common stock, of long-term debt, dividends paid  =

= NET INCREASE/DECREASE in CASH.

➕ Cash at the beginning of the period

= CASH at the END of the PERIOD (will be written also in BS, Current Assets)

-> METHODS: difference only in the operational part.

• DIRECT FLOW: cash logic, we record inflows and outflows (, cash receipts, cash paid to suppliers, employees, interests paid (interests on the debt that we took in order to produce, for example to buy machineries, therefore is due to production and so it’s inside the operational part), income tax paid, etc)
• INDIRECT FLOW:  accrual logic, we start from the EBIT (net profit before interests and taxes, IS), and we make some adjustments:

➖ Gain on sale of facility (different from “proceeds from sale of equipment” because gain on sale of facility was not planned so it is a non-recurring operation)

➕ Depreciation and amortization (due to long term assets): these are not real cash outflows; we are putting money aside to make up for the loss of value of our assets.

➕ Provisions for losses on accounts receivable

➖ Increase in trade receivables

➕ Decrease in inventories

➕ Decrease in trade payables

Changes in Equity (Cambiamenti in patrimonio netto):

-> DEF: reconciliation of the beginning and ending balances in a company’s equity during a reporting period.

• Important for potential future investors and shareholders.
• Shows the potential changes in volumes of the shares and estimate if it is a safeposition for them.
• Show if the company want to diminish or  increase the # of stoks on the market.

📌Company motivate C-level managers giving them “stock option”.

-> Information:

• Number of shares;
• Legal reserve;
• Retained earnings;
• Stock option reserve;
• Treasury shares;
• Non-controlling interests: % of the shares not due to the company.

Link between Financial Statemets:

• Net income = net profit: from IS goes to the Retained Earnings in the equity part of the BS and also in the CF at the beginning of the operating activities (if the CF is made with the indirect method).
• Long term assets in the BS are connected to the IS by nature and also present in the CF (indirect method) among the operating activities and/or among the investing activities as “capital expenditures”.
• Current assets from the asset part in the BS is connected with the beginning cash and the ending cash in the CF.